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Pension Plan Tweak May Elude Most

The federal agency that insures private pensions is proposing a rule change that would add greater protection for workers who roll 401(k) money into a traditional pension.


Workers for years have been able to transfer money from their employer's 401(k) to its traditional pension plan to buy themselves a bigger lifetime benefit - if the employer allowed it.

The Pension Benefit Guaranty Corporation says its new proposal will remove fear among these workers that the amount they roll over from the 401(k) could be subject to its insurance limits if the agency took over their pension. This year, for example, the maximum benefit guaranteed by the PBGC is $59,320 annually for someone who is 65.

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The PBGC proposal would guarantee the increased benefit purchased with 401(k) dollars, even if it put a worker over the limit. The rest of the worker's pension, though, would still be subject to the agency's limits.

Also, under current rules, if an employer revises its pension to increase benefits within five years of terminating the plan, the PBGC will only partially guarantee those benefits. Under its proposal, the agency would exempt benefits acquired through 401(k) rollover dollars.

The changes are seen as a way to encourage workers to roll over 401(k) money into a pension plan that would pay them an income for life.

"It would give certain employees additional security, " although the number of such workers is likely small,  says David C. John, senior strategic advisor for AARP's Public Policy Institute.

Fewer companies these days offer both traditional pensions and 401(k)s, and fewer still allow such rollovers.

Lawmakers, too, are likely to question the PBGC, which already is underfunded, if this proposal puts more financial strain on the agency, John says.

The PBGC says the increased protection for 401(k) rollovers shouldn't have an impact because workers are depositing money into the pension to cover benefits.

Jan Jacobson, senior counsel of retirement policy for the American Benefits Council, an advocacy group for employer-sponsored benefit programs, says permitting 401(k) rollovers into a pension plan is ultimately the employer's decision.

"We know of only a few employers who do this, and I doubt that the PBGC's clarification of the treatment will create a groundswell of interest," Jacobson said in a statement.

Indeed, employers  have been trying to offload their pensions in recent years by offering lump sums to workers or buying an annuity for them from an insurance company. This trend, which started among major employers in 2012, is only expected to increase.

Alan Glickstein, a senior retirement consultant with Towers Watson, gives the PBGC credit for trying to help workers.

"It's good to see a regulatory agency think of ways to provide more options for plan sponsors and participants," Glickstein says. "They aren't taking anything away."

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Even if the rule changes go through, there's no guarantee that more eligible workers would take advantage of 401(k) rollovers, he adds.

Employees, including those who are younger, often say they want a secure retirement benefit, Glickstein says.  At retirement, though, many take a lump sum and there's little sign that they are rushing to buy annuities that can provide a lifetime income stream, he says.

The PBGC is taking public comment on the changes for the next 60 days.


Photo: AndrewWilliam/iStockphoto


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