Any rollovers from the plan to the IRA should be accomplished as trustee-to-trustee transfers, in which the plan's trustee transfers the proceeds directly to the new custodian of the IRA or moves funds by check payable to the new custodian for the benefit of the new account owner.
INVESTING THE CASH
The next question is how the assets should be invested to provide for retirement. Marsden says clients should be looking to "replicate" in their IRA what their pension plan would have provided. The private market actually offers more alternatives than some pension plans offer, he adds.
"When you take a pension from the company, there is very little flexibility," Marsden explains. "The person receiving the pension gets a certain amount every month, with maybe a survivor benefit for a spouse. That's about it." But with a lump sum that is rolled over to an IRA, he says, "the client can then use that money to do a number of things." Marsden listed a number of possibilities:
* Buy a commercial annuity that replicates the options offered by the previous employer (annuity for life, survivor annuity payout as well).
* Buy any other investment vehicle (stocks, bonds, mutual funds, private placements) and have more control over the investment choices.
* Take a lump-sum payout for gifting to family.
* Take a lump-sum payout and use the proceeds to buy a long-term care insurance policy.
One type of commercial annuity offers a potential increase in income, Marsden says. "This type of annuity allows for the possibility of keeping up with inflation over time as opposed to a straight payout from the company, which may never change," he notes. "A monthly pension that covers living expenses today may not do the same over time."
Clients also need to define what they need the money for and for how long. If, for example, they need to provide a bridge before they start collecting Social Security or other pensions, an immediate annuity might be a solution. Or they may want the payout invested to supplement their income for the duration of retirement.
But in today's world of historically low interest rates, finding investments that can adequately fund retirement expenses isn't easy, especially with people living longer.
With average life expectancies increasing, the risk of outliving one's money cannot be ignored. For a married couple who are both 62 years old, for example, there is a likelihood that at least one of them will live to age 92 or beyond. Johnson says she advises her clients to plan as if they are going to live to 95.
Using the so-called Rule of 72 as a guide, at a 3% annual rate of inflation, the cost of living will roughly double in 24 years. So fixed income, by definition, would not seem to be an optimal solution over the long term.
Indeed, it's not easy to find an investment vehicle that provides a lifetime income stream that promises the same return as a pension. Immediate annuities, which currently return only about 1%, "don't get people excited," says Timothy Watters, CFP, principal at Watters Financial Services in Paramus, N.J.
Another solution, variable annuities, is going the way of, well, defined benefit pension plans. Several insurance companies, including Transamer- ica, Equitable and most recently The Hartford, have begun offering lump-sum payouts to holders of their variable annuities, which guarantee a lifetime income stream, to get customers to surrender the policies. Many companies have stopped selling the policies but are at risk for those they wrote in the early and mid-2000s, when they were popular.
Helping clients to choose the appropriate investments, then, is where financial planners add value - to provide advice about such important topics as asset allocation, and product and investment diversification.
Watters says that many otherwise intelligent people don't know what to do when it comes to investing. "401(k)s haven't worked out well for a lot of people," he notes.
THE OTHER OPTION
While taking the lump-sum option is the best decision for most people, that's not always the case. For example, clients who are likely to spend the money on discretionary purchases are better off keeping the money in the pension plan and waiting until their regular retirement age to start collecting, planners say.
"Sometimes clients are their own worst enemies," Watters says. "If they're big spenders, this is not a good situation. People will spend the money. With a monthly pension, you can't hang yourself as quickly."