**UPDATE: We are aware that Intel has changed course and will NOT be changing its minimum pension calculation. We will update this blog post as more information is available.**
Today we are going to tell you everything you need to know about the upcoming 2021 changes to the Intel Minimum Pension Plan (MPP). We are also sharing free resources and templates to help you take quick action.
For those employees eligible for Intel’s minimum pension benefit (MPP) at retirement, the interest rate used to calculate today’s value of that benefit is changing. This means that your estimated Minimum Pension Plan benefit amount is significantly reduced or erased altogether in many cases. There now exists a meaningful incentive for many long-time Intel employees to retire from Intel before May 2021.
We’ve received many questions so far about the relevance and magnitude of these changes on one’s retirement plans. And to paraphrase a famous line from Seinfeld, “The changes are real, and they’re significant.”
The most common questions we’ve received are:
- Is the change real? Yes, from what we’ve seen, this change makes a meaningful difference (six-figures) for many Intel employees.
- Is Intel doing this? No, the change is being driven by a policy change with the Pension Benefit Guaranty Corporation (PBGC), which insures Intel and other pension plans.
- What should I do next? Assess the magnitude of the change for you personally and evaluate if it makes sense to move your retirement date to before May 3rd, 2021.
In this post, I will review how the Intel Minimum Pension works, what is changing, and what actions you should take if you are affected by the change.
Intel Years of Service and Benefits [Excel download]
Pension: Lump Sum vs. Monthly Income [Excel download]
Pension: Lump Sum vs. Monthly Income [Flowchart; pdf download]
What Issues Should I Consider Before I Retire? [Checklist; pdf download]
Additionally, we are offering a Free Intel Retirement Timing Assessment. This includes an initial conversation, analysis of the value of your benefits, review of your pension decision and retirement action plan should you decide to leave Intel.
How the Intel Minimum Pension Works
Intel’s pension plan is a minimum benefit pension plan. That means Intel calculates a minimum benefit for eligible employees in retirement and then compares that to the balance in your Retirement Contribution Account (or, more precisely, the monthly annuity income produced by your “RC Account”).
We have previously written in more detail about how your pension benefit is calculated, but the key factors are your years of service and final average pay.
- Final Average Pay: Your average pay during the highest-earning years. Your estimated social security benefits are also used in the calculation—meant to provide a retirement benefit on the earnings not factored into your social security benefits.
- Years of Service: Income above is multiplied by your years of service to determine your pension benefit.
That’s the calculation for your Pension Benefit.
The purpose of the minimum pension plan is to guarantee a minimum level of income in retirement in addition to the balance/benefit of your Retirement Contribution Account (“RC account”). When your Pension Benefit is calculated, Intel ensures that the RC Account is valuable enough to provide that benefit. They do this by using the Minimum Pension Plan (“MPP”) as a gap fill.
It works like this: The present value of the calculated minimum benefit is compared to the value of the RC Account (remember this is the account into which Intel used to make matching 401(k) contributions). This calculation is done using an annuity factor, which is what is changing in 2021.
- If the RC Account is greater than the present value of the calculated minimum benefit, there is no MPP.
- If the present value of the minimum benefit is greater than the RC Account, then the MPP provides a benefit in the form of an annuity or a lump-sum distribution to make up for the shortfall (for more on evaluating whether to elect a lump sum or annuity payment see this post on What to do with Your Intel Pension when you Retire)
The point I want to stress here is that the MPP only exists to the extent that the RC Account is calculated to be short of providing the intended minimum benefit.
What is Changing With Intel’s Minimum Pension Plan
Again, the annuity factor used to calculate the present value of the minimum pension is changing. This is not a change driven by Intel, but a policy change by the Pension Benefit Guaranty Corporation (PBGC) “intended to modernize the methodology” used for its present value calculations. The PBGC, a government agency, has changed the rates used for this calculation as follows:
- Currently, the interest rate used is 0%
- As of May 5th 2021, the rates used will be in 3 time-based tiers of 0.51%, 2.31%, and 3.15% (to simplify, Fidelity has suggested using ~2.5% as the rate to think about this)
You should note: The PBGC is actually making these rates effective January 1st of 2021, but Intel is extending the use of the old rate until May 5th to allow employees to plan accordingly.
The increase from 0% to 2.5% is material because it significantly reduces the present value of the future benefit.
To illustrate the magnitude, consider the example of an employee with a $375k RC Account (note: I am using simple numbers and annual as opposed to monthly annuity payments to simplify the calculation):
- Example 1: Let’s say Intel calculated that based on the employee’s years of service and average pay, she is entitled to a benefit of $20k/year paid annually for the next 25 years. Assuming 0% interest, the present value of that annuity is $500k
- Today, she would retire with her $375k RC Account AND her MPP in the form of a lump-sum distribution or annuity to make up for the $125k shortfall.
- Example 2: If, however, we assume an interest rate of 2.5%. The present value of the same 25-year $20k/year annuity is only $368,488.
- Thus, in this case, she receives NO MPP benefit because the $375k RC Account value is sufficient to provide the minimum benefit.
In the second example, the rate-increase completely wiped out her MPP! For this employee, there would be a $125k incentive to retire and take her pension prior to the rate change.
We’ve seen examples of a $100k, $200k, and nearly a $300k incentive for retiring before May of 2021, which bring us to our last section: how to go about making this decision in the next few months.
Assessing Your Suddenly Urgent Retirement Decision: What should you do?
Understand how the change impacts you:
To first wrap your arms around the magnitude of this decision, login to Fidelity’s netbenefits website, and view how your MPP is impacted by the change. When you log in, you will see this banner across the top, and you can click “view now” to see how the change affects your benefit:
You will get a report this looks like the one below and will bottom line your incentive to retire before this interest rate goes into effect.
Again, we’ve seen estimates range from as little as $100k to almost $300k.
Be aware of key dates
To take advantage of your pension benefit prior to the PBGC interest rate change, you must leave Intel by May 3rd, 2021. Other key dates to be aware of are dates for bonus payout and vesting for RSUs, PSUs, and OSUs.
Determine whether this change should affect your retirement timeline
If you were planning to retire within the next couple of years, this change might provide an incentive to retire sooner. What is the best time to retire from Intel? You will want to compare the change in MPP with the incentives of continuing to work. Some of the issues to consider are:
- Cash Flow Issues
- Income, Expense, and Tax Planning
- How much in spending will your assets safely support? “Will I run out of money if I stop working?”
- Will you take Social Security? What’s your claiming strategy?
- Payout and timing of Salary, Bonus, and accelerated vesting of RSUs and other equity compensation
- Pension payout in a Lump Sum or monthly income
- Income sources (SSI, Pension, Earned Income) and how much is needed from your portfolio
- What accounts will your money be drawn from in order to minimize taxes?
- Health Care and Insurance Issues
- Are you aged 65 and eligible for Medicare?
- If not, will you fill the gap with Private insurance or COBRA and the cost of each?
- How much do I have in my SERMA account?
- Have your needs for Life Insurance changed? Will you lose coverage?
- Are you concerned about funding Long-Term care?
- Intel Benefits Issues
- Are you, or will you reach, Rule of 60 or Rule of 75?
- Timing of Salary and Bonus Payouts
- SERPLUS Deferral and Staring date of payout
- Timing and potential acceleration of RSUs, OSU, PSU, and Option grants
This list is a start but by no means meant to be comprehensive. For more, see our checklist: What Issues Should I Consider Before I Retire?
We’re here to help if you need us
If you’re like most Intel employees we’ve talked to, it’s quite the shock to suddenly face a decision to retire (more fun in 2020!). And given the short timeline (you must make a decision by early May) and the magnitude of the decision (a six-figure decision for many), this is a stressful period.
There is a lot to think about before making a decision in response to this change: tax ramifications, cash-flow planning, health care planning, etc., as we outlined above.
We specialize in helping our clients make smart financial decisions when faced with changes like this, and we would be happy to discuss how this impacts your individual situation.
Given our long-time history of working with Intel employees, we are offering a Free Intel Retirement Timing Assessment. Through a conversation, analysis, and a review together, we’ll show you how to optimize the date you leave intel. We’ll share our perspective on:
- Your Pension Decision
- An Assessment on the value of your Intel benefits and stock if you leave BEFORE or AFTER May 2021
- A Retirement Action plan if you do decide to leave.
This should help you to evaluate the value of our services and make an informed decision about hiring our firm. And if you simply want to take the assessment and execute on your own, that’s fine too.
To schedule your assessment, start here: cordantwealth.com/start-here