Experts at Towers Watson, a global professional services company, say that today's announcement by Ford Motor Company represents a significant development in the U.S. defined benefit pension marketplace. Ford intends to provide a one-time voluntary lump sum offer to substantially all of its salaried retirees by the end of 2013. It appears to be the first such program to specifically target retirees without being part of a broader plan termination.
Historically, lump sum distributions, which allow plan participants to exchange receiving periodic annuity payments for a single lump sum payout, have been offered to participants only upon separation from active employment. The announcement follows a recent trend by plan sponsors to provide a one-time lump sum offer to former employees who have not yet commenced an annuity payment (so-called “terminated vested” participants).
Although some industry experts have historically questioned the ability of plan sponsors to offer lump sum payments to retirees, Ford Motor Company did not imply they felt there were any legal reservations for them in moving forward. Mike Archer, leader of intellectual capital for the North American Retirement practice of Towers Watson, commented, "There are many considerations, including potential regulatory issues, that plan sponsors contemplating a lump sum offer will need to examine closely. We believe some plan sponsors will conclude that the current regulatory framework will support a properly designed offer."
"This development could have far-reaching implications for both plan sponsors and plan participants. For plan sponsors, the ability to provide a retiree lump sum offer provides greater flexibility to manage their retirement plans, including the ability to better manage the size of the plan relative to ongoing operations, as well as the ability to more efficiently administer the plan on an ongoing basis," said Matt Herrmann, leader of the Retirement Risk Management group of Towers Watson.
"From a participant perspective, the decision to receive a lump sum distribution is completely voluntary. We believe that the option to select a lump sum provides plan participants with greater flexibility to plan for retirement income needs, including more control over the timing of retirement income, as well as more control over how retirement income assets are invested." Archer added, "Each retiree will need to evaluate the trade-offs between greater investment control and the security of a guaranteed lifetime income stream."