Avery Dennison is the latest example of a persistent trend:
the death of the pension plan.
The labeling and packaging
company said on Wednesday it was terminating its pension plan, effective Sept.
28, eight years after first freezing the program. It also said there would be
no change in benefits for the 11,200 current participants, although the plan is
currently underfunded by about $240 million.
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What does that mean for plan
participants right now? The elimination of the plan means current participants
will have to choose between receiving their benefit now as a lump-sum payment
or as a continuing monthly payment, said Edward Snyder, a financial adviser at
Oaktree Financial Advisors in Carmel, Ind. “It’s a good time to revisit your
financial plan to see how the different pension options will impact your plans
and retirement income.”
Of course, that isn’t
exactly easy. There are a few stipulations to consider before making a
decision, said A.J. Walker, a financial adviser at financial advisory firm Lake
Jericho in Chicago. Participants will have to determine if receiving a lump sum
today would be equal to the annuitized payments, or if they may be undersold by
doing so. In some similar scenarios, clients have risked losing out on a
substantial amount of benefits because they opted for a lump sum, sacrificing
the benefits they were meant to receive.
If the math works out, and a
lump sum and annuitized payments are equal, participants must then consider who
would be managing those assets. While Avery Dennison manages the pension plan,
it is federally insured by the Pension Benefit Guaranty Corporation, but that
changes when those assets are transferred to the private insurance companies to
manage. “I would weigh heavily who the provider of the annuity is,” he said.
“You want a good, solid reputable company to have that.” If not, a lump sum may
be the best option as it can be reinvested into diversified stocks and bonds.
The risk of staying with a potentially insecure company is that those assets
are exposed to less reliable investments. This would be an expensive mistake
for anyone, but especially for those employees with three or four decades until
Companies are eliminating
pensions, known as defined-benefit plans, opting instead for defined
contributions plans, such as the 401(k), where participation is voluntary and
employees are responsible for their own retirement savings. Only 16% of Fortune
500 companies offered a defined-benefit plan to new hires in 2017, down from
59% among the same employers in 1998, according to London-based insurance
company Willis Towers Watson. About half of these companies still employ
workers who are actively accruing pension benefits, and 93% of these companies
with a defined-benefit plan in 1998 still manage their plans and assets.
Also, like Avery Dennison,
some of these plans have been frozen. Freezing benefit plans varies based on
the terms of the plans, but basically come down to the benefits no long
accruing. Participants will already get the benefits that have grown, but may
not earn more moving forward. “Participants generally need to be on the watch
that more of this is coming,” Walker said.
Avery Dennison is
transferring its payment obligations and the administration of the plans to one
or more insurance companies that manage pension annuities next year, and as
part of that transfer the plan will be fully funded, said Rob Six, vice
president of communications for the company. Avery Dennison still offers
retirement benefits to employees through a 401(k) plan. Beginning this year,
the company increased its matching contribution rate for eligible participants
to 50% of the first 7% of eligible pay. It also offers an automatic
contribution of 3% of eligible pay.
here for the original article from Market Watch.