Should you accept a lump-sum pension buyout?

Would you rather have monthly income through the rest of your life or a big check now that you can use and invest for yourself? If you haven’t already had to face this question, a recent decision from the Treasury Department has increased the chances you’ll face it later.

As CNN reports, the Treasury recently abandoned the Obama-era decision to discourage lump-sum buyouts of pension plans. This has led business across the country to start lining up potential buyouts, and though most economists argue against accepting these buyouts, retirees continue to accept them.

Whats the angle?

The number of Americans with pensions has declined greatly over recent years as businesses have used 401k plans to shift most retirement risks to their employees. But more than 26 million Americans still have pension plans, and those plans bring considerable investment risks to the companies paying for them. In addition, employers need to insure their pension plans with the Pension Benefit Guaranty Corporation (PBGC), and its premiums have risen. Buyouts offer employers a legal escape from the pensions game.

Why do retirees take the buyouts?

If economists continually warn people not to accept buyouts, why do people take them? Psychology plays a big part. The amounts involved are tempting, and investors often claim they’ll be able to help people get more from their money than their pension plans would. But a 2015 report from the Government Accountability Office found that the IRS rules for buyouts allowed employers to offer lump sums that were well below the actual value of the pensions. Retirees who accepted the lump sums found themselves in the hole from the outset.

How long do the buyouts last?

CNN reports that one-fifth of all retirees who took the lump sums burned through them within five and a half years. AARP reported that 63% of the people who took lump sums shifted their focus from sustained retirement to major purchases within the first year, using the money for vacations, home improvements and other high-price items. The result was that 35% of all people who took lump-sum payments worried they would run out of money before they died.

What obligations do employers have?

Under the Employee Retirement Income Security Act (ERISA), employers and the sponsors of benefit plans need to provide participants with information about their plans, and they need to manage their plans in their benefits’ best interests. According to CNN, however, employers and plan sponsors don’t need to inform retirees about the difference between the value of a pension plan and the lump-sum buyout.

Its rarely a good deal, but it should be fair

If your employer offers you a lump-sum buyout, you should know the reasons why and the risks involved. You should also make sure you’re getting a fair deal. The law prevents your employers from going below market value, but you may want to look closely at the assumptions your employer has made in pricing your plan.

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