Pension De-Risking: Considerations Relevant to Participants
Is a pension plan you serve considering de-risking? If so, your clients may be well-served if you make sure they are aware that de-risking means more than addressing problems the plan itself may be having — it means that participants may have some decisions to make as a result.
In a recent Wall Street Journal blog entry, “How Pension De-Risking May Increase Your Pension Risk,” Dana Muir provides a discussion that illustrates the importance of de-risking to participants. And it suggests some questions by which plan participants may make a more fully informed decision regarding whether it wants to de-risk.
Muir argues that while de-risking may be beneficial for the plan itself, it ironically could put participants’ and beneficiaries’ benefits at risk. This is at least in part because one of the methods by which de-risking can be accomplished, lump sum payments, a participant may outlive the revenue; in another, annuity purchases by the plan, Pension Benefit Guaranty Corporation protection is lost.
So de-risking is not to be undertaken lightly. And Muir reports that according the Government Accountability Office, and the Department of Labor’s ERISA Advisory Council, employers need to do a better job of informing participants and beneficiaries about de-risking.
Muir suggests questions that participants may need to consider when de-risking is a possibility.
If the plan is contemplating de-risking by offering lump sums, Muir suggests that participants may ask:
- how much a pension would be per month if it is left in the plan;
- how many months a lump sum would last if the same amount is spent per month; and
- what the tax implications may be.
And if the plan is considering de-risking by providing annuities from a separate company, they may ask:
- which company will provide the annuity.
- about any state guarantees, including any limits on the guarantees; and
- about the calculation of a pension to be sure the annuity will be for the proper amount.
These questions are instructive for those who serve the plans to which they belong, and provide food for thought and a reminder that doing what’s good for the plan in one way can have effects on participants beyond the benefits of plan solvency.