Pension terminated .. have options

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agsmith77
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Pension terminated .. have options

Post by agsmith77 » Thu Oct 11, 2018 12:09 pm

My pension plan was frozen and now has been terminated. I have 70,000 in the account. My options are:

1. Lump sum and roll over to 401k .
2. Defer payment and continue pension to an insurance company. It is compounding at 5% per year minimum or higher if interest rates go up. Estimates are that pension will go to 160,000 at 5% compounding in 18 years when i am eligible to retire.

I'm thinking option 2 as safest? How realistic is it to get those returns on 401k?

thanks.

bloom2708
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Re: Pension terminated .. have options

Post by bloom2708 » Thu Oct 11, 2018 12:43 pm

What are the fees with option 2? The words "insurance company" would have me running.

With Option 1, I assume you mean Rollover/Traditional IRA, you are in full control.

Roll it to Vanguard or Fidelity. Low cost, broad market based index funds at your desired mix of stocks/bonds.

Put it at Vanguard in the LifeStrategy Growth fund (80/20). This is a 4 in one fund that encompasses the entire market. Let it sit for 20 years.

5% over 20-30 years is certainly possible. With option 1, you are in control.
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agsmith77
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Lump sump vs Pension at 5% compound

Post by agsmith77 » Thu Oct 11, 2018 12:44 pm

[Thread merged into here, see below. --admin LadyGeek]

Hi my company has terminated my the pension. I have 18 years until I can retire. The options are: 1) to either leave it as is (currently $70,000)and collect 5% compound interest which would be $160,000 when I'm eligible to retire (this would be given to an insurance company). 2) Or Take lump sump (rollover to 401k). Is it realistic to get 5% compound return for the next 18 years from the 401k? Which option would seem best from an investment return perspective. Thanks.

agsmith77
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Re: Pension terminated .. have options

Post by agsmith77 » Thu Oct 11, 2018 12:46 pm

I am not eligible for IRA only 401k and I am with fidelity.

fulltilt
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Re: Pension terminated .. have options

Post by fulltilt » Thu Oct 11, 2018 12:47 pm

How are the funds "guaranteed" to increase? Who is making that guarantee? What are your payment options at retirement? Can you take a lump sum at retirement?

If you think getting at least 5% in the market will be challenging over the next 20 years, what makes you think the people managing the pension funds will do any better? If they can't do better, where does the money come from to make up the difference?

Second, why do you think are not eligible for an IRA to roll the funds into?

agsmith77
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Re: Pension terminated .. have options

Post by agsmith77 » Thu Oct 11, 2018 12:51 pm

The 5% is guaranteed from the company until I am eligible. I'm not sure about the IRA I was told you cannot only 401k.

FoolMeOnce
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Re: Lump sump vs Pension at 5% compound

Post by FoolMeOnce » Thu Oct 11, 2018 12:52 pm

It is realistic to expect 5% with risk. Also, if you invest that $70k according to your asset allocation and are not at 100% equities, the probability of outperforming 5%/year starts shrinking. I would take the 5% guaranteed growth if the insurance company is reputable and there are no exorbitant fees. You could also consider this a part of your bond/fixed income allocation and invest more in equities.

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Re: Lump sump vs Pension at 5% compound

Post by bradpevans » Thu Oct 11, 2018 12:56 pm

agsmith77 wrote:
Thu Oct 11, 2018 12:44 pm
Hi my company has terminated my the pension. I have 18 years until I can retire. The options are: 1) to either leave it as is (currently $70,000)and collect 5% compound interest which would be $160,000 when I'm eligible to retire (this would be given to an insurance company). 2) Or Take lump sump (rollover to 401k). Is it realistic to get 5% compound return for the next 18 years from the 401k? Which option would seem best from an investment return perspective. Thanks.
5% guaranteed is on the high side for guaranteed, so that factors in.
Do you get a spousal benefit on this? Lump sum puts the risk on you,
but removes solvency questions and may be better if you wish to
leave an estate.

I'm an aggressive investor: i think i can get better than 2.28x over 18 years...

bloom2708
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Re: Pension terminated .. have options

Post by bloom2708 » Thu Oct 11, 2018 12:56 pm

agsmith77 wrote:
Thu Oct 11, 2018 12:46 pm
I am not eligible for IRA only 401k and I am with fidelity.
Everyone is eligible for an IRA (Traditional, Non-deductible, Roth, Back Door Roth).

Does your company offer a 401k, you currently have a 401k with your company and they are going to move your pension into your 401k?

A 401k is a company based plan. You have to be working for a company to roll funds into your their 401k (if they allow in plan rollovers).

Maybe it is just your description/wording that is confusing.
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Gryphon
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Re: Pension terminated .. have options

Post by Gryphon » Thu Oct 11, 2018 12:57 pm

For option 2, do you know which insurance company will be managing the pension? If so, what's the company's reputation & overall health? Do you think they'll still be around in 18 years? A 5% guaranteed return might seem safe, but it's only as safe as the company making the guarantee.

agsmith77
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Re: Lump sump vs Pension at 5% compound

Post by agsmith77 » Thu Oct 11, 2018 1:02 pm

Okay I will go with the guaranteed option thanks.

tarmangani
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Re: Lump sump vs Pension at 5% compound

Post by tarmangani » Thu Oct 11, 2018 1:04 pm

What's this "guarantee"? Does it include any costs/fees? I suggest you read the fine print very closely.

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Re: Pension terminated .. have options

Post by LadyGeek » Thu Oct 11, 2018 3:44 pm

agsmith77 - You had a duplicate thread, which I've merged into here. The combined thread is now in the Personal Finance (Not Investing) forum (pension).
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Watty
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Re: Pension terminated .. have options

Post by Watty » Thu Oct 11, 2018 4:49 pm

agsmith77 wrote:
Thu Oct 11, 2018 12:09 pm
My pension plan was frozen and now has been terminated. I have 70,000 in the account. My options are:

1. Lump sum and roll over to 401k .
2. Defer payment and continue pension to an insurance company. It is compounding at 5% per year minimum or higher if interest rates go up. Estimates are that pension will go to 160,000 at 5% compounding in 18 years when i am eligible to retire.
It sounds unlikely but one thing to watch out for is that occasionally being eligible for retiree health benefits is tied to leaving your money in the pension plan.

I have a similar old pension plan that also has a 5% minimum. I will have about two years expenses in it when I turn 65 in a few years.

Yours may be different but mine has these features;
a) I can roll the money out to an IRA at any time. It was not a one time choice.
b) If I leave the money in the pension plan then I have the option of converting it to at an annuity which seems to be slightly better than an annuity I could buy.

I left the money in the plan to get the 5%. When I turn 65 my tentative plan is to take the lump sum and use that for my expenses for two years since I may be delaying starting Social Security until I am 70. This is basically liability matching.

One thing I did run into was that at one point a lot of people had taken the lump sum option so the pension plan was underfunded below some percentage. At that point you could only take half the lump sum amount and had to take the rest as an annuity. That lasted about three years then the funding improved enough so that they allowed the full lump sum again. If you leave the money in the plan assuming that you will always be able to take the lump sum later you may find that it does not always work out that way.
agsmith77 wrote:
Thu Oct 11, 2018 12:09 pm
How realistic is it to get those returns on 401k?
It is harder than it sounds. The problem is that depending on your asset allocation you might take that $70K and invest it this way;
a) $20K in bonds that are earning 3%
b) $50K in a total stock fund.

This is a problem the stock investments would have to earn enough to cover the lower earnings that the 3% bonds are getting.

The percentage in bonds will only increase as you age so that by the time you are 65 the majority of the holdings would likely be in bonds.

megabad
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Re: Pension terminated .. have options

Post by megabad » Thu Oct 11, 2018 5:33 pm

agsmith77 wrote:
Thu Oct 11, 2018 12:09 pm
My pension plan was frozen and now has been terminated. I have 70,000 in the account. My options are:

1. Lump sum and roll over to 401k .
2. Defer payment and continue pension to an insurance company. It is compounding at 5% per year minimum or higher if interest rates go up. Estimates are that pension will go to 160,000 at 5% compounding in 18 years when i am eligible to retire.

I'm thinking option 2 as safest? How realistic is it to get those returns on 401k?

thanks.
Why do you state that "estimates are that pension will go to 160,000" in 18 years? Your use of the word estimates scares me. If the 5 % is guaranteed and you start with exactly $70,000 than you should have a minimum of exactly $168,463.30 in exactly 5 years (well if annually compounded, but they should be able to tell you exactly not estimated). Other than that, if you really are guaranteed 5% indefinitely and insurance company is say A+ or better, I would probably go for that option unless you are very young.

magicman
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Re: Pension terminated .. have options

Post by magicman » Thu Oct 11, 2018 5:48 pm

I wouldn't want to deal with insurance companies so I would roll it into the 401k or an IRA. I like the idea of having more control over it.

Gryphon
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Re: Lump sump vs Pension at 5% compound

Post by Gryphon » Thu Oct 11, 2018 5:58 pm

tarmangani wrote:
Thu Oct 11, 2018 1:04 pm
What's this "guarantee"? Does it include any costs/fees? I suggest you read the fine print very closely.
The defined contribution pension at my former employer had a similar provision. Each year, the value of the accumulated contributions from previous years was guaranteed to go up by a minimum interest rate. If the underlying investments didn't perform that well, the employer would make up the difference. I think it was intended to make the transition from the defined benefit plan (which we had previously had) a bit less unpalatable - you knew the value of the contributions was guaranteed to go up every year & would never go down. There was also a maximum rate of around 10%, but we never saw returns anywhere near that. I think in the 2 decades that I participated in the plan the interest rate rose above the minimum only twice.

No fees, at least none paid by the employees. But that was for a pension plan that was still active, and not spun off to a third party.
Last edited by Gryphon on Sun Oct 14, 2018 5:50 pm, edited 1 time in total.

inbox788
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Re: Pension terminated .. have options

Post by inbox788 » Fri Oct 12, 2018 3:28 am

It's a small enough amount that I would just take it out and invest in my AA. It's not worth the trouble to keep an account open for decades and one with particularly troublesome and costly potential. Take it somewhere portable like Vanguard/Fidelity/Schwab where you're in control instead of some company, whoever runs their plan and or insurance company products. I'd imagine they'd switch servicers during this long period, probably more than once. As a past employee with a small account, it could wind up in the cracks.

Yukon
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Re: Pension terminated .. have options

Post by Yukon » Fri Oct 12, 2018 3:39 am

agsmith77 wrote:
Thu Oct 11, 2018 12:51 pm
The 5% is guaranteed from the company until I am eligible. I'm not sure about the IRA I was told you cannot only 401k.
Did you believe your pension was guaranteed by the company prior to it being frozen and terminated? I'd quit believing it's guaranteed. There is no free lunch. Roll it over.
Don't Work Forever.

agsmith77
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Re: Pension terminated .. have options

Post by agsmith77 » Fri Oct 12, 2018 3:46 pm

Thank you everyone for your responses - I'm very grateful. Sorry I didn't give enough details I was typing this yesterday while working and didn't realize I started two posts (I thought the first one didn't go through, and then saw it had been approved but I had already retyped the same question again).

The question for this post is: My pension is being terminated and I have the option to roll over the funds in a 401k or to set aside in an account run by an insurance company earning a minimum 5% compounded interest for the next 18 years.

Here are some more details to the questions asked:
For the first option of deferring payment and leaving $70,000 at 5% compound interest:
1. It is guaranteed (not estimated)
2. Yes I would be allowed to take a lump sum of 162,000 on Jan 1, 2036.
3. The insurance company has not been selected yet but I'm confident they will be credit worthy as I work for a fortune 500 company and they hired an external company to evaluate insurance companies.
4. I am 48 years old.


Basically my question comes down to: Put $70,000 with risk in stock fund or let compound at 5% risk free for 18 years and cash out at 162,000. I do like having control of the funds and having the flexibility to access those funds and also the possibility of outperforming 5% after 18 years.
I've heard you can borrow against your 401k, can you also borrow against a pension fund?

I just don't know how realistic it is to double the 70,000 in 18 years on my 401k. Thanks once again I am very impressed with this site and all the responses / advice.

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sergeant
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Re: Pension terminated .. have options

Post by sergeant » Fri Oct 12, 2018 6:35 pm

I would take the 5% guarantee and count it as F.I. for AA purposes. We don't know enough about your finances to help you make the best decision. Are you all set with your financial plan and this is a small part of it? It does worry me that you are concerned about the ability to take a loan against the amount.
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agsmith77
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Re: Pension terminated .. have options

Post by agsmith77 » Sat Oct 13, 2018 6:16 am

My 401k is a lot more than this terminated pension fund and I don't need to borrow this money. More or less my question is an investment one: Let money compound at 5% (minimum) or put in 401k for the next 18 years. The stock market has gone up substantially but 18 years is still a long time and I like having control of these funds instead of an insurance company. Something tells me I can do a lot better by leaving it in the stock market (401k). Not sure though, just looking for some investment advice I guess. Thanks

typical.investor
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Re: Pension terminated .. have options

Post by typical.investor » Sat Oct 13, 2018 7:00 am

agsmith77 wrote:
Sat Oct 13, 2018 6:16 am
My 401k is a lot more than this terminated pension fund and I don't need to borrow this money. More or less my question is an investment one: Let money compound at 5% (minimum) or put in 401k for the next 18 years. The stock market has gone up substantially but 18 years is still a long time and I like having control of these funds instead of an insurance company. Something tells me I can do a lot better by leaving it in the stock market (401k). Not sure though, just looking for some investment advice I guess. Thanks
As mentioned earlier, take the 5% rate and use it as fixed income.

Confirm if you can move it to 401k at a later date (say if treasuries someday exceed 5%).

Check into the insurance company and the backstop to it (state program). https://www.investopedia.com/articles/i ... e-fund.asp

blevine
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Re: Pension terminated .. have options

Post by blevine » Sat Oct 13, 2018 7:44 am

Eventually you may want to simplify things. A 401k can be rolled into a IRA later if you have one already. Any prior 401k accts, can consolidate to a single IRA at some point.

I dont think earning 5% over a long timeframe is difficult.

https://personal.vanguard.com/us/insigh ... ns?lang=en

Nobody can guarantee but you dont need 100% stocks to earn more than 5%. That said, I do not understand how your employer can guarantee 5% when they have not even selected an insurance company yet? Seems too good to be true. I don’t like to trust too good to be true, read the fine print. I also don’t like complexity, has to be compelling to have yet another account. Finally, I don’t like insurance companies. They are in the business of making promises and then finding ways to keep your money. Hate my every interaction with insurance companies. Vanguard knows it’s your money, and insurance firm treats the account as their money. This contract you are offered may be the best an insurance company ever offered, but read the fine print (if they give it, and if it’s in English:-)

agsmith77
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Re: Pension terminated .. have options

Post by agsmith77 » Sat Oct 13, 2018 8:13 am

The initial contract of my pension is 5% with my employer. My guess is my employer is still responsible to prepay this interest to the insurance co. in some sort of way in which they have agreed?

petulant
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Re: Pension terminated .. have options

Post by petulant » Sat Oct 13, 2018 8:18 am

blevine wrote:
Sat Oct 13, 2018 7:44 am
Eventually you may want to simplify things. A 401k can be rolled into a IRA later if you have one already. Any prior 401k accts, can consolidate to a single IRA at some point.

I dont think earning 5% over a long timeframe is difficult.

https://personal.vanguard.com/us/insigh ... ns?lang=en

Nobody can guarantee but you dont need 100% stocks to earn more than 5%. That said, I do not understand how your employer can guarantee 5% when they have not even selected an insurance company yet? Seems too good to be true. I don’t like to trust too good to be true, read the fine print. I also don’t like complexity, has to be compelling to have yet another account. Finally, I don’t like insurance companies. They are in the business of making promises and then finding ways to keep your money. Hate my every interaction with insurance companies. Vanguard knows it’s your money, and insurance firm treats the account as their money. This contract you are offered may be the best an insurance company ever offered, but read the fine print (if they give it, and if it’s in English:-)
It may be required by the employer's plan documents and ERISA that they compound at 5% regardless of the insurance company they choose, so if the insurance company doesn't like it, the employer would just have to pay the insurance company more to take the accounts.

petulant
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Re: Pension terminated .. have options

Post by petulant » Sat Oct 13, 2018 8:22 am

agsmith77 wrote:
Sat Oct 13, 2018 6:16 am
My 401k is a lot more than this terminated pension fund and I don't need to borrow this money. More or less my question is an investment one: Let money compound at 5% (minimum) or put in 401k for the next 18 years. The stock market has gone up substantially but 18 years is still a long time and I like having control of these funds instead of an insurance company. Something tells me I can do a lot better by leaving it in the stock market (401k). Not sure though, just looking for some investment advice I guess. Thanks
Most likely, having the $70,000 with the insurance company compounding at 5% is a good deal for now. But since you've got plenty of other assets in your 401(k), it probably doesn't matter in the grand scheme whether you leave the $70,000 with the insurance company or roll it over to your 401(k). So, does having the $70,000 with the insurance company stress you out or make your finances feel unnecessarily complex? If so, go ahead and do the rollover, then sleep better at night.

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Re: Pension terminated .. have options

Post by arcticpineapplecorp. » Sat Oct 13, 2018 8:33 am

agsmith77 wrote:
Sat Oct 13, 2018 6:16 am
My 401k is a lot more than this terminated pension fund and I don't need to borrow this money. More or less my question is an investment one: Let money compound at 5% (minimum) or put in 401k for the next 18 years. The stock market has gone up substantially but 18 years is still a long time and I like having control of these funds instead of an insurance company. Something tells me I can do a lot better by leaving it in the stock market (401k). Not sure though, just looking for some investment advice I guess. Thanks
welcome to the group.

If that's all you're interested in, then the answer is simple (which is in the form of a question):

Do you think you can do better than 5% a year compounding over the next 18 years investing on your own?

If the answer is yes, then invest it. You'd do better.
If the answer is no (or you're not sure), then you probably shouldn't invest it. You might not do better. You could do worse (i.e., how do you manage your emotions when the stock market falls?) or (what if the returns don't work out exactly as you planned...sequence of return risk. What if you were earning 5% a year and then the year you retire your investments fall 20%? Will you have regret?)

Now if you answer that you could definitely do better than 5% a year compounding over the next 18 years, tell us exactly what you'd invest the money in over the next 18 years that will do better than 5% per year. And I'm sure some will have ideas about that (you've already received one recommendation for vanguard life strategy growth). Whether that fund or some other mix of funds you'd choose will do better than 5% a year compounding over the next 18 years is the question. It's unknown. There's no slam dunk investment you can make today that will guarantee you more than 5% a year for the next 18 years (and if someone says annuities are paying 6% a year...part of that is return of your principal, so, no).

Another thought is perhaps you don't need to make 5% a year (or more, which you're trying to do), in which case the 5% you're being offered might be enough/more than what you need, in which case why take additional risk for no reason? We don't really know because you haven't posted all your details. If you wish to do so, click the link below and reformat your post according to the following:

viewtopic.php?t=6212
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agsmith77
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Re: Pension terminated .. have options

Post by agsmith77 » Mon Oct 15, 2018 1:10 pm

The money has gone to the insurance company and will accrue 5% compounded interest for the next 18 years. The only thing that bothers me about this is that I can never take it out until then.

Thanks everyone for your help.

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