Switching jobs can present new opportunities, including the option to roll your 401(k) into a pension. While pensions can offer the comfort of a predictable income in retirement, it's crucial to evaluate several factors to determine if this move is wise for your financial future.
The Benefits of a Pension
Pensions offer a steady, lifelong income, providing both emotional and financial security. As John Abernethy, a certified financial planner at Together Planning, points out: “Studies show that retirees with guaranteed income sources experience lower stress and greater happiness than those relying solely on market-driven withdrawals.”
Evaluating the Financial Sense of a 401(k) to Pension Rollover
Before deciding, examine whether rolling over your 401(k) into a pension aligns with your financial goals. "Several factors need to be considered, including the financial health of the pension provider, the presence of a cost-of-living adjustment (COLA), and the retiree’s need for guaranteed income," Abernethy explains. Pensions lacking a COLA may expose retirees to inflation risk, unlike the historically stronger performance of a 401(k). "A balanced stock-and-bond portfolio within a 401(k) has historically outpaced inflation, helping retirees maintain their standard of living," states Abernethy.
Investigating Pension Financial Stability
One critical step is verifying the financial stability of the pension plan. Unlike a 401(k) that's under your control, pension benefits hinge on the plan sponsor's solvency. "An underfunded or poorly managed pension plan risks reducing benefits," warns Abernethy.
- Check for Pension Benefit Guaranty Corporation (PBGC) insurance.
- Review the company's balance sheet, cash flow, and profitability from public financial statements.
To deepen your assessment, refer to the Form 5500 Annual Return/Report of Employee Benefit Plan and focus on Line 14: "Funding Target Attainment Percentage".
Control Over Investments
One significant trade-off when moving from a 401(k) to a pension is the loss of control. "Converting 401(k) savings into a defined benefit pension trades flexibility for security," says Scott Van Den Berg, a certified financial planner at Century Management Financial Advisors. He highlights that while pensions provide guaranteed income, they limit your control over investments, and funds usually can't be borrowed against or accessed early.
Steps to Roll Over a 401(k) Into a Pension
If you decide to proceed, follow these steps:
- Confirm eligibility for the rollover.
- Review payout options and assess the pension provider's financial strength.
- Compare the projected pension payments with your long-term income needs.
- Ensure the transfer is done directly to avoid tax consequences.
Conclusion
Merging your 401(k) with a pension can indeed offer lifelong benefits, but it requires careful examination of the managing company's financial standing and the investment control you might be giving up. Always weigh the security of a pension against the flexibility of a 401(k) before making the move.
