September 30, 2022 - You know that sinking feeling you get when you buy a car (or a cell phone, or a refrigerator, or a pair of shoes, or any consumer product) only to learn you could have purchased the exact same item for less money if you had just taken the time to engage in a little comparison shopping before buying?
Now, imagine that same sick feeling, only on a much grander scale, staying with you for the rest of your life because you failed to price check your pension benefits before finalizing your retirement paperwork.
"What? You mean I have choices?"
All Pensions Are NOT Created Equal
Defined benefit (DB) plans, aka traditional pensions, were once the rage in corporate America but have progressively been replaced over the years in favor of defined contribution (DC) plans, mainly 401(k)s and 403(b)s, which shift the responsibility for providing retirement security from the employer to the employee.
Although not as common as they once were in their heyday, most all government employees as well as a dwindling number of private sector workers can still expect retirement income from their traditional DB pensions when they retire.
Perhaps you are one of them.
But because these DB plans can be expensive for employers to maintain and (most) employers aren't in the business of managing longevity risk, some companies run the risk of running out of money before satisfying their contractual obligations to their retired workforce. Or they can more cost-effectively meet their obligation by outsourcing.
How else do you account for the recent spate of pension risk transfers, where private employers transfer their DB liabilities to a (usually) life insurer better equipped to manage longevity risk?
In addition to being beneficial to have your pension managed by a life insurance company with an infinitely greater capacity to manage longevity risk due to its pooling of mortality credits (inside baseball talk for insuring enough bodies so that those who live longer than their statistical life expectancy can still be paid because there will have been a statistically significant number of individuals who died prematurely), . . .
. . . a private life insurance company option
may pay you more money!
Beyond pension risk transfers involving entire books of liabilities, many smaller-scale pension risk transfers occur when employers give individuals the option to "cash out" all or a portion of the value of their future pension benefits.
Perhaps your company is one of them.
For this reason, soon-to-be-retirees should ALWAYS engage in a little comparison shopping before they sign on the dotted line to accept the pension benefits contractually promised by the soon-to-be-former employer.
But, Dan, how do I know you're not just saying this because you're an insurance guy?
Because I have personal, irrefutable proof you might be better off outsourcing your future.
It Doesn't Get More Personal Than This
Many moons ago, fresh out of college, I began my adult life as a schoolteacher. An education major, I originally thought I wanted to be a basketball coach and began teaching at a local public school near my hometown of Canton, Ohio.
Turns out, while I liked playing basketball a lot, coaching really wasn't for me. I managed to stick with the teaching profession for a handful of years before fate and circumstance ultimately led me to a new career in the insurance industry.
But because I lasted 5.1 years, I qualified (just barely) for a small pension through the State Teachers Retirement System of Ohio (STRS Ohio). OK, a very small pension, but a pension notwithstanding.
I never paid much attention to the annual statements STRS Ohio sent me over the years, but I am now in a position where I need to make some decisions on how best to receive the pension I'm owed.
Fortunately, as a Retirement Income Certified Professional® from the American College of Financial Services, I am the perfect guy to ask:
Should I take the pension STRS Ohio owes me as offered?
Should I take the account value of my future benefits and buy my own?
To get started, first let's look at my latest statement from STRS Ohio. (Purposely enlarged here so you can see it)