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Annuity vs Lump Sum

shipwreckedandalone
in Off-Topic
If the Annuity option is chosen in a corporate retirement scenario over a lump sum option, under what conditions might the annuity default? When the corporation that employed you goes bankrupt or when the insurance company that owns the annuity goes bankrupt? What document should a person ask for from the corporation that explains the risks therein? Is the annuity insured from default? Since the annuity is a contract does it rank above or below bondholders in bankruptcy?

Comments

  • beebee
    Use the airline industry as one guide to find answers:
    aviationpros.com/news/10396326/pension-loss-jolts-some-ex-delta-pilots
  • TedTed
    @Shipwreckedandalone: Corporate pension payouts are backed by the Pension Benefit Guaranty Corporation (PBGC), which is the equivalent of the FDIC. Here is some throne room reading material. Regards,
    Ted A.K.A. Tom Hanks

    Pension Annuity vs. Lump Sum: Which is Best?
    :http://www.investopedia.com/articles/financial-advisors/070115/pension-annuity-vs-lump-sum-which-best.asp

    PBGC: Annuity Or Lump Sum
    http://www.pbgc.gov/wr/benefits/annuity-or-lump-sum.html




  • MikeMMikeM
    Ted is spot on. The PBGC picks up the pension if the employer can not fulfill obligations. Companies are obligated to fund their pension plans to a minimum percentage of obligation. They also pay into this insurance. If they default, as in bankroupcy, the PBGC will insure pay outs to a point. You are not guaranteed what you received through your pension in all cases. There is a formula based on past wage and your age at which you started taking the annuity. If you received a lump sum also as part of you retirement pension, that is also calculated into your insured payment.

    Working for a company that went into bankroupcy like I did, you start to read and worry. So, again, PBGC has limits to what the government insures. High wage earners with a troubled company are often better off with taking the lump. Every situation is different.
  • shipwreckedandalone
    If an employee has not chosen yet whether to accept lump sum or annuity then PBGC covers any bankruptcy while the $ is still with the corporation. However, in this case, once the annuity choice is made the corporation (employer) not longer contributes and the annuity is handed over to the insurance company for payment until death. IOW's the employer buys a policy once the employee is hired with the insurance company who has the obligation to pay assuming the employee vesting is met at some point. So it is confusing who has the obligation the corporation or the insurance company, but I know it MUST be with one or the other.
  • MarkMark
    Some recent news from MN regarding drastic cuts proposed in the Teamsters' Central States Pension Fund. Granted this is a union situation but it demonstrates how SOL one might become. Makes one wonder if they might be better off taking the lump sum and buying their own outside annuity vs. entrusting a company's annuity option.

    http://kstp.com/news/stories/s4027999.shtml
  • MikeMMikeM
    obligation the corporation or the insurance company
    For good or bad, the insurance company is the U.S. government. Not to say it can't default. I've read the PBGC would be well under funded if some big companies defaulted.
  • TedTed
    @MikeM: We did our best, I sense a little paranoia !!!!
    Regards,
    Ted
  • MikeMMikeM
    edited March 2016
    @MikeM: We did our best, I sense a little paranoia !!!!
    Not anymore Ted. I took my money and ran. I left Kodak in 2014 after almost 40 years. They even threw in 9 months pay to leave. They gave an option to split the pension, 1/2 annuity, 1/2 lump. I took the 1/2 annuity piece because it was under the max benefit the PBGC would insure if Kodak defaults on the pension. So I'm covered as long as the government stays solvent.

    Now I work for, dare I say, a Valeant subsidiary. No more bad mouthing my new employer you guys :)
  • TedTed
    @MikeM: I didn't mean you, I meant the original poster. If I were in a similar situation I would take the money and run.
    Regards,
    Ted

    Take The Money And Run; Steve Miller Band:
  • msf
    "So I'm covered as long as the government stays solvent."

    I'm an advocate of annuitization, so don't take this comment the wrong way, but PBGC is not "explicitly backed by the full faith and credit of the federal government; doing so would require a change in the law."

    That's from an EBRI fact sheet. The Employment Benefit Research Institute is a proponent of employee benefits.

    I would go even further. PBGC is not even implicitly backed by the government. See PBGC's deficit FAQs.

    In contrast, the FDIC is implicitly (and arguably only implicitly) backed by the full faith and credit of the US. That is, there is a moral commitment, an "intent of Congress to support the FDIC's deposit insurance fund should the need arise."
    https://www.fdic.gov/regulations/laws/rules/4000-2660.html

    I'm happy to put faith in the FDIC; PBGC not so much. Not that it doesn't provide a backstop, just that I think there's a real question about its funding.
  • MikeMMikeM
    msf, you are to thorough. I thought I was safe. I'm cracking open another beer to ease my paranoia.
  • shipwreckedandalone
    How could the PBCG (starts with Pension...implication is that it is still with the corporation) be responsible once the annuity option is chosen and the corporation passes the cash on to the annuity payer (this case Met Life) and Met Life starts paying the annuity? Once it is with Met Life isn't it no longer a Pension?? How could the US Gov't still be responsible?
  • bumine
    MikeM:

    which VRX subsidiary?
  • msf
    shipwreckedandalone said:

    How could the PBCG (starts with Pension...implication is that it is still with the corporation) be responsible once the annuity option is chosen and the corporation passes the cash on to the annuity payer (this case Met Life) and Met Life starts paying the annuity? Once it is with Met Life isn't it no longer a Pension?? How could the US Gov't still be responsible?

    Objection - assuming facts not in evidence. You are correct that if the annuitization is paid by a private company, then state government insurance guarantors take over. But often it is the company making the payments, as Ted and MikeM suggested: "The PBGC picks up the pension if the employer can not fulfill obligations."

    From PensionRights.org:
    "If your pension is paid by your former employer and that employer goes bankrupt, the Pension Benefit Guaranty Corporation (PBGC), the federal pension insurance agency, might take over your pension. The PBGC has limits on the benefits that it can pay, so your monthly benefit might be reduced. However, the vast majority of retirees who get their benefits from the PBGC receive the same amount that they were getting before the PBGC took over their plan.

    "If your annuity comes from a private insurance company, in the unlikely event that the insurance company goes under, your benefits will be guaranteed up to certain limits by insurance industry state guaranty associations. These limits vary depending on where you live."

    P.S. Don't get too hung up on names - ERISA (Employee Retirement Income Security Act) covers pensions and health plans.
  • shipwreckedandalone
    The direct deposit, logo on the annuity check you receive or retiree employee corporate website may not be the same entity accountable for payment of the annuity even though your annuity check is derived from that source. We are making assumptions. Many corporations have all benefits administered by one consolidator or web site but monies are being exchanged behind the scenes (such as Leave of Absence insurance). Bad example but you get the point. We need a document from the employer that explains what one gets when they choose the annuity option.
    Assuming facts not in evidence---I am 100% positive that the corporation transfers the cash for annuity payments in this case. That is why I started the thread to begin with to see if anyone else experienced this situation. Or it is happening and they are unaware.
  • msf
    Your initial post asked if a pension might default "When the corporation that employed you goes bankrupt or when the insurance company that owns the annuity goes bankrupt" This question allowed the possibility that the employer might purchase an annuity from an insurer to provide a pension. But the question didn't appear restricted to that case.

    Thus you got responses talking about PGBC covering the employer's default that you didn't find satisfactory, because that's not what you had in mind (facts not presented). Once you indicated that you were focused on employer-purchased annuities, I filled in the gap by referring to government protection provided for defaults by private insurers.

    From a default perspective, there's little difference between an employer (doesn't have to be a corporation) buying an annuity for you and an employer giving you a lump sum with which you buy an immediate annuity. That is, annuity vs. lump sum may be a false dichotomy.

    From a value perspective, there can be a substantial difference, as the page I linked to explains.

  • shipwreckedandalone
    An employer has money set aside money for an employee to choose one of two options. A lump sum or an annuity. I was not implying the lump sum would be used for an annuity. Forget the lump sum. If the employee chooses the annuity and the employee has been told the corporation would (or has) purchase(d) the annuity from a private provider Met Life, then .....once the employee commits to choosing the annuity, Met Life owns the obligation to pay the annuity it is no longer covered under PBGC insurance. Therefore, which of the two party's would need to go bankrupt in order for the annuity to stop? Employer or MetLife? More confusing.....the employer will begin to pay the employee the monthly annuity however we both know it is coming from Met Life. All benefits are consolidated under one corporate web site. Technically 1. the investor retired from the company that is administering the annuity 2. the company is the party currently paying the annuity however the obligation belongs to someone else. So there remains a current active link to the employee.
    Maybe the thing I am missing is that all employers annuities are really passed on to insurance companies and employees never know the difference. What do corporations know about annuities anyway? But it still brings the question who is responsible in default? I really don't care if it is insured or not, I want to know which party is holding the obligation.
  • TedTed
    @MFO Members: Time to close thread !!!!!!!!!!!!!!!!!!!!!!!!!!!!!
    Regards,
    Ted
  • msf
    @Ted - I agree - question has been asked and answered.
  • MikeMMikeM
    shipwreckedandalone, I don't know all the technical terms, but my past employer owns and is obligated for the money in the pension plan I draw from. They are responsible for the pension fund being funded at a minimum 80% of total pension obligations (80% is my memory but that could be + or - 5%). In fact, my old employer at one time had a pot of money calculated to be able to pay out 98% of pension money. But management took a lot of that money out of the pension plan to pay for downsizing costs. We retirees get a statement saying at what value the pension plan is funded. Last statement was at about 84%.

    Mellon Bank is the administrator of those funds. Mellon Bank sends me a statement with their name on it every month. But the check statement states that it's from the Kodak Retirement Income Plan. It is my understanding Mellon bank holds no responsibility for keeping the pension 'pot of money' at any level. They don't own it. Mellon Bank is only the administer of the money being paid out. If Mellon Bank goes bankrupt, I assume Kodak would find a new administrator for that money. If Kodak can not continue to fund the plan, the plan would go to the PBGC.

    So in your words companies do not or are not allowed to 'pass on' the responsibility for pension payouts to an insurance company. At least that is my understanding.
  • msf
    My last post in this thead (since Mike added comments):


    - A fine page for wonks (and only for wonks) from DOL (2013):
    Private Sector Pension De-risking and Participant Protections

    "[The director of PBGC] suggested that lump sums are inappropriate for many participants, and likened pension plan lump-sum cash-outs to cigarettes: legal, liked, and bad for you."


    - A short, simplified version (search for pensions and derisking similar pages):
    Bloomberg (2013), When your pension sponsor talks 'de-risking' - watch out

    "De-risking strategies can vary from reducing exposure to risky equities in pension portfolios to offering lump sum buyouts to retirees and former workers. In some cases, plan sponsors have transferred pension obligations to private insurance companies by purchasing huge group annuities to pay out benefits."


    - Supposed 80% funding "rule":
    American Academy of Actuaries (2012), The 80% Funding Standard Myth
  • shipwreckedandalone
    My comments are angering people so I will refrain from starting any new discussions to MFO and go to read only mode. Just understand that this is a very serious decision for some employees that I know that will affect them the rest of their lives. Unfortunately they do not have the means or time or health to start another career if they make a wrong decision here.
  • Derf
    If you could post the documents that these people are trying to figure out or better yet have them see a (lawyer) that deals with this type of thing,would probably be the best thing ! One would guess that more than what is being discussed here is on the line.

    Derf
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