GM, Ford hope lump-sum pensions ease obligations

— -- Put a pile of money on the table before thousands of retirees from two major carmakers. Will they grab it or skip it and stick with a regular monthly check?

A group of white-collar General Motors retirees have until July 20 to decide if they want a payout of $300,000 or $500,000 or so. Some even are staring at $1 million. Some experts say offers to blue-collar retirees could be next.

The trade-off is that if they take the lump sum, they'll give up a steady, monthly check. "The downside is you can run out of money," says Marilyn Capelli Dimitroff, president of Capelli Financial Services.

Warning: This could be the start of something new for retirees across the USA.

Financial advisers everywhere are watching how a significant lump-sum payout deal plays out with two big carmakers. Pension experts caution that many retirement plan sponsors could be dangling lump-sum payouts before their retirees in years ahead. The rules changed in 2012 involving how lump-sum payouts could be calculated — and some say employers could have more incentives down the road to move to limit their own risks associated with managing pension plans.

GM and Ford Motor want to unload billions of dollars in pension obligations — and the automakers are presenting pension buyouts or changes to about 216,000 retirees, surviving spouses and some former white-collar employees.

Other companies could follow. "I'm sure they're all looking at what they can do to de-risk their pension plans," Charles Millard, Citigroup's head of pension solutions, said last month.

The Milliman Pension Funding index as of June 30 showed that 100 U.S. public companies had a funding deficit of $415 billion — the second-largest deficit in the 12 years of the study.

All this should give anyone lucky enough to still have a pension reason to pause, too. "It's not that all companies with pensions are going to do this," says Stephen Utkus, who directs the Vanguard Center for Retirement Research. Some companies have already frozen benefits and may not need to do anything else. But experts say more retirement plans are expected to terminate and distribute assets, possibly through lump sums, to participants.

Vanguard projects that in the coming years, millions of retirees and participants in plans that are terminated might be required to choose a payout option.

Utkus predicts that more companies will likely try to get retirees to give up their traditional, regularly monthly pension checks. "This is the first step," he says of the automakers' offer.

Others, though, aren't sure if this is a start of a shift. Zorast Wadia, consulting actuary for Milliman, said he does not believe GM or Ford's moves relating to salaried retirees will start a trend. He says it is costly to copy what GM is doing and a pension plan needs to be more than fully funded to terminate and offer lump sums. He notes that pension plans face such high deficits now, in part, because interest rates are at historic lows and there's an inverse relationship between rates and liabilities when calculating pension funding.

A lump sum might offer some individuals more flexibility — and certainly being able to roll over $300,000 or more into your own IRA sounds attractive. But it's not something for everyone — and the uproar among auto salaried retirees from the two carmakers shows that people aren't exactly comfortable with a choice.