Saturday, November 27, 2010

Caveat Lectores on New Ways to Cheat Employees

This just in from FPF President Gary Rainey and Lobby Tools.

Not satisfied with robbing employees of their pensions, business and government found a way to short the amount of lump-sum payments when Employees take the cash. Ya gotta love ‘em.

It is a little hard to read without paragraphs so you may want to go to the hyper link.

Pensions: the Lump-Sum Gamble

The Wall Street Journal 11/27/10

More than 90% of employees opt for a lump-sum payout from their pension plan when given the choice. That could be a mistake. Under rules that became effective in 2008 and that affect millions of workers, companies such as AT&T Inc., Chevron Corp., and Dow Chemical Co. have been quietly changing the way they calculate lump-sum payouts from their pension plans phasing out their use of a Treasury-bond rate to calculate lump sums and replacing it with a higher composite corporate-bond rate. The result: substantially lower payouts to employees who are changing jobs, being laid off or retiring anywhere from 10% to 60% or more, depending on age and other factors. Younger employees face the largest reductions. A 55-year-old employee who took early retirement or switched jobs would get about 25% less under the new legislation, while a 45-year-old would take a 50% cut, according to calculations prepared for The Wall Street Journal by Beth Pickenpaugh, a pension actuary and financial adviser at Gianola Financial Planning in Columbus, Ohio. View Full Image Melissa Golden for The Wall Street Journal Donna Rhine, of Bethany Beach, Del., with her husband Bob, took a one-time payout from her employer instead of keeping a monthly pension. A lump sum is essentially the amount of money a person would need to invest today to equal the stream of monthly pension checks he would receive beginning at age 65, and lasting his lifetime. If the investments are assumed to return 4.26%the 30-year Treasury rate that employers have used to calculate lump sum she would need to set aside more money today than if the investments are assumed to return 5.2%, the most-recent composite corporate-bond rate. About half of large pension plans at private employers give departing employees a choice between taking their pension as monthly payments in retirement, or as a one-time payout. Many public employees have lump-sum options as well. For employers, it can mean millions in savings. Whirlpool Corp., for example, estimated the new method would lop $39 million off its pension obligations, according to company filings. Whirlpool declined to comment. The changes are part of the Pension Protection Act, sponsored by Rep. John Boehner (R., Ohio) and signed into law by President George W. Bush in August 2006. Employers had complained that the Treasury rate was so low that departing employees were getting a windfall and asked Congress for relief. Flashback to the '90s Companies had been using the 30-year Treasury bond rate to calculate lump sums since 1994. Before then, they were using a lower rate, and complained that employees taking lump sums were getting a windfall. Companies persuaded Congress to let them replace it with a then-higher 30-year Treasury rate, which at the time was about 8%. The change to the then-higher rate angered employees, who realized their payouts would be reduced by tens of thousands of dollars. But the current change has received little notice. Unlike other moves that reduce pensions, employers aren't required to notify employees of the change, and most financial advisers are unaware of it. The change is being phased in over five years, through 2012, so someone contemplating changing jobs or retiring and taking a lump sum might want to evaluate the impact of taking a distribution before the change is fully phased in. Employers aren't required to use the new, less-favorable rate, and some have delayed implementing it. Northrop Grumman Corp. and BP PLC, among others, began phasing in the new rate this year. When the Pension Protection Act was passed in 2006, the spread between the corporate bond rate and the 30-year Treasury rate was approximately 1.1 percentage points. It ballooned to an average of 2.5 points in 2008, and is about 1.35 now. "The spreads between Treasurys and corporate bonds are greatest in times of economic uncertainty," says Ms. Pickenpaugh. The difference in payouts can be substantial. Consider a 40-year-old who has earned a pension worth $3,000 a month at age 65. If the new rate had been used in December 2008, when the spread between corporates and Treasurys was a steep 3.77 points, his lump sum would have shrunk from $242,839 to $71,148.Even without the interest-rate change, lump sums can be worth only 80%or even less of the value of the pension in retirement, since the payouts may not include the value of early retirement subsidies. 'Inferior Option'" I've advised a number of clients that have been offered lump-sum payouts, and in every case thus far, the lump-sum amount has been an inferior option," says Louis Kokernak, a planner with Haven Financial Advisors in Austin, Texas. Many people favor lump sums because they are worried they could lose their pensions if their employer went bankrupt. But that fear is often overblown. If the pension plan is healthy, they wouldn't lose their benefits. When a well-funded pension plan is terminated, its assets are used to buy annuities that replicate the pension payments. If the plan is significantly underfunded, the Pension Benefit Guarantee Corp. the federal agency that insures pension plan stakes over the plan and pays benefits up to the guaranteed amount, which is currently a maximum of $54,000 a year for a single person who starts collecting benefits at age 65. However, a person with benefits above the guaranteed amount could lose a substantial chunk of their pension, and early retirees and surviving spouses could also take a big hit. Yet lump sums won't necessarily provide a lifeboat to those whose underfunded pensions are at risk in a bankruptcy. The 2006 pension act prohibits plans from paying lump sums if the company is in bankruptcy, or its funding level falls below 60%. William D. Starnes, a financial adviser with Mallard Advisors in Hockessin, Del., evaluates taking pension income streams versus lumps sums for clients from local and state employers. For each option, he calculates the tax liability every year until their death, looks for other sources of cash flow and income, including Social Security, adjusts for inflation and looks at mortality, among other factors. In the end, the decision often comes down to subjective factors. Donna Rhine, who took a lump-sum payout when she retired from Verizon Communications Inc. in 2003 at age 52, and her husband Bob were in a position to assume a little more risk than most people. Mr. Rhine, 60, has a pension from Boeing Co. The couple, who live in Bethany Beach, Del., had little debt, had been paying down their mortgage and still work part-time. With these resources, they felt they could risk taking the lump sum though they were wary of aggressive sales pitches."They were telling me I could make tons of money quickly," says Mrs. Rhine, who attended seminars and met with several advisers before deciding to take the payout. "I didn't believe you could make 15% to 20% a year." Write to Ellen E. Schultz at

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Caveat Lectores by Jeff Carnes

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