You’ve Accepted the Pension Lump Sum: Now What?

By: Kevin Dombrowski

As previous published in the Delaware Business Times

December 18, 2017

I previously wrote about the decision-making process to take a lump sum pension offer or to remain in your company’s pension plan.  If you consider taking your company’s lump sum pension offer, there are several investment options available to you depending on your unique situation.

Keep the cash. When you take a lump sum pension payout, it will be paid to you as ordinary income and thus taxed as ordinary income (not to mention an additional 10% early payment tax penalty under current IRS rules for individuals 59 ½ or younger).  You can do what you wish with the payment today, but understand that the purpose of this pool of money is to help you prepare for retirement.  Tax rules have been designed to encourage you to do just that by investing in a tax deferred solution.

Invest in an IRA Rollover.  When you select a lump sum payment, one of the most popular ways to defer taxes, maintain some control, and invest for long term appreciation is to roll your new assets into an IRA.  An IRA rollover allows for earnings to continue to grow tax deferred until you withdraw them in retirement.  Additionally, an IRA may provide you with access to extensive investment options where you can choose those that best fit your needs.  After opening a regular IRA (Rollover), you have the potential to convert all or a portion of the resulting IRA account to a Roth IRA account at an opportune time., This can be a helpful retirement planning strategy as under current IRS rules, a Roth IRA does not have required minimum distributions during the owner’s lifetime.

Roll the assets into your company’s current 401k Plan.  Some companies allow active employees to roll their assets directly into the company’s sponsored 401k plan.  If your plan sponsor allows for this, you have an opportunity to move the entire lump sum into the 401k plan, while deferring taxes.  This option allows for an individual to keep their retirement savings in one place, assuming they are happy with the 401k plan currently provided.

Buy a Qualified Annuity.  Some companies set up variations of qualified annuities for their employees to purchase with their pension lump sum.  As insurance contracts, annuities may provide options like death benefits and monthly income payments.  Since these vehicles are structured similarly to a standard pension payment, you can evaluate them against the original pension’s payment structure to see how they stack up, considering fees.

Ultimately, the decision will depend on which option above provides you with the best fit for your overall long-term financial and retirement plan.

Should you take your firm’s “Lump Sum” Pension Offer?

By: Kevin Dombrowksi

As previously published in the Delaware Business Times

November 30, 2017

As companies continue to move away from Defined Benefit pension plans to Defined Contribution plans, many active and retired employees are faced with decisions to take a lump sum payment today or to hold out for the promised periodic pension payment at some defined date in the future.  We have seen this happen countless times nationally as well as locally with DuPont and other companies in the area.  If you are faced with this choice, how can you make an educated decision?  Here are a few quick steps to help guide you.

Do the math.  When you are offered a lump sum payment, you can run the analysis quickly and compare the variables.  For example, if you are 50 years old and are offered a lump sum offer of $300,000 today or a monthly pension of $1,000 when you turn 65, you can quickly evaluate the present value of each.  Factoring in an estimate of inflation and a hypothetical expected rate of return on your investment –  which can vary quite a bit depending on the level of risk you are willing to take – you can compare the future potential value of the lump sum with the future periodic payments to see how the values stack up, given your time horizon and the number of anticipated years in retirement.  There are many online calculators that help you with present and future value calculations with the various configurable inputs.

When the dollars do not tell you everything.  There are many other variables to look at when making this decision, such as: Do you have other sources of retirement income or will this be your primary source?  Is there a cash flow need that cannot be met otherwise and will result in taking out a loan with interest?

Examine in the Tax Consequences.  If you take a lump sum payment, you should consider rolling over assets into a qualified investment such as an Individual Retirement Account (IRA) to postpone taxes and potentially avoid penalties.  If you do not roll these assets into a qualified investment you will be subject to regular federal income taxes on the entire amount.  Additionally, if you are younger than 59 ½ when you take the offer, you may also owe a 10% penalty to the IRS if you do not roll over the assets into a qualified investment.  One added advantage of the lump sum payment is the potential to convert the resulting IRA account to a Roth IRA account at an opportune time which may be a helpful retirement planning strategy since a Roth IRA does not have required minimum distributions during the owner’s lifetime. Tax laws and regulations are always subject to change, so know the rules and how they impact your particular situation.

Factor in the incentives.  Remember, most firms are offering this to reduce future pension obligations and to unload debt off their balance sheet.  Thus, they build the choice out in a way to entice some employees to take the lump sum payment today.  When things look too good to be true, take a step back and re-evaluate.

Consider the Risks.  When you take a lump sum, many invest the cash into the market so that inflation doesn’t erode the value of the account over time.  When you do this, you need to factor in the stock market risk as well as other types of investment related risks. If you do not take the lump sum, you may need to factor in the risks that the company will freeze their pension benefits or terminate the plan in the future.  There is no guarantee that what you are promised today will be there in the future and this risk needs to be considered when making your decision.

In the end, there is no perfect answer to this question. To adequately decide, you should consider the present value of your pension, your age and life expectancy, your risk tolerance, any tax consequences, and your retirement income needs and goals. You should consider consulting with a trusted financial and/or tax professional to help you run the numbers and consider all options side by side.

Investor Beware – How Did Those Funds End Up on Your Broker’s Platform?

By: Gary Droz

The U.S. Department of Labor (“DOL”) has endeavored to address the problem of conflicts of interest in retirement advice with its new fiduciary rule, which focuses primarily on brokers because of their compensation practices that often include 12b-1 fees and commission on proprietary or platform products.  Unless the final DOL fiduciary rule is amended or abandoned, any financial professional who works with retirement plans or provides retirement planning advice will be automatically elevated to the level of a fiduciary under ERISA.  This means they will be required to meet the standards of this elevated status as well as meet an exemption in order to receive certain compensation, which creates conflicts of interest, and clearly disclose this information to clients.

Here at MainLine Private Wealth, we applaud the DOL for its efforts, but we believe there is a significant conflict of interest these exemptions and the DOL fiduciary rule will not address including the ways in which fund companies end up with their investment products on your broker’s platform.  Right now, in order for funds to be included on your broker’s platform, many fund companies or money management firms are often required to pay the brokerage firm a hefty access fee.  This means that an investment product that your broker offers as a recommendation may have bought and paid for that spot on the platform instead of earning it.  The question becomes are the funds who pay to play really the best investment options available or just those with the most cash?

These practices became a headline this year when Morgan Stanley, one of the largest brokerage firms in the world, removed Vanguard’s mutual funds from its broker offerings. Why would such a dominant broker network remove one of the most popular fund families available and also refuse to pay brokers on assets invested in Vanguard investments?   It’s simple.  In a recent Wall Street Journal article, Bill McNabb, Vanguard Chairman and Chief Executive, explained that “[t]hey have a model where they want to be compensated for being on their platform in one form or another and that’s just something we won’t do.  We think it raises inherent conflict.”  The article goes on to say that “by excluding Vanguard funds from its compensation structure Morgan would effectively be giving advisers a disincentive to keep clients in the funds.” Morgan Stanley isn’t the only big bank to ax Vanguard.  Another earlier article in the Wall Street Journal noted that Merrill Lynch“already doesn’t allow new clients to purchase new share of Vanguards mutual funds.”

Again, we point to some obvious and important questions. Why remove Vanguard?  What separates them from the rest of the pack? And why would Vanguard refuse to pay?  Among other things, by refusing to pay access fees, Vanguard is able to keep their fund expenses at the lowest possible level, yet those low fees may be exactly what makes them solid performers. In fact, Morningstar discusses this very topic – the link between fees and performance – concluding that the correlation between low fees and good performance is almost unassailable, stating that “[l]ow fee funds give investors the best chance of success over the long run.”

This creates a conflict for investors, as some of the lowest fee options, like Vanguard, are removed from certain platforms because they are unwilling to “pay to play.”  Therefore, it seems likely that other big banks and brokerage firms may follow in the footsteps of Morgan Stanley and Merrill Lynch, which would keep Vanguard (and other great products) out of the investment line up and out of reach for many investors.  And, while the DOL fiduciary rule conceptually is good for investors, even it won’t prevent fund companies from buying their way on to certain platforms.


MainLine Private Wealth was founded on the ideals of trust and integrity, so you can always count on us to be the advisor who sits on your side of the table.

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MainLine Private Wealth, LLC is an investment adviser registered with the Securities and Exchange Commission. Registration does not constitute an endorsement of the firm by securities regulators. Additional information about MainLine Private Wealth and its financial industry affiliations is available on the SEC’s website at MainLine Private Wealth only transacts business in states where it is properly registered, or excluded or exempted from registration requirements. Investing in securities involves risk, including the possible loss of principal. There is no guarantee that goals and objectives will be achieved.