DAVE & DUJANOVIC

Companies can now trade your pension for a lump sum – but should you take the deal?

Mar 21, 2019, 4:39 PM | Updated: Apr 12, 2019, 6:08 pm
Pension plan retirees...
The Treasury Department has made it easier for companies to replace your pension with a lump sum payment -- but is it a good deal? (Photo: Jarid A. Barringer/Erie Times-News via AP, File)
(Photo: Jarid A. Barringer/Erie Times-News via AP, File)

Pensions are on their way to becoming a thing of the past. Today, only 26.2 million Americans – less than one-in-ten of us – are still being offered pension plans, and a new change to regulations may drive that number lower.

Earlier this month, the Treasury Department issued a notice reversing an Obama-era rule that barred companies from buying out retiree’s pension plans with a single lump sum. Your boss, in other words, now has the option to stop paying your pension, hand you the money, and trust you to take care of the investments yourself.

For employers, it’s a great deal. Pension plans can be costly, especially since they force companies to keep their retired employees on their books until the day they die.

But is it a good deal for the rest of us?

To find out, KSL Newsradio’s Dave & Dujanovic sat down with Certified Public Accountant Shane Stewart, who shared what you should do if your boss offers to buy out your pension.

Should you take the lump sum?

Shane Stewart

CPA Shane Stewart talks to KSL Newsradio’s Dave & Dujanovic.

“Personally,” Stewart told Dave & Dujanovic, “I’d take the money.”

That’s an answer that goes against what you’d hear from most financial advisors. When CNN sought out an expert on this question, they spoke to Pension Right Center Policy Director Karen Friedman, who told them that making this plan work was outright impossible.

“You’ll never be able to replicate the annuity you’re getting from the pension plan,” she said. “You’re getting 20% to 30% less than what the pension could buy, and you’re going to try to regain that in the stock market. It’s basically impossible.”

Stewart doesn’t completely agree. His answer, however, comes with a major caveat. He’d take the lump sum because he’s a CPA and he knows how to invest it — but he wouldn’t recommend it for most people who aren’t.

“Assess yourself honestly and ask yourself: ‘Am I a long-term thinking person?'” Stewart suggests.

If you have the ability to invest the lump sum wisely, Stewart believes that it’s possible to earn a better return than your pension would have given on its own.

The right move, he says, is to either invest the money into your 401k or into your IRA and focus on the long run. “As long as it grows just like it was percentage-wise, it will continue to grow the same way, but you’ll have quite a bit more to be invested and to grow,” he says.

That opportunity, however, comes with its fair share of risks. Pensions offer a stable, guaranteed payout, but markets fluctuate. While Stewart believes that the lump sum will be worth more in the long run, he acknowledges that there’s no guarantee things will pan out that well.

As Stewart puts it: “You’re going to take the rollercoaster ride.”

For some, a pension is the right choice

Fiscal Responsibility

Not everybody has the fiscal responsibility to invest wisely, Stewart says. (Photo: Associated Press)

Stewart believes that most people, however, would make an even bigger mistake. As soon as they got that lump sum, he suspects, they’d probably just go out and spend it.

“Human nature would say: let’s go pay something off, let’s go on vacation, or the extreme: let’s go to Vegas,” Stewart says.

He shared a story that to drive his point home:

“A story was told many years ago of Boeing doing something like this. They actually didn’t get rid of the pension, they just gave people the option to either take the lump sum or continue on the pension path.

“A Wall Street Journal writer was in the office of the CEO, and he said: ‘How did it go? How did it go for the company?’

“He said, ‘For the company, quite well. For the individual, come with me.’ And he took him to the window of his office and opened the drapes, and they looked at the parking lot of the Boeing Plant and he said: ‘There’s our retirement plan.”

“There were new trucks, as far as the eye could see. And many of them had taken their pension and bought trucks, paid-off homes — things which aren’t always bad, but that’s their future.”

If the option comes your way, Stewart says, just make sure you’re not forgetting your future.

“There’s an eternal struggle between current self and future self,” Stewart says. If you’re going to take investment into your own hands, you need to be able to focus on that future self.

More to the story

If you missed Shane Stewart live on the air, you can still hear all the financial advice he shared on the Dave & Dujanoivc podcast.

Dave & Dujanovic can be heard weekdays from 9 a.m. to noon on KSL Newsradio. Users can find the show on the KSL Newsradio website and app, as well as Apple Podcasts and Google Play.

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Companies can now trade your pension for a lump sum – but should you take the deal?