Life and Death Planning for Retirement Benefits

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444 Life and Death Planning for Retirement Benefits
pension starting at age 65). If he takes the lump sum, he is giving up $60,000 (five years’ worth of
$1,000-a-month payments) and getting nothing in return.
Does this mean the participant should always choose the subsidized benefit, to avoid
wasting money? No. If the participant is in poor health, or if the pension plan is in poor financial
shape, any life annuity would be a “bad bet,” even if it is subsidized. The point is not that one
should always take the subsidized benefit; the point is that one should be aware which benefit
forms, if any, are subsidized by the plan, in order to properly evaluate the choices. This point can
be missed when (for example) a financial advisor who wants to manage the participant’s money
focuses only on the possibility of rolling over a lump sum distribution to an IRA, without
evaluating the plan’s annuity options.
10.4.04 More expert tips: How to evaluate choices
How can the retiree tell the relative values of different benefit options? Fred Lindgren, Vice
President and senior actuary with Fidelity Investments, points out that (since 2006) pension plans
are required to tell retirees the relative values of the different options the plan is offering them. See
Reg. This regulation, though it appears to deal with qualified annuity options
that must be offered to married participants, also applies to unmarried employees.
Unfortunately, Fred says, the plan’s use of different interest and mortality assumptions to
calculate benefits and/or display the “relative values” of benefits (all as permitted by the IRS
regulations) may create additional confusion. Accordingly, the participant should still seek outside
help. A professional advisor acting on the retiree’s behalf can evaluate the options using “apples
to apples” comparisons, and can also consider the individual’s own health and financial needs, and
the financial health of the plan, factors the plan does not take into account in its “relative value”
analysis. Fred also warns:
 If you delay the start of your pension (for example, because you are still working), will
you get an increased pension when you eventually start taking payments, or are you giving
up current monthly payments and getting nothing in return? In this situation, a “cash
balance” plan would typically be more favorable than a “classic” DB plan.
 If you want an annuity benefit: Will the plan buy your annuity from an insurance
company, or fund it directly from plan assets? If the latter, and your benefit exceeds the
amount insured by the federal pension guaranty program, are you willing to take the risk
of the plan’s insolvency? Are you better off rolling over a lump sum to an IRA and buying
the annuity in the IRA?
If the amount of benefits is not large enough to justify the fee for consulting a professional
actuary, a “quick and dirty” method of evaluating the plan’s annuity offerings is to compare the
prices you would have to pay to purchase each option from an annuity company, outside the plan.
You can obtain such annuity quotes (free) from the website
10.4.05 Problems with the annuity rules
Though the minimum distribution regulations assume that the world is divided neatly into
annuities and nonannuity contracts, the insurance industry (in response to market demand) is busy
developing more and more “hybrid” products: Contracts that provide guaranteed life income (like