Rollovers of 401(k)s into pension plans gets government agency backing

With move, the Pension Benefit Guaranty Corp. clears the way for annuitization of the funds

Nov 26, 2014 @ 12:31 pm

By Darla Mercado

The Pension Benefit Guaranty Corp. on Tuesday finalized a rule to allow participants to push 401(k) assets into pensions, nudging employees to consider annuitizing these funds while curbing their ability to draw from the money before they retire.

The U.S. government agency's regulation had been in the works since April, when it had proposed amending the rules to clarify the protections that would apply to monies rolled over out of defined contribution plans and into defined benefit pensions.

Under this rule, money from a rollover won't be subject to the PBGC's maximum guarantee limits, as the agency insures private sector pension plans. The 401(k) assets also won't be subject to phase-in limitations. According to the PBGC, in 2015 the maximum guaranteed annual benefit will be slightly over $60,000 for a 65-year-old retiree.

The PBGC's gesture is yet another example of the federal government nudging employees and retirees toward considering annuitization, according to Marcia Wagner, managing director at the Wagner Law Group. Earlier this year, the U.S. Treasury cleared the use of retirement account dollars in deferred income annuities. In October, the Treasury and the IRS issued new rules to permit the use of these annuities in target date funds.

“The government is doing everything it can to encourage the full or partial annuitization of retirement benefits,” Ms. Wagner said. “Right now, it's getting rid of the regulatory underbrush that makes it difficult.”

The PBGC's move is a powerful one for the retirees and employees who are fortunate enough to still have access to pension plans.

For one thing, participants who roll money out of a 401(k) and into a pension have better purchasing power for lifetime income annuities via the pension as opposed to obtaining it in the marketplace on their own, noted Jason C. Roberts, CEO of Pension Resource Center.

The rollover of a 401(k) into a defined benefit pension plan also protects the money from leakage — which is what happens when workers make hardship withdrawals and take loans from their retirement plans — because the money has to stay in the plan.

“The leakage issues go away immediately,” said Mr. Roberts. “It takes away the temptation to spend or access the money.”

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