Complex buyout deals spur need for advice

Corporate cutbacks may provide an opportunity for financial advisers: to help employees who have lost their jobs analyze the increasingly complicated buyout packages that companies are offering.

General Motors Corp., for example, recently offered employees buyout packages that included cash payouts, annuity options and tax-free contributions to their 401(k) plans.

At the end of last month, 19,000 union workers at Detroit-based GM said they intended to take buyouts.

Many companies are offering similarly complex packages, said Ted Feight, president of Creative Financial Design in Lansing, Mich.

“You’re going to see [more of] these creative offerings, because [employees] didn’t bite on the first one,” he said. “[Companies] are fishing, and they’ll see which bait works best.”

While buyout offers will continue to become more creative and will include more options — driven by employers’ motivation to cut costs — that doesn’t necessarily mean that the choices are better, said Tom Ruggie, president of Ruggie Wealth Management in Tavares, Fla.

His firm, which manages $280 million in assets, has worked with employees of Overland Park, Kan.-based Sprint Nextel who were offered a wide range of alternatives in addition to cash.

“The offers are more imaginative, but if you read through all of the BS, you basically find it’s a cost-cutting deal for the companies,” Mr. Ruggie said. “They want to get rid of employees — typically, older people — who have escalated to higher salaries.”

If annuities are offered, Mr. Ruggie said, advisers must spend a significant amount of time determining whether taking the annuity is in the client’s best interests.

It is usually in the employer’s interests to purchase an annuity for the departing employee, he said, because the sum paid to an insurance company for the product “is less than if the company had to maintain the same obligation on its books.”

Tax considerations are driving another payout choice — allowing employees to put pretax dollars into a 401(k) plan, said Charles Ballard, a professor of economics at Michigan State University in East Lansing. Where lump-sum payouts are taxed immediately, the same amount of money deposited into a 401(k) plan will grow tax-free until it is withdrawn.

“I think we’ll see all sorts of creative ways to do this, because employers can give employees a bigger bang for the same buck,” Mr. Ballard said.

Company officials said they have begun offering these new options this year to give employees greater incentive to leave.

For example, for the first time this spring, Ford Motor Co. introduced an offering allowing its union employees to take a pretax buyout or receive an annuity payment.

At the end of March, 4,200 hourly workers chose one of the company’s 10 options.

For example, a retirement-eligible skilled trade worker who received an incentive option of $70,000 on top of traditional retirement benefits could choose to place that money pretax in the employee’s 401(k) plan or an annuity, or take the money out as cash, said Marcey Evans, a spokesman with Ford of Dearborn, Mich.

Non-trade workers were offered $50,000 from Ford and had the same options.

The most creative part of GM’s offering is its retirement incentives, said Dan Flores, a GM spokesman.

Production workers with 30 or more years of service at GM were offered $45,000 to leave the company; skilled electricians were offered $62,500. They could take that cash, roll it into a 401(k) plan, take a combination of cash and 401(k) rollover or put the money in an annuity.

The GM incentives came from the company’s overfunded pension fund, and workers did not have to pay Federal Insurance Contributions Act (FICA) taxes.

“We were interested in a program that employees would be interested in, and wanted to give them as many options and choices as possible,” Mr. Flores said.

Outside the auto industry, other companies are getting creative as well, said Craig Carnick, a certified financial adviser and principal of Carnick & Co., a fee-only financial advisory firm in Colorado Springs, Colo. He declined to disclose his firm’s assets.

“We’ve seen some very interesting things in terms of employees’ being let go and then rehired as consultants,” Mr. Carnick said.

He said more employees have received more attractive joint survivor benefits than in previous years. “It’s become almost a no-brainer to select the joint survivor payout,” Mr. Carnick said.

E-mail Lisa Shidler at [email protected].