Pension plans are being frozen and terminated, often creating lump-sum distribution options normally unavailable. Here’s how to prepare for what could be a major financial decision.
For anyone who never thought about pension plan de-risking, now’s a good time to start.
Since 2012, when GM and Ford launched their pension de-risking, there has been a massive surge in similar events. Based on current industry trends, it seems it’s not a question of “if” but “when” your employer will take measures to de-risk your defined benefit pension plan. By definition, de-risking is a strategy for reducing the financial risk posed to corporate balance sheets by pension plans. Companies can employ a range of tactics to de-risk their plans, which may require plan participants to make irrevocable decisions about their benefit.
Pension Decisions
A decision that warrants serious consideration
While de-risking is becoming more common, it can still come as a surprise. Once a company announces a de-risking event, plan participants not only need to understand what their options are, but also how those options may affect their total financial picture. Those options may include ones not previously available, like receiving the benefit as a lump-sum payment. While companies must provide affected employees with information about their options, we think it’s important for plan participants and their financial advisor to work together to understand their options and decide on the best course of action.
Employees receiving lump-sum offers are accepting them with much greater regularity than many would assume. A 2015 AON Hewitt survey of 70 U.S. pension plans and 290,000 participants saw a 58% acceptance rate of lump-sum payments. Some have been as high as 70% or more. The decision could be influenced by the lure of a large windfall or fear about the company’s long-term prospects. But it should really boil down to whether it’s in the participant’s best interest to take a lump-sum distribution vs. a lifetime income stream.
A blueprint for plan participants and their financial advisors
Once a pension plan notifies participants that they need to take action, the decision window is often short, and the choice may be irrevocable. Here are four steps plan participants and their financial advisors can take to help ensure the best possible outcome:
- Review all notifications
- An employer is required to notify plan participants of any de-risking steps. The type of notice depends on the type of de-risking activity.
- If a plan is terminating, the plan sponsor must provide several notices prior to termination, as mandated by the Pension Benefit Guaranty Corporation (PBGC).
- Understand the plan
- An employer must provide plan participants with three key documents: the summary plan description (SPD), the benefit statement, which reflects accrued benefits, and the annual funding notice, which describes the overall health of the plan.
- Get the big picture
- Plan participants and their financial advisor should go through the plan documents, notices and de-risking communications to get a clear picture of the overall situation.
- Before meeting with their advisor, participants should collect key information such as funding notices, annual statements and offer letters/packets.
- Be prepared
Download this free guide, which breaks down key considerations for those facing a de-risking pension plan change. It includes a checklist that plan participants can use to prepare for conversations with their financial advisor.
Bottom line
Current or former defined benefit plan participants could face a crucial financial decision if their employer undertakes pension de-risking. Deciding which option to take requires careful consideration because there are many factors to consider including one’s health, lifestyle, assets, savings and other sources of income. A trusted financial advisor can help plan participants get in front of significant changes to their pension plan, evaluate distribution options and decide which one to choose.
Article by Abram Claude, Columbia Threadneedle Investments
