Change In Pension Peg Trims Lump Sums To Some

Employers who offer workers a lump sum pension payout have to assume an interest rate that the money will earn over the years. The higher the rate, the smaller the lump sum.

In the early 80s, some companies used rates as high as 15 percent, leading employees to complain that their returns would never reach that level.

So, Congress mandated in 1984 that employers use no more than 120 percent of the rate compiled by the Pension Benefit Guaranty Corp. That rate, as low as 4.5 percent last year, was less than many long-term interest rates.

Consequently, people many years from retirement who left their employers received inflated lump sums.

Late last year, Congress addressed the issue with legislation that allows companies to use 30-year Treasury bonds as a base rate. “This enables plan sponsors to take away that windfall that was depleting pension assets,” said Ethan Kra, an actuary at William M. Mercer Inc., consultants.

Because companies can cash out an employee whose accrued benefit is less than $3,500, the biggest impact in dollar terms might be on a young person, say 35, who switches jobs and gets such a lump sum.

“Under the current PBGC rate, this employee might get a $2,450 lump sum,” said Thomas Butterworth, an lawyer at Hewitt Associates, benefits consults. “It could drop to $800 under the new rules. Even though percentage wise it’s dramatic, in terms of the value of retirement benefits, it’s tiny.”

Diversification, diversification, etc.

Call 1994 the year of reversed expectations.

Given the dismal market performances, one would not have expected such volatile stocks as technology and health care to lead the pack.

Investors who feared the worst at the beginning of the year might have sought shelter in traditionally defensive areas like utilities or income funds, both of which turned out to be poor choices.

If there is a lesson in all this, it is that the three most important factors in mutual fund investing are diversification, diversification and diversification.

Concentrating investments, even in conservative funds, does not pay because the markets do not always behave as expected.

Hard as it is for some investors to grasp, adding risk in small doses to a portfolio actually reduces the overall risk.

Even conservative investors need exposure to risky sectors, albeit in limited doses and perhaps through diversified stock funds, said John Rekenthaler, editor of Morningstar Mutual Funds, in Chicago.

Misery loves investment

“People are always asking me, ‘Where is the outlook good?’ ” says Sir John Templeton, the brilliant global investor, in the current Forbes magazine. “But that’s the wrong question. The right question is, ‘Where is the outlook the most miserable?’ “

For sheer misery right now, check out emerging markets.

Latin American funds were down 14 percent last year, Asian funds 12 percent. Fidelity’s Emerging Markets Fund was off 18 percent.

Templeton likes Hong Kong, the Philippines and the Czech Republic. Mexico, he says, could get cheaper.

He doesn’t cite Chile, but the closed-end Chile Fund is worth a look. The economy is booming, but stocks are down 20 percent since February.