Objective information about financial planning, investments, and retirement plans

The GM Pension Do Over – Cadillac or Chevy?

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As you may have seen in the news, General Motors is offering some of its former employees what amounts to a pension do over.  I met with one of these former employees recently to discuss this offer in the context of potentially doing a financial plan for him and his wife.

He has been retired from GM for several years and has been drawing a monthly benefit.  He was recently offered three options:

  • Keep his current monthly benefit.
  • Take a lump-sum distribution.
  • Change his monthly benefit to one of two new options that would involve annuities via Prudential.

For the prospective client this was the “life event” that prompted him to come and meet with me.  In his case, their overall financial situation allows them to fully consider all three options.

As you are likely aware, GM’s motivation for offering this program is to remove the liability for their future benefits from the GM balance sheet.  Let’s briefly look at the three options.

Stay with their current monthly benefit.  In this case the prospective client took an annuity payment with a 65% benefit for his wife should he predecease her.  His current benefit is lower than either of the two new annuity options that are offered via Prudential.  However, regardless of his choice, the liability for providing the monthly benefit is shifted from GM to Prudential.  This means the beneficiary is now relying on the full faith and credit of Prudential.  This is not necessarily a bad thing as Prudential seems to be a solid company.  The skeptics among you might say that so was AIG (or at least they were perceived as such) prior to 2008.  The other consideration is that by moving to the Prudential option one would lose any PBGC (the government organization that insures pension benefits) protection should GM encounter financial difficulties in the future.  Should Prudential encounter financial problems beneficiaries would need to rely on the resources of various state insurance departments, this may be perceived as iffy in these tenuous times for many states.

Move to the new higher Prudential Payouts.  As mentioned above, there are two payout options.  One offers a 50% benefit to his wife should he die first, the other offers a 75% benefit.  The monthly benefit is higher for the first option; both options offer a higher monthly benefit than his current benefit via GM.  Not all retirees are eligible for these additional options, however.  Regardless of his choice, the liability for all future monthly annuity payments will be shifted to Prudential.

Take a lump-sum distribution.  This option allows you to take the lump-sum value of your pension benefit as a distribution.  For most people considering this option the best move would be to roll this amount over to an IRA account in order to preserve the tax-deferred status of the money.  A distribution in cash would trigger taxes and could be quite costly.  This option allows you the ability to manage this money and the distributions.  This can be a good option for those do it yourselfers who are comfortable doing this and for those who work with a trusted financial advisor.  One downside is the loss of the guaranteed income that comes with any of the annuity payout options.

In the case of my perspective client and in the case of many, this decision will be made in the context of their overall financial situation.  My perspective client has other financial resources and his wife plans to continue her professional career for the foreseeable future.  Their current income is fairly high and they have the ability to continue to accumulate retirement assets for several more years.

Others faced with this decision may be in different circumstances which they will need to consider in making this choice, in addition to the features of the choices themselves.

The broader implications of this move by GM may be seen down the road.  Pension costs are a major financial burden for many companies large and small.  The GM pensions were part of the very rich benefits packages won over the years by the auto unions and are very costly to GM on their own.  Current historically low-interest rates work against the funding status of the pension liabilities of domestic organizations offering defined benefit pension plans, both active and those with frozen benefit levels.  These lower interest rates result in higher required pension contributions, a drain on corporate profits and cash flow.  In the case of public pensions this is a tremendous drain on the state and local coffers as we’ve seen here in Illinois.  If this GM move is successful I suspect other companies will follow GM’s lead.  Many other retirees currently receiving pension benefits may find themselves faced with a similar choice to make.

If you need help evaluating your pension options or with financial planning for your retirement please feel free to contact me to discuss your situation.

Hellish Retirement Plans

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Hellish Retirement Plans

 Forbes.com recently published an article “Retirement Plans from Hell” which did a nice job of bringing to light the excessive charges incurred by many retirement plans using an insurance company group annuity platform. This article brought to mind a consulting engagement several years ago with a local non-profit. The organization had a $9 million 401(k) plan and a $27 million pension plan both with a major insurance organization.

I was able to identify over $100,000 in annual recurring cost reductions for this organization (mostly in the 401(k) plan) resulting from hidden asset charges on the investments. This $100,000 was coming directly out of the accounts of the participants resulting in lower returns on their investments.

The article and this consulting engagement made me think about the impact of these types of group annuity plans and other expensive bundled 401(k) plans on the financial well-being of the participants.

In the Forbes article, one plan was paying a 1.25% contract charge to AIG for their services relating to the 401(k) plan, this likely included administration and other services. Still the 1.25% would be on the high side in my experience. Understand that these fees are on top of any mutual fund or sub-account expenses.

You might say so what? The so what is that on $10,000 an extra 1.25% in annual return over 10 years translates into $1,323. The numbers become even more significant on larger balances and higher levels of excessive fees.

If you are a participant in one of these “…Plans from Hell…” what are your options? Here are a few thoughts:

Invest only in the best funds available in the plan. Even the worst plans typically have a couple of funds that are good, or at least decent. If you have investments outside of the plan, you might consider investing exclusively in these few good funds within the plan and using your outside accounts to balance out your overall portfolio allocation.

Contribute at least enough to earn the company match. If your company offers a match you should contribute at least enough to receive the full match. If, for example, the match is 3% on the first 6% contributed, this is a 50% return right off the bat. Not too many investments offer this type of return.

Bite the bullet and contribute the maximum that you can afford. As poor as the plan options might be, as high cost as the plan may be, many studies indicate that the most important factor in saving for retirement is the amount contributed. Even the worst plan offers the opportunity for regular automatic salary deferral on a pre-tax basis. You might consider outside options as a total or partial alternative such as an IRA or a low cost annuity. If you go this route, please make sure that you contribute on a regular basis which is not always as easy as it sounds in the face of competing financial obligations.

In considering whether any or all of the above options are right for you should consider your own unique financial situation and consult with your personal financial or tax advisor.

Voice your concerns to the plan administrator at your company. If your plan is through an insurance company, you are likely being charged several layers of fees on an ongoing basis and may also be subject to onerous surrender charges if you to exit the plan too early. Do your best to find out ALL of the fees involved. If you feel that they are too high and the investment menu isn’t what it should be, complain to your plan administrator or your benefits department. I tend to give companies the benefit of the doubt that they want to do the right thing for their employees and that they are in this sub-par plan arrangement because they don’t understand all of the aspects of 401(k) plans. You may or may not be able to effect change via your complaints, but if the company hears it enough they may take action. Proposed legislation forcing greater fee transparency may also prod companies to take action.

As part of your strategy, send a copy of the Forbes article (see the link below) to the plan administrator and ask them if the points mentioned in the article apply to your plan.

Even if your plan is not offered through an insurance company group annuity, here are some additional questions to pose to your company’s plan administrator

How were the investments in the plan selected?

How often are they monitored?

Are the investments monitored against industry benchmarks?

How do the plan’s overall expenses compare with industry averages for plans of a similar size range?

When posing these questions to your company’s plan administrator common sense and tact should prevail in terms of how these questions are asked.

Here is a link to the Forbes article mentioned above:

http://www.forbes.com/forbes/2009/0713/group-annuity-aig-retirement-plans-from-hell.html

Please feel free to contact me with your questions. 

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