Before this month, General Electrical appear a freeze on pension benefits for existing employees and a lump sum pension buyout offer for 100k former employees.

This topic is very existent for me, both every bit a fiscal planner and as a one-time employee that has been promised a lifetime annuity starting at age 60.  I worked at Full general Electric for approximately 17 years and joined the visitor well before they closed the plan to new entrants in 2012.  And then, why did they stop enrolling employees and why are they now freezing the plan for current employees and trying to buyout former employees?

A Brief History of Pension Plans in the United States

In 1875, theAmerican Express Company established the get-go alimony fund for employees in the United States.  Broader adoption of this retirement funding strategy did non happen overnight.  By 1940, nearly 15% of all private sector workers were covered by pension plans.  At the height of its popularity, approximately 35.nine one thousand thousand workers, or 46% of all private sector workers were covered past a pension in 1980.  Today, that number has fallen to eighteen% of domestic workers in the private sector, according to the Bureau of Labor Statistics.

What acquired the decline in popularity of pension plans?

In 1978, the U.S. Congress passed the Revenue Act of 1978, which established that employees did non take to pay taxes on income they elected to receive equally deferred compensation. A few years later, Ted Benna, a benefits consultant with a individual company, used his own estimation of this police to establish the first 401(k) plan that enabled employees who deposited money into their own accounts to receive matching contributions from their employer.

Aside from the introduction of the 401k and other alternative retirement plans, the other primary crusade of decline for alimony plans is their ever increasing costs. In 1960, life expectancy was approximately lxx years of age (67 for men, 73 for women).  By 2010, life expectancy had increased to approximately 79 (76 for men, 81 for women).  Any program administrator had to have into account the statistical expectation of an additional ix years of benefits.  And we tin certainly expect that the 2020 data will show some other tangible increase in life expectancy relative to the 2010 effigy.

Signing up for a guaranteed payment over a xx-xxx yr retirement horizon has fabricated defined benefit plans financially unviable for companies.  In social club to address this ballooning liability on their residuum sheets, they are required to explore all of their options.  2 primary options that are bachelor: (1) end or freeze their program so that additional benefits cease accruing and (2) offer discounted lump sum buyouts on benefits that have already been earned.  As noted in the intro, GE pulled both of these levers by freezing their pension (constructive January 2021) and offer lump sum buyout offers to one-time employees.

A Alimony Buyout Example

A alimony buyout offering is not readily available for most employees and thus it is a scenario that many have never even contemplated.  Below are fictitious numbers, only they are presented in relative proportion to how the alimony buyout offering from GE was presented to me in my offering alphabetic character.

Option A:  Have a one-fourth dimension lump sum in the amount of $150,000.  By accepting this payment, you relieve the company of all futurity alimony payment obligations.

Option B: Take a reduced monthly benefit of $725, which begins immediately upon your acceptance of this offer.  Same as above, accepting this offering permanently reduces your lifetime annuity benefit to this agreed amount.

Option C: Take your monthly original monthly do good of $2,275, which will begin the starting time month following your 60th birthday.  This is the default option if no action is taken earlier the stated borderline.

OK, how should you go virtually evaluating this offering?  Allow's get-go with the lump sum (Pick A) against the originally promised lifetime annuity (Pick C).

The $150,000 lump sum equates to 5.v years of the original annuity ($2,275 x 12 = $27,270 ; $150k / 27k = ~5.v).

Based on the unproblematic "back of the envelope" calculation, you might conclude that getting 5.5 years' worth of benefits in exchange for forfeiting a lifetime annuity that could bridge thirty+ years would be too much of a disbelieve to exist worth considering.  But this is where the time value of money comes into the picture.


The $150k lump sum would be paid out today (or very shortly after accepting the offer).  In my case, I am 16 years away from the first monthly alimony payment.  Then, let's take the $150k and assume a pocket-size average annual render of five%.  16 years downward the road, the $150k payment would abound to ~$327k.  At the theoretical start line of retirement benefits, the lump sum balance is 12 times the annual pension benefit.  If y'all increase your expected investment return to 6%, the balance at age 60 jumps to $381k (14x annual pension benefit).

It's of import to notation that the 5-6% annual return is not guaranteed and investing in stocks/bonds/real estate and other asset classes involves the adventure of principal loss.  That said, the long-term average annual return on the stock market (as measured by the Southward&P 500 index) is approximately ten% while the Barclays Aggregate Bond Alphabetize shows a long-term return of 3.18% (per Morningstar).

In my view, having close to xv years of cumulative pension benefits in your account on the day your normal pension benefits would begin is a very compelling argument in favor of the lump sum.  At age 60, you can brainstorm to "pay yourself" the equivalent annuity while allowing the large remaining balance to continue to grow.  You lot also no longer have the risk that your former employer will non brand good on their promise of benefits throughout your retirement period.  That said, at that place are several important questions to ask yourself before accepting that big buyout check:

Risks of Accepting the Lump Sum

ane) Do I have the financial subject area to resist taking the lump sum and spending the money on something other than it'southward original purpose...my financial security in retirement?

It's not every day that someone places $150k in front end of you.  In that location could be many alternative uses:  a down payment on a home, upgrading your car, contributing to your child's higher fund.  These might be noble causes, but in addition to robbing your own hereafter financial security, you're as well making a poor financial decision by subjecting yourself to current tax AND by incurring a 10% penalty (generally before historic period 59.five).  Rolling over the funds to a suitable retirement account (your current 401k or an IRA) will be the better selection unless you are currently facing major fiscal hardship or take debt at very loftier interest rates.

2) Am I confident that I tin manage these funds on my ain?

With great privilege comes great responsibleness.....I think those words of wisdom come from Mr Spiderman himself.  Receiving a windfall can be a blessing if you feel comfortable managing your coin and choosing an appropriate investment strategy.  For those that don't fall in that category, information technology can exist a curse or a tremendous source of feet.  Simply depositing the funds in the bank will earn you 0.01% in basic checking/savings or at all-time 0.8-1.0% (as of September 2020) if you choose a high-yield savings account.  If you lot go along your money "on the sidelines" for xx-30 years, inflation will erode the purchasing power to almost half of what information technology can purchase you today.  You need to have a well thought out plan to manage this balance or y'all need to find a professional to have on this responsibleness for you lot.

three) Does my family bear witness signs of longevity?

If you have several family member that accept lived well into their 90's and you are generally in very good health, you might be well advised to at least pause and consider the potential that you also will live to a ripe old historic period.  You lot need to take a fiscal program that will fund a lengthy retirement period.  One of the arguments in favor of keeping the pension is you cannot outlive it.  Taking the lump sum increases the potential adventure that yous will outlive your money.  On the flip side, if you have specific health risks or reasons to await a shorter life expectancy, all else equal the lump sum payout becomes more attractive.

Risks of Holding On To Your Current Pension Benefits

Now that you have considered important questions on the risks and rewards of taking a lump sum payout, what risks demand to exist considered if you lot choose to keep your regular pension benefit?

i) What is the risk that my company volition not pay my full alimony benefit when I retire?

If someone asked me this question on the mean solar day I joined GE and started accruing my pension, I would take said in that location was practically a 0% likelihood that my do good wouldn't be paid in total.  GE was one of the largest public companies in the world and was the sole surviving fellow member from the original Dow Jones Industrial Index from 1896!  During the second year of my employment in 2000, the company reached its highest market cap (share price ten shares outstanding) at $594 billion.  As I write this, GE's marketplace cap is $55 billion (a 91% drop), the in one case certain dividend has been cutting to as depression equally $0.01, and the visitor has the largest pension deficit (assets minus projected liabilities) of any U.S. public visitor.  Based on this fact pattern, I encourage anyone with a pension to run a retirement scenario where your employer cannot make the payments, the Pension Benefit Guaranty Corporation steps in, and your pension benefit is significantly reduced relative to its original value.

2) What happens to my pension if my former employer goes out of business?

Equally I eluded to immediately to a higher place, if your employer is no longer in business or can demonstrate a stressed financial state of affairs, the Pension Do good Guaranty Corporation (PBGC) is the government entity that will take over the pension liability and brand payments to the pension participants.  The PBGC is primarily funded by premiums collected from defined-do good plan sponsors.  Click Hither for some FAQ's on how the PBGC operates and the probable impacts to the timing and amount of your do good payments if they were required to step in.  In my view, while information technology is certainly proficient that the government has established the PBGC to protect pension participants, I'm not excited nearly a retirement funding programme that is relying on the federal regime for both my pension AND my social security benefits.  Also, if the PBGC is funded via premium payments from programme sponsors, the premiums are built on assumptions regarding how many alimony plans they volition accept to eventually assume responsibility for.  If the premium calculations underestimate their ultimate liability, it seems the PBGC might face the aforementioned financial challenges projected for the Social Security trust (i.e. benefit expenses are as well loftier and revenue is too low).

Building a retirement program involves several key assumptions (investment returns, life expectancy, tax rates, aggrandizement, social security, etc) and has a lot of moving pieces.  Hiring a financial planner tin can get answers to of import questions like "am I on track to retire and stay comfortably retired?" and they can run retirement projections nether both scenarios (1 - have the lump sum and invest it ; ii - keep your monthly pension do good) to see which projects a higher probability of success.

If you accept been presented with a pension buyout offering and you are unsure of the all-time determination for your situation or if you lot would like an independent view on your progress toward retirement in general, please contact me or click HERE to book a complimentary consultation.