In 1995, a study was done looking at the top 100 Fortune 500 companies in America. One part of this study was whether there was more value in a defined benefit pension or whether an employer sponsored savings plan would be best. You recognize the latter as a 401K or 403B plan. To understand this comparison, let’s first understand the difference:
- Employer Sponsored Savings Plan: A participating plan where your employer will contribute to the retirement savings investments for the employee after a certain period of employment. Often, these plans may include the employee participating at a 3-6% contribution to get a 3-6% matching contribution to the plan. This 401K or 403B plan will be yours and available after you are 59.5 years old for your needs.
- Defined Benefit Pension Plan: This plan can be participation or non-participating, but the risk lies completely on the employer to maintain an income payment for a certain period of time once the employee retires. Often, this benefit is selected for the lifetime of the employee and their spouse.
There are pros and cons to both investments, but with limited space to write this month on this topic, I will focus on whether it makes sense to leave your Pension with your employer after you retire. Most retirees don’t know that they could move it, and most don’t recognize that it may make sense to. Let’s look at a couple of ideas on this.
A Pension is a unique guarantee with your former employer to receive an income for a period of time or for life. Most of the time, the Pension is insured by an Annuity company, and like a debt collection concept, the Annuity company will guarantee what they can while still remaining profitable. So, here is the question: Have you ever thought of moving your pension to another Annuity company? The fact is, most of the largest companies in Iowa that provide Pensions are having them serviced with an insurance and annuity company that isn’t offering you the highest guarantee that could be available. So what do you do?
A Pension will often offer a lump sum value that you can take at retirement, instead of the income option. It may be completely taxable, so it may have to go direct to the new company, if it is in your best interest. In the understanding of how these “vehicles” work, you could consider taking this lump sum amount to a different insurance company and possibly locking in a higher guarantee income payout for life. It may also guarantee a death benefit, that may otherwise not exist with leaving it with your employer. And the good news, with Iowa as the “insurance capital” of the USA, you have lots of options.
So, what do you do? Working with a Fiduciary Financial Advisor will help you to understand whether it is better to leave your Defined Benefit Pension with your employer or move it to a different Pension company. You might be leaving thousands of dollars on the table by not considering it.
As always, let us know if we can be of any help.
Blessings,
Dan