The promise and problem with pension and annuity buyouts
By Kevin Startt
Now, pensioners as well as annuity holders from the earlier 2000s are facing what happens when you cross the Godfather with an economist: an offer you can’t understand. Advisors can utilize this opportunity not only in the pension market but with variable annuity companies that are making the same lump sum payout offers on their income riders.
In late September, I predicted that 2013 and 2014 would be the years of the buyout and that we should prepare for it by brushing up on how to use social media to track job changers. ERISA provides substantial benefits to protect against employer abuse of defined benefit pension plans.
For the most part, ”Every Ridiculous Idea since Adam” has worked well. It was never imagined that zero interest rates would put many of these plans in hock along with the plans' chief financial backer, Pension Benefit Guaranty Association. The average 22-year-old employee changes jobs 11 times during his or her career; this represents an opportunity to make 11 sales of at least $25,000 during an employee’s lifetime using social media to track rollovers. Then, the annuity rollover specialist should establish a relationship with a trusted outplacement firm for rollovers. With the workforce living and working longer, this number of rollovers will skyrocket.
Now, pensioners as well as annuity holders from the earlier 2000s are facing what happens when you cross the Godfather with an economist: an offer you can’t understand. Advisors can utilize this opportunity not only in the pension market but with variable annuity companies that are making the same lump sum payout offers on their income riders. Seldom are these offers going to make sense economically or mathematically as, of course, mathematics doesn’t make sense and economics is just downright incomprehensible.
Reinvestment risk is basically staring pensioners and annuity owners right in the blindside. That is, of course, unless there is a death, disability, unemployment or concern that the insurance company or company offering the pension will not be able to make the payment in the future.
Then there is the advisor who convinces his client that he can invest the money better than the institution and winds up with a pie in the face and the loss of multi- or cross-generational life or annuity sales. They argue that a bird in hand is better than one in the bush, although there is no empirical research or evidence to show this.
When given the choice, most employees take the lump-sum offer. But that appears to be changing as many employees realize that today’s zero rate environment presents different challenges than their parents faced going through two major bull markets and plunging rates. Most pension plans have based their returns on 7 percent to 8 percent interest rates that are now in the range of 2 percent for fixed income (representing at least half of many plans' and annuities' long-term liabilities).
One of the major reasons for using a rollover, whether it be an IRA, Roth or another alternative, may be the unique customization of using a benefit pool that allows multiple income options, long-term care and confinement options, death benefit enhancements, and even unemployment riders.