Understanding Interest Rate Shifts: What L3Harris Employees Should Know About Pension Lump Sums

In 2024, L3Harris employees planning or preparing to depart from the traditional Defined Benefit (DB) pension systems are facing significantly lower lump sum distributions than initially anticipated. The notable fluctuations in cash interest rates throughout the year have negatively impacted these values, marking a significant departure from earlier forecasts.

Throughout 2023, studies on statutory interest rates highlighted this trend, beginning with an April publication that detailed the potential effects on lump sums in the event of rising interest rates. A second update in November 2023 further adjusted these forecasts, confirming that the initial estimates were overly optimistic. By the end of September 2023, the IRS segment rates used by L3Harris Technologies Pension Plan for lump sum calculations had experienced one of the largest 12-month increases on record, strongly influenced by the Federal Reserve's rate hikes aimed at curbing historically high inflation.

To gauge this influence specifically for L3Harris employees, the IRS segment rates in November 2023 showed increases of 30 to 60 basis points across different segments, significantly affecting pension lump sum calculations under the L3Harris Pension Plan, which offers eligible employees a choice between lump sum distributions or annuity payments. These adjustments underscore the importance of proactive financial planning for retirement within the framework provided by L3Harris.

For instance, applying these November 2023 rates to a hypothetical scenario where a 51-year-old non-union L3Harris employee enrolled in the L3Harris Technologies Pension Plan defers a $1,000 monthly pension benefit until age 65, the lump sum payment significantly diminishes, as demonstrated by the latest data:

• In November 2022, with segment rates of 1.02%, 2.72%, and 3.08%, the estimated lump sum was $116,800.

• If rates increased by 1%, the total lump sum would drop to approximately $92,600, reflecting a decline of about 21%.

• By September 2023, as segment rates rose to 4.48%, 5.26%, and 5.07%, the lump sum decreased further to approximately $71,500, representing a decline of 39%.

• By November 2023, with rates at 5.09%, 5.60%, and 5.41%, the estimated lump sum decreased to approximately $66,300—a total decline of about 43% from the previous year.

This shift disproportionately impacts younger plan participants within L3Harris, who experience larger percentage declines in their lump sum pension calculations, whereas older participants see relatively smaller reductions.

Additionally, under L3Harris Technologies Pension Plan rules, if the present value of accrued benefits drops below the $5,000 threshold due to these interest rate increases, the company has the option to distribute these smaller amounts directly as cash payments or offer automatic rollovers into an Individual Retirement Account (IRA). This can affect retirement payout decisions for several L3Harris employees.

Aside from the Pension Plan, L3Harris offers robust retirement savings options, including the L3Harris Retirement Savings Plan, a 401(k) plan where employees can contribute pre-tax or Roth after-tax dollars, often matched by L3Harris. Employees should consider maximizing these contributions to offset potential pension lump sum declines.

Regarding healthcare benefits for retirees, L3Harris provides retiree medical coverage options subject to eligibility, often dependent upon years of credited service and age at retirement. It is important for both union and non-union employees to review eligibility specifics, as negotiated agreements may impact benefit structures and costs.

In summary, these changing interest rate dynamics reinforce the importance for L3Harris employees to thoroughly understand and regularly review their retirement plan benefits, including pension lump sum options, the 401(k) savings plan, and healthcare coverage, ensuring well-informed retirement planning decisions tailored specifically to their individual circumstances.

Moreover, the rise in interest rates has specific consequences for cash balance plans. Although these plans are generally exempt from interest rate hikes concerning lump sums, they must still offer an annuity equivalent to the cash surplus. The rise in interest rates reduces the actuarial factor used in this conversion, potentially making annual payments more attractive. For example, a total sum of $100,000 for a 65-year-old retiree, based on November 2022 rates, would represent a monthly annuity of about $530. However, with the elevated rates of November 2023, this could increase to approximately $690 per month, adding an annual sum of $1,920 for the retiree's lifetime.

It is also crucial for plan participants to understand the implications of Section 415, which sets a limit on the cash amounts that can be paid out from these plans. Typically, the total sum is either the lesser amount calculated using the applicable plan's mortality table with an interest rate of 5.5% or the sum deducted using the mortality and interest rates of Section 417(e). Traditionally, the former calculation method has produced a lower sum due to the applied interest rate rise.

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As we move towards 2025, the potential for interest rate reductions could have a significant impact on the landscape. Jerome Powell, chairman of the Federal Reserve, has announced new reductions as early as the next Federal Reserve meeting, with the possibility of further cuts within the year. This forecast of a decrease could offer some relief to borrowers while posing new challenges for savers. For those with defined compensation plans, a reduction in interest rates could lead to increased payments, suggesting that deferring withdrawal to benefit from these potential better distributions might be a wise decision.

This evolution highlights the importance of meticulous and early planning concerning retirement finances. As 2024 progresses, it will be crucial for L3Harris employees to stay informed and adaptable to economic changes to optimize their retirement outcomes due to interest rate fluctuations.

As the Federal Reserve signals potential interest rate decreases, retirees might observe positive adjustments in their pensions. According to an April 2024 study by the Employee Benefits Research Institute, many individuals over 60 could benefit from these changes, as the present value of defined retirement pensions increases when interest rates decrease. This could boost the cash sums available to retirees, thus providing more significant financial protection as they transition into retirement. This trend underscores the importance of strategic financial planning and monitoring economic indicators to optimize pension outcomes.