Should You Take Your Employer’s Lump Sum Offer To Protect Against Their Future Bankruptcy?

No!

That was easy.

But I was asked that question privately and it seems worth answering publicly, as I’d read (and written) previously that survey data shows people taking lump sums because they fear exactly this: that a bird in the hand is worth two in the bush, that if their employer is in precarious financial condition, they risk losing out entirely if they wait to take a pension benefit rather than getting cash-in-hand now, and then the company goes bankrupt.

But the pension benefits offered through those employers which are engaged in the process of offering lump sum payouts to their terminated vested participants (former employees with vested rights) and to employees preparing for retirement are all protected by the PBGC, the Pension Benefit Guaranty Corporation.

Readers may have heard of the pending insolvency at the PBGC. I’ve fretted about it. But there are two different funds at the PBGC – the Multiemployer Insurance Program is projected to reach insolvency in 2025 but the Single-Employer Program is healthy.

What’s more, the single-employer arm of the PBGC guarantees benefits comprehensively enough that most retirees won’t notice the difference. For a person with a vested benefit they’re eligible to begin at age 65, if their employer enters bankruptcy and terminates the plan and the PBGC takes over before that person has started collecting benefits, the PBGC will guarantee $5,812.50 per month, or $69,750 per year in pension benefits (2020 figures).

In addition, employers are not permitted to offer complete lump sum buyouts to plan participants if the pension plan is less than 80% funded (on a funding-legislation basis, which is different than the financial-reporting basis); between 60% and 80% they can offer partial lump sums, and below 60%, not at all.

And, finally, your employer is required to send you an “Annual Funding Notice” each year to inform you of the plan’s funded status. This notice will also contain information on PBGC guarantees that are applicable to your case.

There are some caveats:

If your employer provides cost-of-living adjustments (COLAs), these are not protected by the PBGC. Neither are any non-pension benefits such as life insurance/death benefits or healthcare benefits.

If you participate in a multi-employer plan, this doesn’t apply to you; that fund and its finances are separate.

If you participate in a Church Plan, either by working at a church directly or at certain religiously-affiliated hospitals, you do not have these protections.

If you work in the public sector, it’s a whole ‘nother story: your employer can offer you a lump sum at a value considerably less than its worth according to any measure (as Illinois is doing now) and can reduce your benefit in the future in the event (however unlikely) of bankruptcy (as happened in Detroit). But politics makes the first of these considerably more likely than the second, as far as I can tell.

But outside these special circumstances:

I wrote that folks weighing the lump sum offers might be tempted to view the cashout option as the bird-in-the-hand. The reality is that it’s quite the opposite: a guaranteed pension at retirement vs. the hope that they’ll be able to manage their money well enough to beat that promise.

As always, you’re invited to comment at JaneTheActuary.com! And if you’re looking for personalized advice on a lump sum offer, see here for details.

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