Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

pension starting at age 65). If he takes the lump sum, he is giving up $60,000 (five years’ worth of $1,000-a-month payments) and getting nothing in return. Does this mean the participant should always choose the subsidized benefit, to avoid wasting money? No. If the participant is in poor health, or if the pension plan is in poor financial shape, any life annuity would be a “bad bet,” even if it is subsidized. The point is not that one should always take the subsidized benefit; the point is that one should be aware which benefit forms, if any, are subsidized by the plan, in order to properly evaluate the choices. This point can be missed when (for example) a financial advisor who wants to manage the participant’s money focuses only on the possibility of rolling over a lump sum distribution to an IRA, without evaluating the plan’s annuity options. How can the retiree tell the relative values of different benefit options? Fred Lindgren, Vice President and senior actuary with Fidelity Investments, points out that (since 2006) pension plans are required to tell retirees the relative values of the different options the plan is offering them. See Reg. § 1.417(a)(3)-1(c) . This regulation, though it appears to deal with qualified annuity options that must be offered to married participants, also applies to unmarried employees. Unfortunately, Fred says, the plan’s use of different interest and mortality assumptions to calculate benefits and/or display the “relative values” of benefits (all as permitted by the IRS regulations) may create additional confusion. Accordingly, the participant should still seek outside help. A professional advisor acting on the retiree’s behalf can evaluate the options using “apples to apples” comparisons, and can also consider the individual’s own health and financial needs, and the financial health of the plan, factors the plan does not take into account in its “relative value” analysis. Fred also warns:  If you delay the start of your pension (for example, because you are still working), will you get an increased pension when you eventually start taking payments, or are you giving up current monthly payments and getting nothing in return? In this situation, a “cash balance” plan would typically be more favorable than a “classic” DB plan.  If you want an annuity benefit: Will the plan buy your annuity from an insurance company, or fund it directly from plan assets? If the latter, and your benefit exceeds the amount insured by the federal pension guaranty program, are you willing to take the risk of the plan’s insolvency? Are you better off rolling over a lump sum to an IRA and buying the annuity in the IRA? If the amount of benefits is not large enough to justify the fee for consulting a professional actuary, a “quick and dirty” method of evaluating the plan’s annuity offerings is to compare the prices you would have to pay to purchase each option from an annuity company, outside the plan. You can obtain such annuity quotes (free) from the website www.annuityquotes.com . More expert tips: How to evaluate choices

Problems with the annuity rules

Though the minimum distribution regulations assume that the world is divided neatly into annuities and nonannuity contracts, the insurance industry (in response to market demand) is busy developing more and more “hybrid” products: Contracts that provide guaranteed life income (like