In the wake of falling earnings, General Electric recently announced three retirement measures to help reduce the company's debts. It's a desperate move, but the best way to clean up a balance sheet.
The gameplan of the American multinational conglomerate is: suspend the pensions for approximately 20,000 salaried employees and an optional policy for approximately 700 staff; give lump-sum for nearly 100,000 former employees; and pre-fund $4-5 billion of the expected financing.
Freezing the policy of GE ensures that as of 2021, 20,000 salaried employees will not be able to accrue new benefits under the program. (The program had already been closed to new applicants in 2012.)
When these workers leave, they receive the compensation that they have already received, but the payments will be dependent on their current earnings rather than on the higher earnings that they were probably to have had.
The worker pension benefits will be lower than expected in this case, and the business will save some cash. The suspension only extends to around 700 employees who had a supplemental retirement and became managers until 2011.
By 2021, retired employees must exit the current401(k) program of the organization to receive an additional 2 percent of compensation for two years.
To reduce risk and control costs, GE must follow thousands of other businesses that have switched from conventional plans to 401(k)s.
The relevant part of GE's decision is its plan to make lump-sum payouts accessible for nearly 100,000 former employees.
To those who spend time supporting the mandatory annuity of at least a part of 401(k) accounts so that they do not lose their assets, the proposition for "un-annuitize"- converting life-long earnings into lump sums- appears as a step in the wrong direction.
Retirees with continuing monthly pension payments are much better off compared to those who have to find out if their investment resources can be distributed over an unpredictable period.
For conventional investments, investors will not survive their payments and do not have to ponder about stock market volatility.
It is a very risky business to give the lump sum. Once the cash is earned from former employees, they will have to spend it to replicate something similar to what they got from GE.
It is possible that they will end up paying high fees and encounter unpredictable financial markets. Many retirees can plan to take their money directly from an insurance company or purchase an annuity.
Nonetheless, purchasing annuities on their own is costly for consumers, because they would end up with less monthly incentives than they would have gotten from GE.
Some market analysts say well-to-do people who have plenty of other resources -- and who are not reliant on their GE pension as their primary source of income -- may want the lump sum.
Even then, despite the volatile markets of today, even the savvy buyer is unlikely to be able to generate more revenue from their lump sum than their GE retirement.
The choice is made by retired GE staff. If they want a secure retirement, they must tell "no" to lump payments almost all of them.
