In the past, companies offered defined benefit pension (DB) plans as a means of attracting and retaining skilled employees. Typically, these were funded and invested by the employer, and benefits were determined by an employee’s income and tenure.
Today, DB plans are nearly extinct.
Before the financial crisis, DB plans sponsored by many reputable companies were fully funded with enough money set aside to pay the benefits to current and future retirees. By 2012, DB plan funding levels had fallen to 69.5% — an unwelcome development exposing companies to increased pension risks.3
PENSION PLAN DE-RISKING
During the past few years, strategies have been developed to help companies reduce the risks associated with their defined benefit plans. One approach is to offer current retirees and former employees the option to take lump sum buy-outs instead of receiving income during retirement.4
LUMP SUM DECISIONS
Lump sums give participants an opportunity to take the full present value of their earned and vested plan benefits, as well as the flexibility to make choices about how to invest the money according to their needs.3 If you’re offered a lump sum payout, its important to weigh the pros and cons before making a decision on how to best leverage your assets.
4Deloitte, CFO Insights De-risking pensions: Can it be done?, 2013. National Retiree Legislative Network, Pension Plan ‘De-Risking’:
5Strengthening Fiduciary Duties to Protect Retirees, 2013.