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Curious pension mess
Old 10-18-2007, 07:19 AM   #1
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Curious pension mess

My brother is in the final stages of lung cancer. He has worked for the phone company for 35 years. He (actually my sister-in-law) with his POA retired taking a lump sum. The original plan was for him to stay on the company rolls until he died but they learned that the pension choice would be dramatically poorer if he did. By retiring and pulling the lump sum he got all of it, which he will leave to his wife. If he died on the rolls his wife would only get half. The actions have already been taken so I haven't researched this in detail. It sounds like a previous defined benefit plan was converted to defined contribution and, essentially, outsourced to Fidelity. The cash out papers went to Fidelity and Fidelity will send the check. It doesn't make sense to me that a defined contribution plan should be able to half the lump sum that a surviving spouse can receive. To those of you have have such setups, do you know if this is possible? It ended up forcing my brother off the rolls at an arbitrary point just to protect his retirement funds.
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Old 10-18-2007, 07:34 AM   #2
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I think it all depends on the employer and the retirement options in place. What you are describing is very similar to options available in my company for those still under the "traditional" pension plan.

I don't know all of the details, but when they retire they have an option to (1) take the lump sum, (2) sign up for an individual lifetime annuity (spouse gets nothing) or (3) opt to take joint annuity w/ spouse at greatly reduced rates (i.e., the company is paying the same lower amount until at least one of them is alive).

In our case, I have been hearing 1 & 2 are almost the same, since you can take a lump sum and get more-or-less the same immediate annuity from someone else. If he was one of my co-workers, he would be cashing out as well...

edit - here's a potential snag... when electing lump payment, is he giving up on the family health bennies?
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Old 10-18-2007, 07:58 AM   #3
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For my state's defined plan, similar to lucija. When retired, you can opt for benefit for your life, you can opt for guarenteed benefit for 10 years (surviving spouse gets it for the remainder if you die early), or you can get lifetime survivors benefit for spouse. Amount of benefit decreases for each, based on spouses age and actuarial tables. You can also retire and take a lump sum, which represents the present value of the expected payout for your life (not spouse).

It sounds like they took the best course in a bad situation. For health care, hopefully they have COBRA or retirees health benefits for the duration.
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Old 10-18-2007, 08:28 AM   #4
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doneff,

I'm a little confused. First you said that your SIL gets all of the lump sum ["By retiring and pulling the lump sum he got all of it, which he will leave to his wife"], but then you said "It doesn't make sense to me that a defined contribution plan should be able to half the lump sum that a surviving spouse can receive." Which is it? Does SIL get all of the lump sum or half?

Just because SIL is getting a check from Fidelity, that doesn't mean that it's not a lump sum from the defined benefit plan. Fidelity could just be the custodian/administrator for the DB plan. Companies usually outsource this stuff.

Go read the Summary Plan Description. For example, mine says that if I die while still employed, DW gets "annuity equal to 100% of your accrued benefit be provided to your surviving spouse through a series of monthly payments for the life of your surviving spouse." However, if DW dies while still employed, I get "annuity equaling 50% of your accrued basic retirement benefit."

Given the options you described, I think the lump sum is probably the best option. If it's a whole lot of money, like hundreds of thousands of dollars, watch out because if she deposits the money into her checking/savings account, she may have to pay taxes on all the money this year. However, she may be able to send the check to someone like Vanguard or Fidelity to put it in an IRA, and defer paying taxes on the money.

btw - for those deciding b/w single life annuities and J&S annuities, all the annuity options should be actuarially equivalent, meaing that the present value of the streams of payment are the same.

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Old 10-18-2007, 08:41 AM   #5
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My former employer had a similar sort of defined benefit pension plan and when I found out that if I died, my wife would only get 50% of the lump sum value, it was quite a surprise to me. I suppose this is the lump sum equivalent of a 50% joint and survivor pension where your spouse's monthly pension would be half of what it had been when both spouses were alive (assuming you were the employee).

I did a similar thing and rolled the full lump sum value over to a 401K plan at the same company. I thought at the time and to this day believe this had preserved the full value but I suppose I will have to double check that now. I know that they track the origin of funds.......normally they will not allow you to take partial withdrawals from the 401K, but in my case, I can take out this pension lump sum separately from the rest of the 401K.
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Old 10-18-2007, 09:11 AM   #6
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I got worried enough so I called my 401K plan administrator (who also happens to be Fidelity). FWIW, they said that the full value of my pension plan rollover would be preserved since I had rolled it into the 401K. I asked her if this was a general truth or something that was dependent on the specific plan. She said it was a general truth. So perhaps this is a case of 2 different CSRs and 2 different answers and one is wrong.......unfortunately all too common, it seems.

You may want to call again (and again.....) and see if you get the same answer. Maybe talk to a supervisor.......Fidelity seems to have a pension dept and a separate 401K dept and you may want to speak to someone who is versed in both. And if the decision is to still cash out and rollover into an IRA, you may want to do a direct rollover to the new plan so that you don't get the 20% tax withholding and having to either pay taxes on that or having to replace that 20% with separate funds.
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Old 10-18-2007, 09:13 AM   #7
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Sorry to hear about your brother....

Quote:
Originally Posted by donheff View Post
By retiring and pulling the lump sum he got all of it, which he will leave to his wife. If he died on the rolls his wife would only get half.
I believe that when you research further - at an appropriate time - you'll find that if your brother had died while still an active eimployee (on MLOA), his wife would have received half in the form of a 50% monthly annuity check, not a lump sum. Edit - just exchanged emails with a HR dept friend...... Your SIL could have recieved a 50% lump sum, based on a 50% annuity, if the plan provided for lump sum equilvalent distributions.
Quote:
It sounds like a previous defined benefit plan was converted to defined contribution and, essentially, outsourced to Fidelity. It doesn't make sense to me that a defined contribution plan should be able to half the lump sum that a surviving spouse can receive.
You may find your brother's pension was not converted to a defined contribution plan but was still a defined benefit plan with an option for the retiree to take a lump sum instead of a monthly annuity.

The key is that employment must be severed (go to ex-employee or retired employee status to avoid a mandatory 50% survivors benefit option.

At the Megacorp I retired from, I sadly knew two gravely ill individuals who switched from MLOA to retired status and started their pensions to benefit their wives. We didn't have a lump sum option. They started their monthly annuities with the 100% survivor benefit option instead of the default 50% option. Beneficiaries of deceased active employees recieve the default 50% option, no choice.
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Old 10-18-2007, 09:33 AM   #8
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Another thing you may want to check ........make sure all the beneficiary designations are in order for insurance policies, retirement plans, IRAs etc. I got a big scare this morning when I called Fidelity and the CSR told me they had nothing on file......turned out she didn't know what she was doing.......but still a good reminder. Problems could be that desired beneficiaries have changed or that custodian company has incorrect designations as a result of changing computer systems and losing info ,etc. etc.....unfortunately seemingly also too common.
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Old 10-18-2007, 10:54 AM   #9
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I agree with other posters. It is a DB pension with a lump sum option equivalent to the annuity needed to purchase the DB monthly stream. When we were offered that option, they tried to discourage it by eliminating ongoing benefits (health, dental, et al). So I took the montly plan.

Of course 15 years in, those benefits are slipping away rapidly.
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Old 10-18-2007, 04:07 PM   #10
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Quote:
Originally Posted by ats5g View Post
doneff,

I'm a little confused. First you said that your SIL gets all of the lump sum ["By retiring and pulling the lump sum he got all of it, which he will leave to his wife"], but then you said "It doesn't make sense to me that a defined contribution plan should be able to half the lump sum that a surviving spouse can receive." Which is it? Does SIL get all of the lump sum or half?
He retired while still alive and took the entire lump sum. Alternatively, he could have retired and taken a reduced annuity with 100% survivor benefit. That annuity would have been calculated based on the amount of the lump sum - same as you or I buying one from Vanguard or wherever. Either of those courses of action would have protected his wife as best possible.

As we understand it, if he did not retire but died on the rolls my SIL could choose between a 50% annuity or half of the lump sum. In other words, anyone with a terminal illness can only get the full value of their retirement system by getting off the rolls before they die. That seems perverse. Kind of a "beat the reaper" count down to retirement. If you stay on the rolls to maximize benefits (e.g. sick leave, health, vacation, etc) or, as my brother did to keep working and bring in an income as long as possible, you risk loosing half of your pension if you die in service. He almost lost that bet.

The basic concept of a spouse getting a reduced pension is common in DB plans. But it is the lump sum issue that is confusing. Once a plan brings a lump sum option into the equation it seems like the total sum should be viewed as the employee's property once earned and that sum should be available for the employee or the employee's spouse. Otherwise you end up with very negative incentives in serious illness situations.
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Old 10-18-2007, 04:32 PM   #11
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Quote:
Originally Posted by donheff View Post
The basic concept of a spouse getting a reduced pension is common in DB plans. But it is the lump sum issue that is confusing. Once a plan brings a lump sum option into the equation it seems like the total sum should be viewed as the employee's property once earned and that sum should be available for the employee or the employee's spouse. Otherwise you end up with very negative incentives in serious illness situations.
Not saying what is right or wrong... but if the annuity is based on the lump sum, you would think that if they decided to reduce the benefit to 50% then both choices are reduced....
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Old 10-19-2007, 12:01 AM   #12
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Another concer---you said the check from Fidelity for the lumpsum was on ots way? Directly to the wife, or to another IRA custodian.

If it comes directly to the wife (or whoever is designated with POA), Fidlity is required to withhold 20% income tax. To preserve tax-deferred status and earnings growth over time, the lump should be put into an IRA.

Make sure the money gets back into an IRA well before 59 days after Fidleity withdrawal date. Unfortunately, the wife will have to make up that 20% withheld from other funds when putting into a new IRA---or eat it and have to pay income tax on 20% if it does not go into an IRA and is hence considered by IRS as a withdrwal for that year.

Hopefully, when you said the Fidelity check is on its way---you meant to a new IRA custodian as a direct rollover.
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Old 10-19-2007, 06:51 AM   #13
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Another concer---you said the check from Fidelity for the lumpsum was on ots way? Directly to the wife, or to another IRA custodian.
She has it going directly into an IRA rollover money fund at her bank (easiest quick option). She is interested in Vanguard. I am talking to her about AA options. She will keep working for about 10 years and allow the account to build.
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Old 10-19-2007, 11:33 AM   #14
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She has it going directly into an IRA rollover money fund at her bank (easiest quick option). She is interested in Vanguard. I am talking to her about AA options. She will keep working for about 10 years and allow the account to build.
Phfew!! Thanks for clarifying that!! Had me momentarily worried for her.

Sound like she is on the right track, and has some decent folks, such as yourself, advising her during these trying times. Very wise to get it into a "parking spot" IRA while taking her time to study more permanent IRA custodian options such Vanguard---which by the way I personally would highly recommend. I have been a Vanguard customer for well over a decade, and have nothing but good to say about them---good service, good low expenses, good product selection, good useable informative website, and good alignment of interests with their customers, as their customers (fundholders) own the company.
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Old 10-19-2007, 02:14 PM   #15
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The 50% joint survivorship option on DB pensions is a classic example of screwing the recipient. If people are close in age, then the wife might outlive the husband by two or three years, so the extra cost of term insurance to fund the pension for 2-3 years 15 to 20 years out is pretty minor.

It is another example of corporations choosing a low cost option or trying to inflate their pension amounts for marketing reasons.
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