Cash Distribution on DB Pensions at Retirement.

[Guest Justin Hocker]

For those with DB pension plans, do you allow upon retirement, retirees to have the option to elect a cash option (100% or partial) versus annuity? If so, what are potential pitfalls, problems, etc. We are looking at this and as one member of trustees, I'm against due to administration burden regarding pre-retirement counseling. Presently, we offer 7 different annuity options for retirees.

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Justin

[david rigby]

Depends on many factors. Many large plans do not allow an unlimited lump sum option. Many small plans do, especially if it is a "family" business.

The most obvious (to me anyway) difference in this is that your investment strategy may be affected. That is, the traditional design of a DB plan pays monthly benefits to retirees. Thus, the trust continues to hold the money for investment. The trust/plan sponsor also bears the risk of bad investment and reaps the reward of good investment. If you pay out the entire value of the benefit at retirement date, then you are increasing your cash flow, and removing potential investmetn return.

In U.S. qualified plans, the interest rate required to value the lump sum will usually be less than the long term exepcted rate of return. Thus the plan may pay out a lump sum that exceeds the true actuarial value of the monthly annuity.

On the plus side, the lump sum is easy to understand and communicate.

Few plans offer a partial lump sum option.

[This message has been edited by pax (edited 04-07-2000).]

[jlf]

Justin: I would be ashamed, as a Trustee, to say I am against lump sum distributions because of the administrative burden of offering pre-retirement counseling. Isn't there an "administrative burden" in annuitizing? Your fiduciary responsibility is to offer reasonable choices, notwithstanding "administrative burdens". You cannot be accused of offering an unreasonable number of payout options if you offer all the options permitted under Federal tax law.

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yes

[This message has been edited by jlf (edited 05-04-2000).]

[This message has been edited by jlf (edited 05-06-2000).]

[Guest Ray Williams]

Pax- if you think offering a lump sum distribution is the easiest for the Participants to understand, see the yesterday's Benefitslink Newsletter, where Treasury asserts that Participants do not receive correct information about lump sum distributions, and in fact cost themselves " tans or evene hundreds of thousands of dollars" of lost benefit.

[KIP KRAUS]

Justin:

It occurs to me, just a guess, that if you made a change on a sizeable plan to allow for lump sum distributions it would require an immediate actuairial increase in the funding of the plan unless the plan is way over funded. Have you run this by your actuary for such a possibility? That may be an immediate draw back.

[david rigby]

I agree with comment from Kip.

I have read the comments about the lump sum vs. monthly. One article gave a specific example regarding an IBM employee. I believe there must be some information missing in this example, such as the possible impact of an early retirement window, because it sounds like apples and oranges to me.

[This message has been edited by pax (edited 05-05-2000).]

[Guest Justin Hocker]

As clarification to the individual in NJ, I was NOT attempting to get out of the lump sum payments on DB plans as an "administrative" reason, but only to simplify the explanation process to potential retirees.

If you administer DB plans with six different annuity options, most employees do not understand initially what an annuity is. When you throw in our proposal on have certain % in cash along with various annuity options, it makes it more difficult to provide the accurate information for ees to prepare their retirement financial planning.

I have read that DB plans are either being phased out for cash balance type of plans, or at least being simplified. What our employer proposes is to make it more complex for the employee. The DB plan was (and is still) designed to provide a basic monthly benefit (guarantee) for employees retirement, such as the reason Social Security was set-up. Why make it more confusing to the employee, increase liability upon the employer and trustees (like me), and take a new approach to an aging dinosaur that has pretty much outlived today's working society?

[Erik Read]

Very good string!

However, Justin, I must disagree with your statement that Defined Benefit Plans are aging Dinosaurs. They are coming back in force. Our firm is selling DB's to professional's like hotcakes!

I agree that having six annuity options as well as a lump sum provision could confuse participants, however I also think it's a viable option for participants to use in their planning. Estate planners would love to have several options to look at rather than only an annuity to work around. Provided we're talking about significant balances, I would hope the participants are using some type of an advisor for their financial needs in retirement.

[IRC401]

The discussion has focused on retirees. If someone terminates at age 30, do you want to hold on to his money for 35 years and then pay him a piddling annuity?