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Rollover to pension could increase income stream, but forfeits access to capital
The federal Pension Benefit Guaranty Corp. (PBGC) had made it easier for participants with both a 401(k) plan and a defined benefit pension to roll over funds from the former to the latter, when their 401(k) plan provides the option to do so.
Participants who make this type of rollover would increase the amount of their annual pension income during their retirement years, but would forfeit access to the capital that was rolled over from the defined contribution plan.
The PBGC, which insures private-sector pension plans, published a final rule in the Federal Register on Nov. 25, 2014 stating that:
• Amounts rolled over from defined contribution plans to defined benefit plans would not be included under the limits on annual pension income limits invoked when the agency steps in and pays benefits for bankrupt pension plans. For a plan terminating in 2015, the agency's maximum guaranteed benefit for a 65-year-old retiree will be just over $60,000 a year.
• Rollover amounts generally would remain untouched by PBGC's five-year phase-in limits. Normally, benefit increases from changes to a plan in the five years before it ends are partially guaranteed. Under the new rule, these restrictions generally would not apply.
AARP commended the agency's action in a released statement, saying that the move "provides additional guarantees for the rollover of pension benefits, thus facilitating access to lifetime income streams and bolstering participants' retirement security."
But Arlington, Vir.-based financial advisor Ric Edelman was less enthusiastic. In a commentary posted Dec. 3 on CNBC.com, titled "Please avoid this great new retirement savings opportunity," Edelman cautioned that:
Placing that 401(k) balance into the pension plan means you'll forever give up access to the principal. … If you ever need a lump sum due to, say, a medical problem, marital issue, family need, job loss or whatever, that money will be unavailable. When you die, the monthly checks stop—and the principal is gone forever.
Edelman also noted that most pension plans provide monthly incomes that don't increase with inflation, so that "although you're guaranteed to get the check, you're also guaranteed that it won't be worth as much in the future."
These arguments mirror those made in favor of taking a lump-sum pension plan distribution at retirement, if that option is offered, and then reinvesting those funds rather than choosing to receive monthly pension payments for life. And as with that debate, the choice will hinge, to a large extent, on the participant’s comfort with the financial risk of investing retirement assets on their own or with a financial planner.
Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow him on Twitter @SHRMsmiller.
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