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Any financial legal eagles here?
My wife works for a large financially sound bank. After a merger several years ago, the bank discontinued contributions to the defined benefit retirement plan that she is vested in (approx. $54,000). Inquiry to the plan administrator revealed this would purchase a lifetime annuity of $325.00 per month should she decide to retire now. We would prefer the annuity to the lump sum rolled over to her IRA. Problem is, we do not trust the bank. Were she to take the annuity, is there any legal possibility the bank could discontinue the annuity and tell her to sh--- it.
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Any financial legal eagles here?

Not me, but I hope you don't mind me interjecting anyway! <gggg>

Inquiry to the plan administrator revealed this would purchase a lifetime annuity of $325.00 per month should she decide to retire now.

First question I would ask is: "Does she have to accept an annuity or can she just take the cash and roll it over into a self-directed IRA?"

Second question: "If she is able to take the cash, how much would that be again?" (I like to do reality checks from time to time).

Third question: "If we want to roll it over, when is the soonest we could do it?"

Fourth question: "Are there any restrictions to doing so or any costs related to doing so?"

Problem is, we do not trust the bank.

That's a powerful feeling you expressed there. If I felt that way, I would take the money and roll it over. I'm not sure of the advisability of an annuity vs other potential options, but if you did decide on an annuity, you could buy your own through the IRA.

Anyhow, that's my two cents, and worth almost every bit of it! <ggg>

PosFCF
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Always take the lump. You can then spend it on annuities, mutual funds, stocks, etc. You can then shop around, and you have total control.

Nick
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Another question to ask; Until she leaves the company, what is it invested in?

When she leaves the company I would be very surprised if she couldn't roll it out to and IRA as a lump sum. Ask on this.

Several of the other posts mentioned that if she rolls it out to an IRA then she could just buy an annuity within an IRA. Usually(but not always) an annuity within an IRA is a bad choice because one of the appeals of an annuity is its tax advantages, but within an IRA those tax advantages don't matter.

Either way you should also research the costs/ commissions/ overhead/ and restrictions of any annuity that you are looking at. Many if not most annuities are a rip-off because of their costs and performance.

Usually the employer would buy the annuity from a third party but it is possible that the third party could end of being a subsidiary of the bank. Hopefully the bank would use their clout to get a good deal on the annuity but don't count on it. The quality of the company that provides the annuity is what you want to check on because if they go belly up it will be a mess. If it is a small company there is a good chance that they will be bought by another company any

In addition while interest rates are low the annuities will have a relatively low payout that you will be locking yourself into for the rest of your life. Just as now probably isn't a real good time to buy 30 bonds, it isn't an ideal time to buy an annunity.

Greg
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Thank you for the input, people. Leaning toward lump-sum rollover.
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The annuity is guaranteed, and the pension plan must, by law, offer it as an option.

Any attempt to hinder a participant's ability to elect to receive an annuity is a violation of ERISA (the legislation governing pension plans).

Section 417 of the IRS Code cevers this:

http://benefitsattorney.com/cgi-bin/framed/framed.cgi?url==http://benefitsattorney.com/cgibin/links/jump.cgi?ID=304&id==304
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From someone who works on defined benefit plans daily....

As mentioned above, you should take the lump sum. (I disagree with the 'always take the lump sum,' but I won't get into that here.) The reason is this: when a qualified plan distributes a lump sum, they are giving you the money that they would need to put away today to cover your $325.00 annuity every month until you (or your beneficiary) dies. In order to figure out this lump sum's value, the Plan Document (the pamphlet that describes your benefit) dictates what interest rate to use to discount each annuity payment to now….and the smaller the interest rate, the larger the present value. There is some flexibility in the choice of interest rates, but it is generally based on what a 30-year Treasury would yield if they were still being issued. (If you'd like to read more, try Revenue Ruling 2001-62, but only when your insomnia fires up.)

Since interest rates have been so low over the last couple of years, the highest that rate has been is 5.16%. Why is 5.16% good you ask? Well, because in order to provide yourself with that annuity of $325.00 when you retire, all you need to return on your assets is roughly 5.16%.
So, take the lump sum, roll it over into an IRA, and invest. Anything over about 5% will be extra cash to you.

Another thing: qualified defined benefit plans are required to purchase insurance from the Pension Benefit Guaranty Corporation. The $325.00 monthly benefit is well under the amount they'll cover in case the bank decides they're not going to pay, so your trust in the bank shouldn't come into play when deciding which option to choose.

Regards,
BW
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