Another company just cut its pension plan — what to do if it happens to you

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Avery Dennison AVY, -0.95%  is the latest example of a persistent trend: the death of the pension plan.

The labeling and packaging company said on Wednesday it was terminating its pension plan, effective Sept. 28, eight years after first freezing the program. It also said there would be no change in benefits for the 11,200 current participants, although the plan is currently underfunded by about $240 million.

See: Government money should help solve this pension crisis

What does that mean for plan participants right now? The elimination of the plan means current participants will have to choose between receiving their benefit now as a lump-sum payment or as a continuing monthly payment, said Edward Snyder, a financial adviser at Oaktree Financial Advisors in Carmel, Ind. “It’s a good time to revisit your financial plan to see how the different pension options will impact your plans and retirement income.”

Of course, that isn’t exactly easy. There are a few stipulations to consider before making a decision, said A.J. Walker, a financial adviser at financial advisory firm Lake Jericho in Chicago. Participants will have to determine if receiving a lump sum today would be equal to the annuitized payments, or if they may be undersold by doing so. In some similar scenarios, clients have risked losing out on a substantial amount of benefits because they opted for a lump sum, sacrificing the benefits they were meant to receive.

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If the math works out, and a lump sum and annuitized payments are equal, participants must then consider who would be managing those assets. While Avery Dennison manages the pension plan, it is federally insured by the Pension Benefit Guaranty Corporation, but that changes when those assets are transferred to the private insurance companies to manage. “I would weigh heavily who the provider of the annuity is,” he said. “You want a good, solid reputable company to have that.” If not, a lump sum may be the best option as it can be reinvested into diversified stocks and bonds. The risk of staying with a potentially insecure company is that those assets are exposed to less reliable investments. This would be an expensive mistake for anyone, but especially for those employees with three or four decades until retirement.

Companies are eliminating pensions, known as defined-benefit plans, opting instead for defined contributions plans, such as the 401(k), where participation is voluntary and employees are responsible for their own retirement savings. Only 16% of Fortune 500 companies offered a defined-benefit plan to new hires in 2017, down from 59% among the same employers in 1998, according to London-based insurance company Willis Towers Watson. About half of these companies still employ workers who are actively accruing pension benefits, and 93% of these companies with a defined-benefit plan in 1998 still manage their plans and assets.

Also, like Avery Dennison, some of these plans have been frozen. Freezing benefit plans varies based on the terms of the plans, but basically come down to the benefits no long accruing. Participants will already get the benefits that have grown, but may not earn more moving forward. “Participants generally need to be on the watch that more of this is coming,” Walker said.

Also see: Here’s a way to get a pension-like benefit in retirement

Avery Dennison is transferring its payment obligations and the administration of the plans to one or more insurance companies that manage pension annuities next year, said Rob Six, vice president of communications for the company. Avery Dennison still offers retirement benefits to employees through a 401(k) plan. Beginning this year, the company increased its matching contribution rate for eligible participants to 50% of the first 7% of eligible pay. It also offers an automatic contribution of 3% of eligible pay.

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