Trading Away Pensions
Pension plan participants are giving up their lifetime benefits to take lump sums. Why?
In recent years, defined-benefit plan sponsors increasingly have been offering participants lump sums in lieu of lifetime payments. Many plan participants have accepted these lump sums, even though doing so may not be in their best interests.
When participants take a lump sum, they take on two risks that their employer used to bear--investment risk (the risk that their investments might not perform as they expect) and longevity risk (the risk that they might outlive their savings). Plan sponsors have been happy to shift these risks off their balance sheets and onto participants.