Lump-Sum Payouts and Annuity Purchase for Honda Motor Company Employees

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When considering retirement or a job change from Honda Motor Company, it is imperative to learn about your eligibility for a lump-sum payment offered by your retirement plan.

When deciding whether or not to take a lump-sum payment, it is essential to plan out the allocation of proceeds you will receive. For those working at Honda Motor Company, this money may comprise a significant portion of the financial assets in their possession and may be the only private source of their retirement income. With that under consideration, it may be in your best interest to seek assistance with different retirement options and electing the one best suited for your needs.

The insurance association LIMRA conducted a study of employees retiring, changing jobs, or leaving the workforce with eligibility for a lump-sum payment from their pension plan. The study's purpose was to assist pension companies with developing products and services that  help employees preserve their pension benefits. The study includes information on 1,763 employees eligible for a lump-sum payment from their employer's retirement plan: 684 employees who had retired in the past three years, and 1,079 employees who had changed jobs or left the workforce in the past three years.

Size and Growth of the Market

Employees who are eligible for a lump-sum payment from their Honda Motor Company-sponsored retirement plan include those who are:

• retiring
• disabled
• changing jobs or leaving the workforce
• losing their job due to layoffs or corporate downsizing
• participating in a pension plan that is being terminated
• beneficiaries of a deceased participant in a pension plan

In 1996, employer-sponsored pension plans made up a total of $336 billion in benefit payments – an increase of 6 percent from 1995 and 31 percent from 1991. Of that amount, an estimated 28 percent ($94 billion) was in lump-sum payments. This amount does not include more than $20 billion that plan participants choose to leave in their plans.

The U.S. Department of Labor found that from January 1993 to September 1994, 940 workers aged 40 and older received a lump-sum payment.  Subsequent analysis indicates that this study underestimates the number of people receiving a payment and that it does not include those who were offered a payment but left the money in the plan. It does show that a large number of workers representing billions of dollars have the task of deciding what to do with this money.

The number of employees faced with this decision, as well as the amount of money involved, is not only large but increasing rapidly. Three factors contributing to this rapid increase are:

• the growth of defined contribution plans, particularly 401(k) plans.
• the growth of participant account balances in defined contribution plans.
• the increasing number of persons reaching retirement age early in the next century.

Need for Assistance

As an employee of Honda Motor Company, choosing the right pension option can be one of the most important financial decisions you will make. Those eligible for a lump sum payment will have countless options. Their choices will include at least one or more of the following options:

• take the money in one lump-sum cash payment
• leave the money in the previous employer's plan
• transfer the money directly to an IRA
• take a cash payment and transfer it to an IRA within 60 days
• take the money in installments or purchase an immediate annuity

Each option has advantages and disadvantages. The options have differing effects on household income, tax liabilities, and preserving pension benefits. Not all options create the same estate value or survivor benefits for beneficiaries. Some options create maximum current income but not estate value. Other options create no current income but preserve estate value and spousal benefits.

Employees are strongly discouraged from taking a cash distribution. If they do, they will have to pay Federal and State taxes and if under 59 1/2, may incur a 10 percent penalty. The employee has 60 days to place this money into an IRA or qualified pension plan to avoid income and penalty taxes. However, the employee will not receive the 20 percent refund until income taxes are filed for that year; and, to avoid the taxes and penalty on the amount withheld, the individual must put, within the same 60 days, the equivalent of the 20 percent withheld into an IRA or qualified pension plan.  The 10 percent penalty is not imposed if the employee died, became disabled, reached age 59½, or reached 55 in the year his or her employment was terminated. If the employee has a loan from the plan, it will have to repaid.

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Size of Payment

For retirees, the average lump-sum payment offered is $119,200. In addition, nearly 15 percent of retirees have lump-sum payments valued at $250,000 or more.  When eligible for a lump-sum payment, the most popular option chosen is to transfer the money to an IRA – 2 in 5 employees choose this option. Approximately 1 in 5 employees leave the money in the employer's pension plan. Another popular option is to take the money in installments or as a series of annuity payments. A cash payment is popular among job changers. Of those taking a cash payment, 45 percent saved some or all of the money.

Where Do Retirees Invest or Save the Money?

For those transferring the money to an IRA or taking a cash payment, the majority invest the money in mutual funds. Other savings and investment products include money market funds, savings accounts, annuities, stocks, and bonds. The competition for these investment dollars is high. No one company has a dominant market share. The five companies with the largest market share have a combined market share of less than 25 percent.

Those placing the money in an IRA show no clear preference for the type of company chosen to service the account. Banks and credit unions are the most popular among retirees, with 27 percent opening their IRA with this type of institution. Mutual fund companies are more popular with job changes – 1 in 3 employees who experienced a job change placed their IRA with a mutual fund company.

Leaving the money in the Honda Motor Company-provided pension plan is the easiest option for an employee to choose. Other reasons include:

• The plan offers good service.
• They want to avoid taxes and penalties.
• The plan has good investment performance.
• They liked the investment choices.
• They would have a larger amount of money.

Sources of Assistance

Honda Motor Company plays a critical role of providing information to employees on their options. Over 90 percent of employees felt they received adequate information from their employer. This information includes employer-written materials, employer seminars, and face-to-face meetings with the employer's staff. Another useful source of information mentioned frequently is commercially available written material from bookstores.

Most do not seek the advice of a professional. They rely on either their own analysis or the help of family and friends. If retirees choose to contact a professional, they typically choose a financial planner or independent investment advisor.

Conclusion

Pension companies and employers are only in the early stages of understanding the needs of employees eligible for a lump-sum payment from their pension plan and designing products and services to help these employees. They can play a vital role in assisting employees in preserving their retirement benefits. Pension companies need to be more proactive in providing plan sponsors with necessary tools. One example is a service plan where the company assumes many of the administrative procedures performed by the employer. This service offers the employer the pension company's expertise in advising employers and cost savings. It offers employees access to a full time retirement specialist who works daily with employees in similar situations. In addition, the employer can tailor the services to meet the special needs of its employees.

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Notes

1. Woods, John R., 'Pension Benefits Among the Aged: Conflicting Measures, Unequal Distributions,' Social Security Bulletin, Volume 59, No. 3, Fall 1996
2. LIMRA estimates approximately 23 percent of persons eligible for a lump-sum distribution leave this money in the employer's plan.
3. Retirement Benefits of American Workers: New Findings from the September 1994 Current Population Survey, U.S. Department of Labor Pension and Welfare Benefits Administration Office of Research and Economic Analysis, September 1995.
4. Participants in 457 plans are not allowed to transfer their distribution to an IRA, and cash distributions are only allowed after retirement.
5. Stable value investments – a type of investment that is only offered within pension plans. Stable value investments – also commonly referred to as guaranteed interest contracts (GICs) – are a popular investment option for participants in defined contribution plans. A stable value investment option offers a return of money invested at a predetermined interest rate.