I Have Two Pensions, Should I Combine Them?

Having multiple pensions from different employers or types of retirement plans is a common situation for many individuals throughout their careers. The question of whether to combine these accounts often arises, driven by a desire for simplicity or potential financial advantages. This decision is not straightforward and depends heavily on individual financial circumstances and long-term goals.

Understanding Your Pension Accounts

Pension accounts typically fall into two main categories: defined benefit (DB) plans and defined contribution (DC) plans. Defined benefit plans promise a specific payout at retirement, often based on factors like salary history and years of service. These traditional pensions are usually funded and managed by the employer, who bears the investment risk.

Defined contribution plans, such as 401(k)s, 403(b)s, and Individual Retirement Accounts (IRAs), involve contributions made by the employee, the employer, or both. The retirement payout from these plans depends on the total contributions and the investment performance of the account.

Contributions to DC plans are typically invested in various funds chosen by the participant. When retirement arrives, distributions from these accounts are generally taxed as ordinary income. Understanding the specific rules and characteristics of each pension account is important before considering any consolidation.

Evaluating Pension Consolidation

One important factor to consider when evaluating pension consolidation is the impact on fees and expenses. Multiple accounts can sometimes mean paying multiple sets of administrative fees, recordkeeping charges, and investment management fees. Consolidating accounts into a single plan or IRA may help reduce the total fees paid over time, allowing more of the money to remain invested and grow.

The range and quality of investment options available in each account also warrant careful examination. Some older plans might have a limited selection of investment choices or higher-cost funds. Consolidating into a new account, such as a Rollover IRA, could provide access to a broader array of investment vehicles, which might better align with an individual’s financial strategy.

Withdrawal rules and access to funds represent another significant consideration. Different pension types and plan administrators may have varying age requirements for penalty-free withdrawals. Understanding these rules for each account is important, as consolidating could alter the flexibility of accessing funds.

The level of protection and guarantees associated with each pension account is a factor that should not be overlooked. Defined benefit plans, for example, may be protected by the Pension Benefit Guaranty Corporation (PBGC). Defined contribution plan assets held with a brokerage firm are typically protected by the Securities Investor Protection Corporation (SIPC), while cash components may be insured by the Federal Deposit Insurance Corporation (FDIC). Consolidating a DB plan into a DC plan, such as through a lump-sum rollover, would mean forfeiting the PBGC protection for that benefit.

Consideration should also be given to how consolidation might impact survivor benefits for beneficiaries. Defined benefit plans often have spousal consent requirements for waiving survivor annuity options. Defined contribution plans allow for direct beneficiary designations, and consolidating multiple DC plans can simplify the management of these designations, ensuring that all beneficiaries are correctly identified in one place.

Administrative simplicity is a common reason individuals consider consolidating their pensions. Managing one account instead of several can streamline recordkeeping, reduce paperwork, and make it easier to track overall investment performance and asset allocation. This approach can result in more organized and less time-consuming retirement planning.

Executing a Pension Transfer

If the decision is made to consolidate pension accounts, the transfer process involves several steps. The most common method for combining defined contribution plans is a direct rollover. In a direct rollover, funds are transferred electronically or by check directly from the old plan administrator to the new plan administrator, without the money ever passing through the individual’s hands. This method avoids any mandatory tax withholding and potential tax implications.

An alternative method is an indirect rollover. In this scenario, a check is made payable to the individual, who then has 60 days from the date of receipt to deposit the funds into a new qualified retirement account. If the individual receives the check, the old plan administrator is required to withhold 20% of the distribution for federal income taxes. If the full amount (including the 20% withheld) is not deposited into the new account within 60 days, the untransferred portion may be considered a taxable distribution and subject to early withdrawal penalties.

To initiate a direct rollover, the individual typically contacts the administrator of the old plan to request a rollover form. This form will require information about the new account. Once the form is completed and submitted, the administrators of both the old and new plans will coordinate the transfer of funds. It is important to confirm with the new plan administrator once the funds have been received in the new account.

Managing Multiple Pensions

For individuals who decide not to consolidate their pension accounts, effective management of multiple pensions is still achievable. Maintaining organized records for each account is important, including statements and contact information for plan administrators. This ensures that all necessary information is readily accessible.

Regularly reviewing statements and monitoring the investment performance of each account is also important. Understanding the rules, withdrawal options, and beneficiary designations for each individual pension is also important for effective management.

Even with separate accounts, consider a holistic view of all retirement assets when making investment decisions. This means looking at the combined allocation across all pensions to ensure it aligns with overall financial goals and risk tolerance. While accounts may remain separate, a unified strategy can help optimize long-term growth and prepare for retirement.