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American International Group Inc. will freeze its U.S. defined benefit pension plans on Jan. 1 and beef up its 401(k) plans.
“After extensive research, we found that AIG's spending on employee retirement programs is materially higher than most of our peers, and that our programs are not in line with where the marketplace is headed,” Jeff Hurd, AIG executive vice president and head of human resources and administration in New York, wrote in a Wednesday memo sent to employees.
“With that in mind, we have decided to freeze AIG's U.S. pension plans,” Mr. Hurd added.
Under the freeze, AIG employees covered in the insurer's cash balance plan will not earn pay credits for compensation paid after Dec. 31, 2015. However, plan participants will continue to earn interest credits on their account balances.
Employees in AIG's final average pay pension plan, will not earn benefits for service or compensation earned after Dec. 31.
AIG, though, will beef up its 401(k) plan, starting Jan. 1, 2016, by making an automatic contribution equal to 3% of pay to employees' accounts. That automatic contribution will be in addition to matching contributions AIG now makes.
At the end of 2014, AIG's U.S. pension plans were underfunded with $4.11 billion in assets and $5.77 billion in liabilities, according to its latest 10-K report.
AIG joins the hundreds of other employers, including such well-known corporations as American Airlines Inc., Cigna Corp.,The McGraw-Hill Cos., Macy's Inc., Wells Fargo & Co., and, most recently, United States Steel Corp., that have frozen their pension plans during the last few years.
By freezing their pension plans, which ultimately will reduce the size of the plans, employers reduce their exposure to making higher contributions to the plans, such as when interest rates decline or investment results on plan assets are lower than expected.
American International Group Inc. plans to sell its remaining stake in AerCap Holdings N.V. for about $500 million, AIG announced Tuesday after close of markets.