How to know if a pension lump sum is right for you when companies like GE offer one

Personal finance

About 100,000 ex-employees of General Electric will face a choice soon: stay in the company’s pension plan or accept a lump sum and cut ties instead.

Whether you count yourself among those former GE workers or are employed by another company with a similar option on the table, advisors say the decision shouldn’t be made lightly.

“It can be tempting to accept a large-sounding payout, but you have to consider if you have the help necessary to invest the funds successfully,” said certified financial planner Liz Miller, president of Summit Place Financial Advisors in Summit, New Jersey.

The logo of General Electric is pictured at the company’s site of its energy branch in Belfort, France, February 5, 2019.

Vincent Kessler | Reuters

GE announced Monday that, as part of its efforts to reduce deficits in its pension plan, the company will make changes to benefits for some current and former workers.

In addition to the lump-sum offer for the 100,000 or so ex-employees who have not yet started receiving pension payments, GE also will freeze plans for about 20,000 U.S. salaried employees after 2020, as well as supplementary pension benefits for another 700 executives. A pension freeze generally means that your accrued benefits stop growing and no more funds go into the plan.

GE, whose pension has been closed to new enrollees since 2012, also said this latest move will not affect retirees already receiving their benefits.

The company is not the first to offer similar buyouts — Federal Express, Verizon and General Motors are among others that have gone this route for varying reasons. As companies continue shifting away from defined benefit plans such as pensions, which are funded by employers, to defined contribution plans like 401(k) plans — largely funded by workers through payroll contributions — employees are increasingly faced with funding their own retirement.

About half (51%) of private-industry workers had access only to 401(k) plans or similar plans in 2018, according to data from the Bureau of Labor Statistics. Just 4% had only a pension available, and another 13% had both options. In 1990, about 35% of workers participated in a pension plan.

For people who are offered a lump sum in exchange for exiting their company’s plan, there are some things to consider.

For starters, be aware that the amount offered is generally lower in comparison to the amount you are promised to get down the road, over time, if you were to stay in the plan.

It can be tempting to accept a large-sounding payout, but you have to consider if you have the help necessary to invest the funds successfully.

Liz Miller

President of Summit Place Financial Advisors

However, if you want to remain a participant, be sure you have confidence in the company’s ability to make those future payments. Although the Pension Benefit Guaranty Corporation would step in if the company could not, the federal agency would pay only a certain portion of promised benefits.

Sometimes, companies end up buying annuities for workers who decide to remain in the plan, which means an insurance company takes over the payments (and the financial risk).

Also, if you choose to remain in the pension plan instead of taking the lump sum, keep in mind that the amount you’ll receive may be fixed for life. Pensions typically don’t have a cost-of-living adjustment for payments, which means the income would lose purchasing power over time.

Additionally, although some pensions offer spousal benefits — i.e., when you die, your spouse would continue getting a portion of the payments — there is nothing left for heirs. In other words, your death (or your spouse’s) ends the plan’s obligations to you.

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In contrast, if you take the lump sum, you might have money left over at the end of your life that could be left to non-spousal heirs.

There are other aspects of the lump sum offer to consider, as well.

If you don’t roll it over to an individual retirement account or other qualified option, you’ll pay taxes on the distribution. So, assuming the money would go into an IRA, you’d also need to decide how to invest those assets to meet your income needs.

“Say staying in the pension plan would mean getting $35,000 a year through monthly payments,” said Jon Ulin, a CFP and managing principal of Ulin & Company Wealth Management in Boca Raton, Florida. “Look at the lump sum and ask yourself if you could re-create that income with the amount you’re being offered.”

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And, how you invest should be based on factors that go beyond that equation, including your risk tolerance. That’s generally a combination of how long until you need the money and whether you can tolerate swings in the stock market.

You also need to be aware that rolling over the money and choosing how to invest it might not be the end of your decisions.

If the money goes into an IRA, for instance, you’ll face required minimum distributions from that account once you reach age 70½. Those annual amounts, which are based on a combination of your account balance and lifetime expectancy per IRS tables, could generate penalties of 50% if they are not withdrawn.

There are ways to reduce those required distributions and the taxes you pay on them — such as by rolling over to a Roth IRA — but those decisions are best done with the advice of a professional.

Also, if your company offers a partial lump sum — with the rest remaining in the plan — that might help make the choice easier. However, any decision should be in the context of the rest of your financial plan, advisors say.

“You have to decide ‘do I want the risk of a pension with no inflation protection, or do I want to manage the money myself and have it not work out as well as planned,'” Ulin said. “It’s a sensitive decision for a lot of people.”

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