Lump Sum Payment Option for Current Retirees Adds to Defined Benefit Plan De-Risking Strategy, Says Cowden Associates

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Elliot N. Dinkin: As the retirement benefit landscape changes, employers should scrutinize their alternatives and communicate clearly and candidly with affected employees.

Cowden Associates | a Nationally Known Expert in Actuarial, Compensation, and Employee Benefits Issues.

Elliot Dinkin, CEO of Cowden Associates, discusses why employers need to understand and communicate pension options to current retirees.

“In today’s business environment,” says Dinkin, “it is essential for companies to reduce their financial risk. At the same time, for reasons of morale, loyalty, and company reputation, employers need to communicate the importance of this action to their employees.

Among the effects of the 2017 Tax Cut and Jobs Act on corporate finance is an increased motivation to address problems with defined benefit employee pension plans. In a recent CFO Research/Prudential Financial study, 64% of senior financial executives said they were very likely to use 2018 tax savings to increase funding of their defined benefit employee pension plans. Virtually the same number (62%) said they were very likely to execute a pension risk transfer to an insurance company once the plan became well-funded.[1]

“This is further indication of the ongoing shift in the U.S. pension benefits landscape,” says Elliot Dinkin, President/CEO for Cowden Associates, Inc. and a nationally known expert in actuarial, compensation, and employee benefits issues. “As these changes occur, it is essential that employers and employees clearly understand their options.”

An increasingly common approach to pension plan de-risking is the conversion of an open-ended benefits obligation into a single lump-sum payment.[2] Despite some recent alarmist headlines[3], says Dinkin, a lump sum payment, while not perhaps the most prudent choice for the average retiree, does not represent an evasion of an employer’s obligation to pay promised retirement benefits. The formula for calculating these payments is strictly specified by the Internal Revenue Service, and applies to all plan participants. An employer may choose to limit the offering for lump-sums to certain retirees, only through non-subjective criteria. Moreover, under the terms of the Employee Retirement Income Security Act of 1974, an employer cannot force a retiree or former employee to accept a lump-sum payout in lieu of monthly benefits. It is simply offered as an option to eligible plan participants who might be in a position to take advantage of a one-time infusion of capital.[4]

The rise of lump-sum payments, notes Dinkin, comes with (and sometimes as part of) a greater use of pension risk transfer (PRT) arrangements, by which employers reassign their benefit obligations to an insurance company. They are both indicators of a widespread trend in the U.S. business sector to lower corporations’ structural financial risk. A company offering a pension must maintain a separate, audited fund designated to be sufficient to meet its future obligations. As neither human mortality nor investment return is predictable, the presence of a pension fund injects an element of chance into corporate financial planning. A desire for risk reduction also helps account for the growing popularity of what are popularly known as 401(k) plans. Rather than place thousands of dollars per worker into a pension fund each year and hope for the best, many employers now opt for a defined-contribution plan, which transfers risk to the employee.[5]

“In today’s business environment,” says Dinkin, “it is essential for companies to reduce their financial risk. At the same time, for reasons of morale, loyalty, and company reputation, employers need to communicate the importance of this action to their employees. As business advisors, we counsel plan sponsors to explore all the options open to them, and explain those options as clearly and candidly as possible to their employees.”

About Cowden Associates, Inc.:
Cowden Associates, Inc., headquartered in Pittsburgh, PA, was created in 2001 by the merger of Halliwell and Associates and MMC&P Spectrum Benefits, which was founded by Jere Cowden in 1986. Currently led by President & CEO Elliot Dinkin, Cowden specializes in helping corporate clients find the best solutions, both for the enterprise and for its employees, with regard to compensation, healthcare benefits, retirement and pension issues, and Taft-Hartley fund consulting. Winning Workplaces and The Wall Street Journal have recognized Cowden as a “Top Small Workplace,” a lifetime designation awarded to executives for their ability to build and lead savvy organizations. For more information, visit

1. Schmidt, Chris, “Tax Law Drives Pension De-Risking Activity,” CFO, June 25, 2018.
2. Rojas, Warren, “Pension Buyouts Likely to Be Bolder, if Not Bigger, in 2019,” Bloomberg Law, December 17, 2018.
3. DePillis, Lydia, “It just became easier for employers to dump employees’ pensions,” CNN, March 20, 2019.
4. Bauer, Elizabeth, “What You Need To Know About Pension Lump Sums,” Forbes, April 4, 2019.
5. Wathen, Jordan, “Pensions Are Disappearing, Here’s How to Save for Retirement,” Motley Fool, June 5, 2018.

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