More than 90% of employees opt for a lump-sum payout from their pension plan when given the choice. That could be a mistake.
Under rules that became effective in 2008 and that affect millions of workers, companies such as AT&T Inc., Chevron Corp., and Dow Chemical Co. have been quietly changing the way they calculate lump-sum payouts from their pension plans—phasing out their use of a Treasury-bond rate to calculate lump sums and replacing it with a higher composite corporate-bond rate.
The result: substantially lower payouts to employees who are changing jobs, being laid off or retiring—anywhere from 10% to 60% or more, depending on age and other factors.
***
The changes are part of the Pension Protection Act, sponsored by Rep. John Boehner (R., Ohio) and signed into law by President George W. Bush in August 2006. Employers had complained that the Treasury rate was so low that departing employees were getting a windfall and asked Congress for relief.
***
Companies had been using the 30-year Treasury bond rate to calculate lump sums since 1994. Before then, they were using a lower rate, and complained that employees taking lump sums were getting a windfall. Companies persuaded Congress to let them replace it with a then-higher 30-year Treasury rate, which at the time was about 8%.
The change to the then-higher rate angered employees, who realized their payouts would be reduced by tens of thousands of dollars. But the current change has received little notice. Unlike other moves that reduce pensions, employers aren't required to notify employees of the change, and most financial advisers are unaware of it.
Read the whole thing.
No comments:
Post a Comment