Retirement | May 22, 2020

What You Can Do If You Face a Pension Freeze or Buyout

If you’re one of the 30 million Americans who participate in a pension plan,1 the recent spate of high-profile pension freezes and buyouts—including those at DuPont, General Electric, IBM, and UPS—may have you worried about the future of your own benefits.

Here’s what to know should you face a pension freeze or buyout—and what you can do to help protect your future.

Get the facts

When a company freezes its pension, active employees may no longer accrue new benefits, though they’re still entitled to all previously earned benefits. If this happens to you, request an updated retirement-benefit estimate so you can determine whether you’ll need to save more to reach your long-term goals. Then inquire if your employer will offer extra compensation—for example, an increased 401(k) match—to help make up for the shortfall.

When a company offers a lump-sum buyout, on the other hand, employees are under no obligation to accept it—and may want to think twice before doing so. Assuming they’re fully funded or insured against insolvency, pensions offer guaranteed minimum payments for life, so choosing the buyout means giving up that security. So, what factors should you weigh when deciding?

  • Your health: Employees (and their spouses) who expect to live long lives may be better off sticking with their existing pensions, whereas those who don’t expect to live as long might be better off taking the lump sum.
  • The company’s health: If the company’s primary goal is to remove a financial obligation from its books, then that could be a good reason to stick with the plan. However, if the company is looking for ways to keep an already underfunded plan afloat, then you might want to consider the buyout before things go further south.


Close the gap

If a change to your pension results in less guaranteed retirement income than you planned on, you’ll need to figure out a way to help close the gap.

If you’re considering taking the buyout, think about what to do with the lump sum once you receive it. Generally speaking, you have three options.

  1. Invest it yourself: For those comfortable with selecting their own investments and able to stomach the risks that come with exposure to the market, investing the lump sum in a tax-deferred IRA may allow the funds to benefit from future growth.
  2. Invest it with a robo-advisor: If the idea of managing a lump-sum investment feels daunting, consider putting the money in a low-cost robo-advisor account, which can help select and manage investments for you—and may even be able to help you generate a predictable monthly paycheck once you reach retirement (see “Pay yourself,” below).
  3. Buy an annuity: An annuity is a contract with an insurance company that can be used to grow your funds through tax-deferred savings or offer guaranteed lifetime income through annuitization (subject to the financial strength and claims-paying ability of the issuing insurance company). Using the lump sum to purchase an annuity generally makes sense only if it provides bigger payouts or has more flexible features than your employer’s pension, or if you feel more comfortable housing your assets with an established insurance company. 

    Annuities come in a variety of different flavors, but they usually fall under three broad categories: 
    • Fixed annuities typically have an accumulation phase during which your initial investment can earn a minimum guaranteed interest rate. When the accumulation phase ends and payouts begin, the income payments generally will be paid for your (and, depending on the payout option you choose, your spouse’s) lifetime.
    • Fixed indexed annuities offer growth during a specified period from either a fixed interest rate or a variable interest rate linked to the performance of a broad market index. The insurance company guarantees that your principal investment won’t lose value due to negative market performance, though your returns may be subject to a cap or other limits. For an additional cost, you can add a guaranteed lifetime withdrawal benefit (GLWB) rider that provides a base level of income for your (and your spouse’s) lifetime.
    • Variable annuities allow you to invest your lump sum in one of several investment portfolios for future potential growth. Consequently, your investment can grow or shrink with the market—meaning your payouts could be higher or lower based on your account value at the time of the distribution. You can also add a GLWB—again, at an additional cost—to provide a base level of income for your (and your spouse’s) lifetime.

Annuities can be complex and involve a variety of fees and insurance costs. Additionally, they may not offer as much flexibility as investing in the market. However, the resulting income stream can still be a valuable addition to your retirement portfolio—just make sure you understand all the details before buying.

Regardless of whether you’re facing a freeze or a buyout, make sure you’re contributing enough to your 401(k) to capture the full match from your employer.  If you need to save even more—which may be the case with a freeze, since you’ll no longer accrue new benefits—in 2020 you can contribute up to $19,500 to your 401(k), plus another $6,500 if you’re 50 or older. (See how Schwab can help you save for retirement.)

Talk it out

It you need help weighing your options, it’s wise to consult with a financial advisor before making a decision.

1How many American workers participate in workplace retirement plans?” Pension Rights Center, 07/15/2019.