Pension Liquidation

[JustLurkin]

I have received notice from a former employer the pension fund will be liquidated. We are to take no action now, it is just a notification of what's coming down the pike. We are being given the option of cashing out, rolling to our 401k, rolling to an IRA or getting an insurance annuity. No numbers are on this notice. When I separated from the company after 10 years, I was given an estimated value of $750 a month during retirement; I am currently 40.

My knee-jerk decision was to have the funds rolled into my 401k. However, I don't understand IRAs or insurance annuities and don't want to discount them just because of ignorance. Any suggestions? Please speak really slow and use little words--I think I had to read the paperwork 3 times to come away with the above paragraph, and am just glad I opened it instead of tossing it into the 'later' pile.

As always, thank you all for taking the time to read and respond.

[resolution]

I think you would need to know how much the lump sum payout would be and how much the annuity would be before you can make an educated decision.

The lump sum rollover may be safer and more controllable for you, but it is not necessarily the best deal. My employer's pension plan has a cash out offer that is substantially lower than the value of the monthly payments, but yours could be totally different.

[MN-Investor]

Personally, I would roll it over into an IRA where you have total control over what investments you select.

My DH retired last year and went through the decision process of what to do with his pension. He rolled it into an IRA. There are three issues with an annuity - 1) with current low interest rates, you're not going to get a great monthly payout, 2) you are relying on the insurance company which is providing your annuity to be there for decades into the future and 3) you are relying on money being there decades from now to pay your annuity. DH and I would rather rely on ourselves and our investing ability.

[Opti]

Nov 22, 2017 21:49:14 GMT -5 JustLurkin said:

I have received notice from a former employer the pension fund will be liquidated. We are to take no action now, it is just a notification of what's coming down the pike. We are being given the option of cashing out, rolling to our 401k, rolling to an IRA or getting an insurance annuity. No numbers are on this notice. When I separated from the company after 10 years, I was given an estimated value of $750 a month during retirement; I am currently 40.

My knee-jerk decision was to have the funds rolled into my 401k. However, I don't understand IRAs or insurance annuities and don't want to discount them just because of ignorance. Any suggestions? Please speak really slow and use little words--I think I had to read the paperwork 3 times to come away with the above paragraph, and am just glad I opened it instead of tossing it into the 'later' pile.

As always, thank you all for taking the time to read and respond.

My advice is wait until the paperwork with the numbers comes out. They are just warning you, you will need to make a decision. When the paperwork comes, make a note of when your decision needs to be in and mark it on the calendar. Somewhere in the paperwork will be the default action they will take if you don't actively choose.

I don't know about a total liquidation thankfully, but my first employer in NJ has been sending me something similar for the last couple years as they try to pay off or divest some pensioners. If I remember correctly my amount was roughly $200/mo. at retirement age. Not much, but I want the guaranteed income more than I wanted to take a say $10K payout and hope I could invest wisely enough to generate $200/mo.

I am 57. I think retirement age for me is 67? per SS.

[Deleted]

I agree on waiting for the paperwork with the alternatives.  I have two pensions of about $900/month each coming in- no choice on annuity or lump sum.  People in my family are long-lived and if either plan goes belly-up (or even both) I can live without them. 

There's also the Pension Benefit Guaranty Corporation, the government entity that backs up pension obligations.  The PBGC is struggling right now because it's been left picking up the tab for a lot of defunct plans, but my guess is that if it has to throttle back the payments, the smaller pensions won't be hit.

[Deleted]

(Duplicate Post)

[phil5185]

I would consider the IRA to be best (you are free to pick your investments). And I would say that the annuity is the worst (they are usually a terrible investment because they have high costs, fees, and are entangled in traps when you try to cash them out).

[Wisconsin Beth]

My dad rolled his into an IRA. He's made money, lost money and made money. I know he started with around $90K, probably 15 years ago. I suspect he's got high fees because it's with his and mom's bank. But he's not moving it now. He's 79 and in ok health.

[The Walk of the Penguin Mich]

I rolled mine into an IRA in 2000.  Today, that money would replace roughly 3-4x what my pension would have been at 65 (another 7 years for me) NOW.  I suspect it'll be 4-5x when I tap into it then.

However, you really do need to get the numbers and do the math.

[JustLurkin]

Ok, according to the notice I will be getting more information in June. I'll be sure to post the numbers when I get them. I'm sure this letter is part FYI, part address verification...since mine was forwarded, I'll be sure to have a change of address to them in Monday's mail!

[hoops902]

You need to know what the numbers are first. One of the things my company does is buy up smaller pensions that people no longer want to administer. Participants basically get the exact same choices you get. If they choose the annuity they aren't getting a typical annuity...it's basically an annuity product that would function really similarly to a pension plan. You can't take money out of it, you get your "payment" as an annuity payment, which is going to look super similar to what your pension payment would have looked like (in terms of form, you get a payment starting upon X date, you get Y amount, though you may get some different payout options).

Once you know the numbers, the entire calculation ends up being a decision on the current value of money. Almost always you are more correct to take a lump sum and invest it in an IRA or something. You'll get higher returns than the imputed rate the annuity/pension company use to calculate your benefits (in small words, the pension/annuity is going to assume that from now until you start taking money, they can earn 3-4% on your money, and calculate your payments accordingly. In reality, you could make more by investing it in something more risky and getting a higher payout from your IRA later).

[nittanycheme]

I think that when a company liquidates a pension, they are required to get you an annuity that pays out what they said you would receive unless they are doing it as part of bankruptcy.  But I could be wrong there - you would need to wait to see what numbers they send you.  And, as hoops said, then you just need to decide if you think you can get a better return, or if you just want a pension.  The annuity may have lower payout, but should be less risk, and depending on how old you think you will get.  I know that I've kept a pension at an old employer because I just want some guaranteed income when I get to that age.  I have money in my other accounts, but I like the diversity of a couple of different streams, and the security of knowing that as long as I have that, I could pay my utilities and buy food.  Real food, not just ramen noodles. 

[MN-Investor]

Nov 23, 2017 14:43:28 GMT -5 phil5185 said:

I would consider the IRA to be best (you are free to pick your investments). And I would say that the annuity is the worst (they are usually a terrible investment because they have high costs, fees, and are entangled in traps when you try to cash them out).

I believe that most pensions rolling over to annuities are basically equivalent to Single Premium Immediate Annuities which are much better options than their deferred variable annuity cousins. SPIAs are pretty straightforward and may have a place in your retirement plan. The "financial advisors" who hard sell annuities are pushing the deferred variable annuities for which they receive high upfront fees. I can see no reason to buy a deferred variable annuity.

[hoops902]

Nov 24, 2017 14:11:04 GMT -5 MN-Investor said:

Nov 23, 2017 14:43:28 GMT -5 phil5185 said:

I would consider the IRA to be best (you are free to pick your investments). And I would say that the annuity is the worst (they are usually a terrible investment because they have high costs, fees, and are entangled in traps when you try to cash them out).

I believe that most pensions rolling over to annuities are basically equivalent to Single Premium Immediate Annuities which are much better options than their deferred variable annuity cousins. SPIAs are pretty straightforward and may have a place in your retirement plan. The "financial advisors" who hard sell annuities are pushing the deferred variable annuities for which they receive high upfront fees. I can see no reason to buy a deferred variable annuity.

It's probably a single premium fixed deferred annuity (in the case of OP who is 40).  Our company does both...if you're already taking distributions, you get a SPIA, if you aren't of retirement/distribution age yet, then you get a SPDA.  Both are fixed, no commissions, low/no fees, and you don't get to choose your investments like you would in a deferred variable annuity. 

It's really not much different than having your pension, except now you have your own little bucket of money and instead of calculating things based on years of service or something, you're taking a lump sum and just figuring out what the payment of that lump sum will be.  That said, it's going to function very much like a fixed annuity, which means not a great return on your money.  It's safe, but at age 40, is unlikely to be worth anything near what another investment would be once retired. 

You're absolutely right in that it behaves nothing like a deferred variable annuity though. 

[beergut]

Nov 24, 2017 14:11:04 GMT -5 MN-Investor said:

Nov 23, 2017 14:43:28 GMT -5 phil5185 said:

I would consider the IRA to be best (you are free to pick your investments). And I would say that the annuity is the worst (they are usually a terrible investment because they have high costs, fees, and are entangled in traps when you try to cash them out).

I believe that most pensions rolling over to annuities are basically equivalent to Single Premium Immediate Annuities which are much better options than their deferred variable annuity cousins. SPIAs are pretty straightforward and may have a place in your retirement plan. The "financial advisors" who hard sell annuities are pushing the deferred variable annuities for which they receive high upfront fees. I can see no reason to buy a deferred variable annuity.

And yet, I've had potential clients who demand them. 

Annuities (not necessarily variable products, just annuities in general) have their place. While many financially literate people don't like them, for people who don't want to learn about investing, the idea of getting a monthly paycheck (just like they receive a paycheck now) can be a comfort to them when they're retired. Everyone's needs are different in retirement, so using absolutist statements does you no good.