Thursday, May 8, 2008

Will the Sub-Prime fallout sink your Pension Plan?

Did you know that it’s possible your pension fund was invested in sub-prime loans?

State Street, which manages hundreds of pension funds, has been accused of investing pension money in highly-leveraged investments in mortgage-related financial instruments – otherwise known as sub-prime loans.

As of October 2007, Prudential is one of four companies suing State Street for engaging in “deceptive, impudent and incompetent investing” without notifying Prudential or its retirement plan participants. The companies claim they have lost tens of millions of dollars in State Street funds that they were told would be invested in risk-free debt like Treasuries.

And to add a little more fuel to the fire, State Street has revealed today that they could spend up to $1 billion on the related litigation. Evidently, they expect quite a battle.

Up to now, I have been relatively unscathed by the sub-prime mess. Sure, the drag on the stock market has taken me along for the ride, but that type of risk is always present in the market. The resulting housing bubble burst has had little impact in my area and since I do not have a mortgage and am not planning on selling my home anytime soon, this most recent financial crisis has been a minor nuisance.

However, I do have a pension. And stories like this about State Street make me wonder just how far this sub-prime octopus can reach. Do you have a pension plan? Do you know who manages that fund for your employer?

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