Considering Rolling Your 401(k) Into a Pension? Here’s What You Need to Know

If your new job comes with a pension, you may wish to roll over the retirement savings you have in a 401(k) plan from an old employer into your pension. While there’s much to like about having a pension, there are several factors you must consider to determine if this option is right for you.

“A pension provides predictable, lifetime income, which can be emotionally and financially reassuring. Studies have shown that retirees with guaranteed income sources experience lower stress and greater happiness than those relying solely on market-driven withdrawals,” says John Abernethy, a certified financial planner at Together Planning.

Key Takeaways

• Before you rollover a 401(k) into a pension plan, evaluate the financial stability of the company in charge of the pension.
• Check to see if the pension allows for cost-of-living adjustments. Ideally, the plan should have them.
• Understand that once money from a 401(k) is rolled over into a pension, you won’t be able to access the money ahead of retirement.

Is It Smart to Roll Over a 401(k) Into a Pension?

It may feel good to have a pension, but does rolling over retirement savings from a 401(k) plan into a pension make financial sense?

“Whether rolling over a 401(k) into a pension is a good idea depends on several factors, including the financial health of the pension provider, whether the pension offers a cost-of-living adjustment (COLA), and the retiree’s need for guaranteed income,” Abernethy says. “Pensions that do not include a COLA expose retirees to inflation risk, as their purchasing power declines over time.”

In contrast, healthy returns from a 401(k) plan may do a good job of outpacing inflation.

“A 401(k) invested in a balanced stock-and-bond portfolio has historically provided returns that outpace inflation, allowing retirees to maintain their standard of living,” Abernethy says.

Checking the Financial Stability of a Pension

Review the financial health of the company managing the pension before moving money from a 401(k).

“Unlike a 401(k), which remains under the retiree’s control, pension benefits depend on the solvency of the plan sponsor. If the pension plan is underfunded or poorly managed, there’s a risk of reduced benefits,” Abernethy says. “While some private pensions are insured by the Pension Benefit Guaranty Corporation (PBGC), coverage is limited, making it essential for retirees to assess the long-term viability of the pension before making a rollover decision.”

You can check if a pension plan is insured under the Pension Benefit Guaranty Corporation (PBGC) by visiting its website. In addition to reviewing its insurance, you should also check the financial stability of the managing company and the pension itself.

“To evaluate the company’s financial health, you can review its balance sheet, cash flow, and profitability metrics from publicly available financial statements. If it’s a publicly traded company, you can check its 10-K filing on the SEC’s EDGAR database,” Abernethy says. “You would look for signs of financial stability like strong cash reserves, manageable debt levels, and consistent earnings. A financially stable company is more likely to meet its pension obligations.”

Where do you go to uncover information on a pension?

“The best place to look is the Form 5500 Annual Return/Report of Employee Benefit Plan, which provides key details on the plan’s financial health,” Abernethy says. “The most relevant metric is Line 14: “Funding Target Attainment Percentage,” which compares the plan’s assets to its liabilities.” The higher the percentage, the better funded the plan.

Financial Control vs. Stability

In a 401(k) plan, you have control over your investments, but you give up this control when you move your 401(k) savings to a pension.

“When you convert your 401(k) into a defined benefit pension, you trade flexibility for security. With a pension, your accumulated savings are transformed into a predictable, often lifelong income stream. This structure shifts the investment risk away from you, providing a guaranteed retirement benefit,” says Scott Van Den Berg, a certified financial planner at Century Management Financial Advisors. “However, this stability comes at a cost: you lose much of the control you might have over your investments. Once funds are moved into a pension, you typically cannot borrow against them or access them early.”

Steps to Roll Over a 401(k) Into a Pension

What steps do you need to take to roll over a 401(k) into a pension?

“If a pension plan allows rollovers from a 401(k), the process typically involves confirming eligibility, reviewing payout options, evaluating the financial strength of the pension provider, and comparing financial projections,” Abernethy says. “It’s important to analyze whether expected pension payments align with long-term income needs and whether a 401(k) would provide greater flexibility and control. If moving forward, funds are usually transferred directly from the 401(k) to the pension to avoid tax consequences.”

The Bottom Line

If you have a pension, adding the retirement savings from a 401(k) may seem like a great idea. After all, pensions can provide steady, guaranteed benefits for the life of the pensioner. Before you roll over your 401(k), check the financial standing of the company managing the pension. If the company is not in good shape, you may receive reduced benefits. Also, consider what you are giving up. With a 401(k) plan, you have control of your investments, and you sacrifice this control when your money moves into a pension.