What Happens to my Pension if I Leave my Job?

In today’s world, companies that offer a defined benefit plan, (pension), are far and few. The pension used to be available to employees of a company to assist them with retirement income.  A pension is funded differently from a 401k in that employers contribute a sum of money during the years an employee works, so that when the employee retires, the funds can be withdrawn to support an employee’s retirement.  The payments a person receive would be a fixed amount and guaranteed to last for the rest of a person’s life and potentially their spouse’s life.  In the 1980’s, 401k plans were introduced and eventually replaced pension plans as the most popular form of a retirement plan for U.S. workers.  Some employees are still eligible for a pension benefit and quite often are unsure of what to do with that benefit if they leave their employer. 

Where to Start

If you have a pension benefit and are planning on leaving the employer, you will need to determine the vesting schedule for your plan.  Vesting means earning the right to a present or future payment or benefit.  It is important to understand your plan’s vesting schedule so you can determine the value of your benefit.  If you have a pension plan that requires or allows you to contribute, those would not be subject to a vesting schedule. The vesting schedule pertains to the employer portion of the contributions.  Normally the vesting schedule is based on the years of service for an employee.  Prior to leaving or thinking of leaving a company, you should be aware of the vesting schedule for your plan and if you have questions, contact your plan representative. 

Ready to Leave your Job

Once you have made the decision to leave your employer, it is time to determine the best steps for your pension benefit. You typically have four options:

• Leave the money in the plan, if your plan allows
• Rollover the assets to your new employer’s plan, if one is available and rollovers are permitted
• Rollover to an IRA
• Cash out the account value

How to Decide

When you leave an employer with a pension plan, deciding what to do with your pension benefit is not as clear as one would think, nor is there a right or wrong answer.  The decision on what to do is on a case-by-case basis and there are factors that should play into what you decide to do. 

• Years until retirement – If you are an individual with a long time until retirement, taking the lump-sum payout might be a better option for you as investing those funds into another qualified investment allows for the opportunity for those dollars to grow.  An individual who is close to retirement might want to keep the funds in the plan as that might provide the best benefit.
• Comfort level with market volatility – If you are someone who is not comfortable with the volatility of the market, then keeping those dollars in an investment which would give you a guaranteed payment might be the better option.

My Process

When a client comes to me wondering what their options are, I follow the below process:

• Discuss with the individual the difference between knowing what your payment amount would be vs. an unknown payment.  These will help me understand what type of solution the individual would like me to focus on.
• I have the individual find out what the lump-sum payment would be and what the payment amount would be at different ages. These ages would be related to when the individual is thinking of retiring.
• Taking the lump-sum payment into consideration, I determine appropriate distribution, investment, and cash-flow options. 
• Present to the individual the different options available to them; (my rollover/distribution strategies vs. keeping the dollars in the plan). 

NOTE:  There may be situations where it makes sense to split the dollars and combine several strategies. 

Conclusion

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  All performance referenced is historical and is no guarantee of future results.  All indices are unmanaged and may not be invested into directly.