Retirees allowed to change benefit election

[ConnieStorer]

We have a defined benefit plan that wants to terminate. The plan has only allowed lump sum payments of less than $5,000. There are over 100 Retirees who are currently receiving monthly payments from the Plan. The client would like to offer lump sum payments to as many of the Participants as possible. We told them that this is no problem for Actives and Deferred Vested Participants but that we generally advise them to purchase an annuity for the Retiree group.

Is there any regulation that prohibits us from providing the lump sum option to a Retiree? I am especially concerned about the expense of purchasing annuities for elderly Retirees with small monthly benefits. The current lump sum value for several of the Retirees is less than $5,000.

Thanks

[david rigby]

This topic has been discussed a few times earlier. Start here:

http://benefitslink.com/boards/index.php?/topic/55009-change-benefit-election/

Your concern about the cost of annuity purchase is well-founded; look into a group annuity purchase as well as individual annuities.

It cannot be stated too strongly, on average retirees will not like this.

[My 2 cents]

Ask anyone at the DOL or PBGC and they will tell you that money is no object when terminating a plan.

The information provided to the retirees in connection with an offer to cash out their annuities must be clear enough for the oldest retirees to have a clear understanding of what is being offered and the financial consequences of taking a lump sum (imagine how the lawsuit would turn out if an elderly retiree takes the offered lump sum and then, that money being long gone, tearfully testifies that they had no idea that it would mean that the monthly checks would stop!), and however much higher the annuity cost may be than a lump sum payout, there can be no hint of coercion. There can be absolutely no pressure put on the retiree to cash out the monthly annuity they have been receiving, and if the participant retired with a joint benefit and the spouse is still alive, no pressure can be put on the spouse to sign off on a lump sum. Not sure what happens if the participant retired with a QJSA in place and has since remarried - presumably at least the former spouse would have to agree (good luck with that!).

Unlike participants not in pay status with benefit worth less than $5,000, for whom no annuities will be available, retirees with smallish remaining benefits have the absolute right to insist that their benefits be annuitized.

What about retirees unable to handle their own affairs? Do you trust those with powers of attorney or guardianship to make an appropriate decision, solely based on what is best for the retiree, with respect to the offer of a lump sum?

One thing to bear in mind, the more retirees being purchased, the wider the selection of annuity providers or annuity products. If 60 of the 100 retirees choose lump sums, there may not be enough left to gain access to many group products or insurers.

The actives and the deferred vesteds have the authority to demand that their benefits be annuitized. If any of them want annuities, having the retirees included in the annuity purchase will probably make it go smoother.