Mayo Clinic shifting interest rate risk to pension participants

[tede02]

Last week I was asked to evaluate a pension change the Mayo Clinic is rolling out. Employees currently have a traditional defined benefit pension plan. The plan states a participant's accumulated benefit via a monthly dollar amount. Someone earning $100,000 annually accrues a $117 benefit each year (they'd have a $1,170 benefit after 10 years if their salary stayed the same), etc. 

 

However, Mayo is changing the plan so participant's benefits are accumulated as a lump sum that they can choose to roll over at retirement or convert into a monthly benefit. They are essentially trying convert their pension into a quasi 401k that can be annuitized. The catch is the MONTHLY benefit wouldn't be known until a participant elects to start drawing benefits. Thus, it would be similar to purchasing an annuity in the open market. The monthly payment would be completely dependent on where interest rates are when they elect to start.

 

Mayo is telling participants that the benefit to them (for making this change) is they know exactly what their lump sum amount is at all times. 

 

But, this looks to me like the pension plan is trying to shift the interest rate risk onto participants. In theory, if interest rates were unchanged, the plan formula is supposed to create an equal benefit to the current methodology. But I'm thinking participants may be better sticking with the defined monthly benefit. They know exactly what they'll get at 65. If interest rates happen to fall, they have the optionality to take a lump sum. If rates are high, the lump sum isn't as attractive but they still have their monthly benefit which isn't impacted by rates.

 

Current participants have the option to opt in or stick with the traditional pension formula. I'm trying to think of reasons why I'd want to opt in to the newer formula. It seems like the only scenario where I'd rather have a known lump sum (the new formula) is if I was very confident interest rates were going to be high. 

 

 

[Blugolds]

This "new" plan you're describing is the same as one of my previous employers. The interesting thing with that variability tied to interest rates is that often you have a tremendous exodus of retirees. Specifically in the last year or two, before rates started to go up, when they were low, the lump sum payouts were large and everybody was running for the exits before rates increased. Planners were telling guys that they would lose $50k-$100k if they stayed another year, so they took the money and run. Most end of taking the lump sum rather than the annuity. When calculating the annuity it basically takes the lump sum and divides it from the age of retirement to 84 if I remember correctly. So take the lump sum and roll it over and invest...or take the annuity (with reduced survivor benefit to boot!) and if you live past 84 you are making more. Still not more than you would make if you just invested it even conservatively. 

 

Some folks sleep well at night with the annuity even if "returns" arent great. 

 

Personally I would rather have the "old" plan you discuss. I would rather know my monthly benefit, and then have the option to take the lump sum if it benefited me and I did the math, otherwise give me my money every month. 

 

I've always viewed a pension as a cherry on top. Most employers freeze, or eliminate the pension, many dont offer any more, so I dont plan on it and never use it in calculations...probably a little more secure at Mayo than many other employers, but this idea of shifting risk from the employer to the employee is standard practice, that was the entire idea behind the 401k vs pension. Offer the employee a match (that many dont even take advantage of at all, let alone full match) and be done with it, no risk carrying coverage on the books etc. Shift responsibility from regulated liable employer to financially illiterate employee who may or may not contribute, and if they do contribute, have no clue what to put the money in and end up getting scalped via fees and ER for an entire career potentially costing them hundreds of thousands of dollars and its no wonder so many retires are strapped for cash and not enjoying those "golden years"....its sad really. 

 

If I was a company, I would want to do the same thing they are doing...as an employee I would say, no thanks I'll stick with what I got

Edited August 22, 2023 by Blugolds11

[tede02]

@Blugolds11 I basically concur. I was thinking the exact same thing with respect to rollovers in recent years. I'm sure many pension plans ended up writing some huge checks that their actuaries never anticipated (when rates were rock bottom). My reading between the lines is this is all about shifting interest rates risk onto the employees. I've been in the financial services industry for 15+ years and sadly, virtually every time I've seen a company messing around with its retirement plan, it isn't good for the employees. 

[Value_Added]

Same thing was implemented 15 years ago at my employer.  All new hires get the new “cash balance” plan while then current employees were grandfathered into the traditional pension.  HUGE difference in monthly payout favoring traditional.

 

The most recent change for management is everyone under 40 lost retirement healthcare.  No grandfathering… just a line in the sand.  Talk about a kick in the gut. Can’t figure out for the life of me why they would implement it like that.  I can only assume retirement medical is something tracked as a liability on the balance sheet and removing that liability is somehow benefitting them in the near term?

[Gamecock-YT]

17 hours ago, tede02 said:

Last week I was asked to evaluate a pension change the Mayo Clinic is rolling out. Employees currently have a traditional defined benefit pension plan. The plan states a participant's accumulated benefit via a monthly dollar amount. Someone earning $100,000 annually accrues a $117 benefit each year (they'd have a $1,170 benefit after 10 years if their salary stayed the same), etc. 

 

However, Mayo is changing the plan so participant's benefits are accumulated as a lump sum that they can choose to roll over at retirement or convert into a monthly benefit. They are essentially trying convert their pension into a quasi 401k that can be annuitized. The catch is the MONTHLY benefit wouldn't be known until a participant elects to start drawing benefits. Thus, it would be similar to purchasing an annuity in the open market. The monthly payment would be completely dependent on where interest rates are when they elect to start.

 

Mayo is telling participants that the benefit to them (for making this change) is they know exactly what their lump sum amount is at all times. 

 

But, this looks to me like the pension plan is trying to shift the interest rate risk onto participants. In theory, if interest rates were unchanged, the plan formula is supposed to create an equal benefit to the current methodology. But I'm thinking participants may be better sticking with the defined monthly benefit. They know exactly what they'll get at 65. If interest rates happen to fall, they have the optionality to take a lump sum. If rates are high, the lump sum isn't as attractive but they still have their monthly benefit which isn't impacted by rates.

 

Current participants have the option to opt in or stick with the traditional pension formula. I'm trying to think of reasons why I'd want to opt in to the newer formula. It seems like the only scenario where I'd rather have a known lump sum (the new formula) is if I was very confident interest rates were going to be high. 

 

 

 

Sounds like when the US government switched from CSRS to FERS. They tried like hell to get people to switch to FERS. If it was such a great deal, why push people to the other plan?