Many defined benefit (DB) plans offer lump sum payouts to their terminated vested participants as a way of “right-sizing” their plan. The ultimate goal is to reduce plan costs and risk. These plans reference a uniform interest rate table issued by the IRS known as the IRS 417(e) rates. There are actually three different rates or “segments”, divided up by time periods through retirement based on one’s life expectancy, that encompass the end lump sum calculation. These rates are issued on a monthly basis.

There is an inverse relationship between these interest rates and the pension lump sum amount a participant would receive. That is, when these interest rates increase, the value of the pension lump sum decreases, and vice versa. With interest rates being so low these past few years, the lump sum option has been an attractive option among retirees.

As someone in or nearing retirement and in the process of making your payout selection, i.e. lump sum verses monthly payments, it is important to consider the following:

Know what your plan is offering.
A DB may incorporate the lump sum option available as part its plan on an ongoing basis or it may offer the option for a limited period of time in a “window”. Know how much time you have to make a decision.

What are the interest rates that will be used for the lump sum calculation?
This may be based on the DB plan year which does not necessarily correspond with a calendar year. Likewise, you must determine which monthly rates the calculation will utilize. Two DB plans we are very familiar with use different months – one uses the July rates, the other December rates. Both apply the designated rate for the entire following plan year.

Are you able to evaluate an A-B comparison with your payments to time your decision?
In other words, are you able to determine the interest rate month and when it takes effect? Does your plan offer a window of time to aid your decision, showing amounts before and after the rate change?

A top notch DB plan, combined with a communicative HR department, should be able to provide you with the pieces necessary to make an informed decision. To navigate through the numbers and understand the impact this decision and the timing of it could have on your retirement outlook, contact Mainstay Capital Management toll-free at 1-866-444-6246.

In the end, it could make a sizeable difference to your retirement nest egg. After all, a change in discount rate of only 5% changes the lump sum payment on $500,000 by $25,000!

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Mainstay Capital Management, LLC is an investment advisor registered with the Securities and Exchange Commission. Due to various state regulations and filing requirements, Mainstay and its representatives may only provide investment advisory services in those states in which it is first appropriately registered or otherwise exempt or excluded from registration requirements. The purpose of this website is to provide the public with general information about the services offered by our investment management firm. Mainstay does not render personalized investment advice or services or effect, or attempt to effect any securities transactions, on this website. Our firm continuously monitors its filing requirements in all states, and will provide individualized advisory services only in accordance with various state regulations. Mainstay does not make any representations or warranties as to the accuracy, completeness, or relevance of any information prepared by any unaffiliated third party provider, whether linked to Mainstay's website or incorporated herein. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.


Disclosure Information - Rankings and Awards

Barron's Magazine - Top 100 Independent Wealth Advisors

According to Barron’s: The rankings are based on data provided by individual advisors and their firms. Advisor data is confirmed via regulatory databases, cross‐checks with securities firms and conversations with individual advisors. The formula Barron’s uses to rank advisors is proprietary. It has three major components: assets managed, revenue produced and quality of practice. Investment returns are not a component of the rankings because an advisor’s returns are dictated largely by the risk tolerance of clients. The quality of practice component includes an evaluation of each advisor’s regulatory record. The data is based on one fiscal year (7/1/22 - 6/30/23) and appeared in Barron’s on 9/18/23.

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