Personal Finance

What should I do about a previous pension that’s getting sold to another company?

Rich Duprey

Published: November 23, 2024 12:16 pm

Because of market volatility, many people prefer the surety of a pension plan over a 401(k) or other market-based retirement account. A bear market, a recession, or even a depression could severely deflate the account’s value while the pension will maintain its value over time.

While that was true at one time, today it is no longer the case. Far too many workers have counted on having their pension there when they retired only to have the company go under and their pension plans dissolved.

That’s why if you find yourself in a situation similar to what a Redditor did on r/Retirement401k, there is really just one course of action to take.

The lesser of three evils?

The Redditor had a small pension at an employer that sold the account to another company. He was given a very short deadline to make a decision on what to do with the proceeds:

• Accept a lump sum payment and roll it over into a 401(k) or IRA
• Start collecting payments, even though he was only 35 years old
• Leave it and let the new company determine what happens to the plan

Now this pension is only a small amount. The lump sum payment he could rollover would be $3,900, which wouldn’t dramatically alter his existing 401(k) plan, which has $101,000 in it.

The direct monthly payments would also be small, $21.77 per month, if he chose to start collecting.

As the company only gave him a few days to make a decision, the Redditor was seeking advice on which option to choose.

While I’m not a financial planner, so this is just my opinion, I actually faced a very similar scenario a number of years ago and the decision was a no-brainer for me.

24/7 Wall St. Insights:

• When switching employers, a pension plan may be left behind, which requires you to make a decision about what to do with the funds.
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One thing you should never do

Of the three choices, the worst one is to simply leave it with the new company. You lose control over the funds and must trust the new company’s management and terms they come up with. There is no guarantee it will offer better terms or payout options than what are currently available. 

So let’s look at the benefits and disadvantages of the remaining two options.

Option 1: Take the lump sum payment

On the plus side, taking the lump sum payment gives you immediate control over the funds that you can roll over into a 401(k) or IRA. By doing so you maintain tax-deferred growth and control over how the money is invested.

Over time, the lump sum could see substantial growth if you invest wisely. For example, if it earns an average return of 7% annually, it could grow to approximately $29,000 in 30 years.

Moreover, rolling it over provides flexibility, as the funds become part of your retirement portfolio. That gives you options to adjust your investments based on your financial needs and goals.

Of course, $3,900 is a pretty modest sum, so the immediate impact on your retirement savings will be limited. You have to trust the power of compound interest over time and your returns will depend on market performance. Any poor investment choices will reduce the account’s value.

Option 2: Take monthly payments 

While the monthly benefit amount is meager, it is a guaranteed amount for life, regardless of market conditions. So if you live a long life, the total payout could exceed the lump sum. For example, over 40 years, the payments total approximately $10,435.

Yet as mentioned, $21.77 per month is not going to be life-altering. And due to the effects over time of inflation, the sum will see a significant degradation in its purchasing power. Moreover, once you choose this option, you’re locked into the small payments forever without access to the principal.

The easy choice

After weighing the pros and cons of each, taking the lump sum and rolling it over to a 401(k) or IRA is likely the best option for most people. It is what I did. 

This approach provides flexibility, offers the greatest potential for significant growth through compounding over time, and gives you full control over your funds. 

While the monthly payment option offers longevity protection, it is not nearly substantial enough to provide any meaningful income to make the choice worthwhile.