What Can You Do When Your Employer Changes Your Retirement Plan?

January 03, 2020

You may be counting on your pension or 401(k) to provide a sizable amount of your retirement income. But if your employer changes these plans in some way, what steps should you take?

Let’s consider some possible scenarios about changes to your retirement plan:

When a pension is frozen … If your employer freezes your pension plan, you won’t lose any of your existing benefits, but you won’t earn any new ones. Some freezes are considered “soft,” which means your benefits can grow based on your salary increases, but you won’t get credit for any further years of service.

When a pension terminates … When an employer terminates a pension plan, you’ll likely be offered a lump sum immediately or monthly payments for life, starting when you retire.

When a 401(k) is frozen … A 401(k) freeze typically occurs when two companies merge. During this process, the new company may temporarily halt all new plan contributions and withdrawals, but you still have the same ownership rights you had before the freeze.

When a 401(k) terminates … When a 401(k) or similar plan is terminated, your employer may offer to directly roll over your money to another qualified retirement account (such as an IRA), so the funds can continue to potentially grow tax deferred. You could receive the lump sum directly, but unless you roll it over to an IRA within 60 days, you’ll face taxes and a possible early withdrawal penalty if you’re younger than 59 ½.

Compensating for Lost income

What can you do if a change in your retirement plan results in your having less income available when you do retire? Here are a few suggestions:

  • Work longer. You may have had your heart set on retiring at a certain age, but if you work a little longer, you can gain some important benefits, such as more time to contribute to your IRA (and to your 401(k), if you’ve got one). Plus, if you have employer-based health insurance, you may be able to delay the need to purchase additional coverage, such as a Medicare supplemental policy.
  • Fully fund your IRA. If you do face reductions in your employer-sponsored retirement plan, it’s more important than ever for you to try to fully fund your IRA each year. Currently, you can put in $6,000 annually to your IRA, or $7,000 if you’re 50 or older.
  • Increase contributions to your employer’s plan. Some companies offer pensions and 401(k) plans, so following a pension termination, you may want to increase your contribution to your 401(k). And, of course, you may change jobs, leaving the company that froze or terminated its 401(k) for a new employer and a new plan. In any case, contribute as much as you can afford to your plan and boost your contributions whenever your salary increases.
  • Review your investment mix. If you anticipate less money coming from your pension or 401(k), you may want to review your investment mix to determine if it’s possible for it to provide you with more growth potential, given your risk tolerance and time horizon.
  • Consider an annuity. If you’re already contributing as much as possible to your IRA and whatever employer-sponsored retirement plan you still have, you might want to consider investing in a fixed annuity, which can be structured to provide a lifetime income stream.

Experiencing a termination or freeze in a pension or 401(k) can certainly be unsettling – but it doesn’t have to destroy the hopes you had for a comfortable retirement lifestyle. As you can see from the above suggestions, you do have ways to address a projected shortfall. Contact an Edward Jones financial advisor to learn more about these and other possibilities.

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