My Employer is Closing its Pension Plan: Now What?

What Is a Pension Plan?

Pension plans used to be a common benefit offered by employers to their employees. Also referred to as defined benefit plans, a pension is different from more recognizable 401(k) plans. A pension is typically an agreement that helps fund employees' retirement by making regular payments from the day of retirement for the remainder of the employees’ lives. Employees usually have to work for the employer for a certain period of time before the benefits are fully vested and belong to them in full. Where employees choose how much they wish to contribute and have more control over a 401(k) plan, it is the employers’ responsibility to manage funding and have more say in the riskiness of the investment. Because pension plans are costly to manage, many employers have stopped offering them and have switched to 401(k) plans to transfer more of the risk and administrative costs to the employees. 

Not only are pension plans becoming rarer than ever, many employers who offered them at one time are now terminating them and often ending their management of the funds, putting those employees who are vested in the plans in a situation where they need to understand their options.

What Happens Next?

Once a company terminates their pension plan, employees typically become 100% vested in their benefits. The benefits are usually distributed either via a lump sum payment or through an annuity purchased from a life insurance company.

The company is required to send a Notice of Intent to Terminate to affected employees at least 60 days in advance of the termination date. This notice should tell you the options for rolling the funds over, from receiving a lump sum payment to leaving the funds to the annuity provider of choice by the employer. 

If you receive a Notice of Intent to Terminate, it is imperative to contact your financial professional as soon as possible to discuss what each option means for you. Do not wait to start the process since there is a deadline to initiate the process of transferring funds or receiving a distribution. 

Sometimes the company may decide to simply send a distribution in the form of a lump-sum payment to you. If that happens it is important to know what it means for you. Taking a lump-sum payment often means that the federal taxes will be paid in advance to issuing the distribution. This is usually around 10%. A taxable event such as a distribution from your retirement account may also mean you pay additional taxes later if this is considered an early distribution due to being less than 59 ½ years old. Even if you are of retirement age, a distribution will be seen as taxable income that can potentially trigger additional taxes if the amount pushes the recipient into a higher tax bracket. If you have no choice but to receive a lump-sum distribution there are options to reinvest the amount received, but it must be done within 60 days to avoid additional taxes. It is also essential to work with a tax specialist to confirm this is noted correctly on your tax return. 

Turning Confusion into Opportunity

While a pension termination can be confusing, it can also present an opportunity to take control of your retirement funds and ensure they are being used strategically. If you are considering allowing the funds to roll automatically into the annuity chosen by the employer, it is a good idea to see if there are other annuity or investment options available that could better meet your individual goals. For example, this can be an opportunity to utilize the pension funds to invest in a policy that offers guaranteed income and long-term care benefits. You can also have more options in terms of indexing and diversification. Talk to your financial professional to ensure any decision you make is taking your situation into account through a holistic approach. 

By Joanna Nash

Sources:

Internal Revenue Service, www.irs.gov/retirement-plans/retirement-plans, 2025.

Pension Benefit Guaranty Corporation, https://www.pbgc.gov/workers-retirees/manage/when-pension-plans-ends, 21 Feb 2024.

Pension Rights Center, https://pensionrights.org/issue/changes-to-retirement-plans.