Pension Decisions: Making the Right Choice

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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.

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.

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