If you have a defined-benefit pension from your employer, you could face a common scenario—your company may decide to offload the hassles of maintaining this pension onto another party. This practice is known as “pension risk transfer.” According to Mercer’s 2020 Defined Benefit Outlook, 63% of companies are considering termination of their plans within five years.

When this happens, plan participants usually are given two options—accept a lump-sum payment at retirement instead of the previously promised monthly paychecks…or accept an annuity that your employer has purchased at a group rate from an insurance company and receive monthly income in the expected amount from that annuity. What to do…

Be wary of the lump sum—you will face the same risks that made the pension unpalatable for your employer. You could live longer than expected…your investments could underperform…interest rates could go crazy. Factor in “overspending risk” and possible cognitive decline as you age. Even if you invest the money, you would require a market return of 6% to 7% to meet your needs.

Do careful analysis before choosing anything. Choose the annuity unless you’re single and in poor health. While the protection from the Pension Benefit Guaranty Corporation, a federal agency that ensures up to $4,000 per month for a 60-year-old, ends when the employer purchases an annuity from an insurance company, a state guaranty association may insure all or part of your annuity payout. Coverage limits vary by state.

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