When a pension plan closes, the procedure that returns the money to the investors is called an allocation of plan assets on termination. This is a fancy way of saying that the employers running the plan must return the employee’s contributions. This situation may occur if the employer is going out of business or if they choose to divest themselves from an existing pension plan.
There are two ways this might be done: the employee is repaid their contributions plus interest, or the employees are categorized based upon their entitlement to benefits. The method of divestment depends upon the employer’s discretion. In a fair world those employees who invested more in the plan will get more back at divestiture.
The distribution of the assets within the fund is managed by the plan administrator or a trustee. The method which the administrator or trustee chooses for allocation is likely to favor one group of employees or another. For example, highly compensated employees would favor a disbursement scheme that is dependent upon entitlement, whereas common employees would rather get back their contributions and interest.
Assuming that you are getting money back from a retirement account that is closing, you have several options. If you are before retirement age it is wisest to reinvest those funds in another retirement account. This avoids a tax penalty and continues to grow your retirement investments. If you are at retirement age, you will have to determine if it is worth cashing out the fund or investing in an income generating account.
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