LACERS Financial Report: Our Pension Avoids Lump-Sum Bad Deal


Michael Wilkinson, LACERS/Legal Representative

By Michael R. Wilkinson
LACERS/Legal Representative

Every now and then I like to write an article covering the pensions offered in private industry and look at the rules that give small protections to employees working in the private sector compared to what we take for granted working in public service.

It used to be common for large public companies to provide traditional pensions to their employees. The company would reward employees who devote a career of service for a guaranteed pension. No longer: Most firms that provide pensions have closed the pensions to new hires and provide only 401(k) plans, also called defined contribution plans. The key difference between a traditional pension (a defined benefit pension) and a 401(k) plan is that all the risk of having a continuing stream of income in retirement is on the retiree in the 401(k) plan.

A recent change by the U.S. Treasury Dept. allows companies to offer one-time lump-sum payouts to retirees who give up their guaranteed pension. Although the lump-sum payment may look like a generous offer, experts from the AARP, representing seniors, say that it is a bad deal for seniors because most retirees do not have the financial expertise to know that it is not a favorable trade for the retiree.

A research study done by MetLife in 2017 found that one in five retirees who took lump sums spent them down in less than six years, and nearly a third regretted using money for short-term needs like home improvements. Many people look at the money right in front of them and find the lure to cash in instantly to be too tempting. They take the deal to use their lifetime pension even if it might be far wiser to take the annuity payments that might pay out much more but require patience. The buyout is voluntary, but many retirees take the bait to cash in the pension that they may regret later.

All this gives us a chance to be thankful that we have a solid pension that has a guaranteed payout formula for the member’s life and that of a surviving spouse and even provides a cost of living adjustment