Boomers and Gen Xers may be in for some potentially unpleasant surprises in retirement.
The pension they were expecting to receive every month from their former employer might not be coming from that employer. Instead, it may be turned over to an insurance company hired to manage the pension plan and turn it into monthly annuity payments. If that happens, the pension benefits will no longer be guaranteed by the federal Pension Benefit Guaranty Corp. (PBGC), but by a state insurance guaranty agency.
Alternatively, your employer may try to get your pension off its books by letting you take it as a lump sum rather than in monthly installments. If you do this, you’ll then have to figure out how and where to invest the money in retirement.
All of these possibilities are part of a growing trend known as pension “de-risking,” “risk transfer,” “pension stripping” or “risk dumping.” They’re designed to transfer some or all of the risks of what are known as defined-benefit pensions over to retirees; they don&rsqo;t apply to 401(k)-type programs known as defined-contribution plans.
So what are the risks to you if your pension is handed off to an insurer?
The insurer is required to pay out the benefits the employer promised, but “when your pension is migrated to a group insurance plan, you lose all the protections that the ERISA [Employee Retirement Income Security Act of 1974] law afforded you,” says Jack Cohen, chairman of the 134,000-member Association of BellTel Retirees, whose pension was converted to a Prudential annuity in 2013.
Another risk: If you’re bankrupt and an insurer now manages your pension, your benefits generally will no longer be protected from creditors, says Cohen.
One more risk: You may not receive the monthly pension benefits you’re due if the insurer can’t find you. In February, MetLife revealed that roughly 13,500 workers didn’t receive their monthly retirement benefits over the past quarter century for just this reason.
Read the full Next Avenue article here.