Q I'd like to know what my pension is worth. I will receive $2,300 a month, fixed. What would it cost in the marketplace today to buy that level of pension?
A You can learn what it is worth to you by getting an estimate of what it would cost to buy a life annuity that provided the income you have, under the terms that you have. That last phrase -- "under the terms that you have" -- is important.
When you take a corporate pension, you are given a number of choices. You can take it for your life only, or for your life with 10 years certain. This means the payment will continue for your life or 10 years, whichever is longer.
If you are married, you will also have the choice of a "joint and survivor" pension. This will provide a lifetime income for you or your spouse, for life. It is also possible to choose 100 percent, 75 percent or 50 percent survivor's benefits. When you take a joint and survivor option, your monthly income is lower than for your life alone to start, and your survivor will get the chosen percentage of that amount.
The website immediateannuities.com provides representative online quotes for different life annuity terms. Your annuity, assuming you are 65, would cost about $333,000 if it was life-only. It would cost as much as $387,000 if it was for life or 20 years certain. Add a 62-year-old spouse with 100 percent survivor benefits and it would cost about $415,000.
This isn't small change. Most workers don't accumulate as much in their 401(k) plans. Worse, extracting a lifetime income from a portfolio is a risky business.
Q I'm confused about ETFs. Can you answer these questions? Are ETFs closed-end, open-end, or something else? How are the premiums or discounts of ETFs kept small? Why aren't closed-end funds ETFs? They are exchange-traded, too. Why is the investment community enthusiastic about ETFs, while trying very hard to ignore closed-end funds?
Years ago, you wrote that you don't discuss closed-end funds because most people don't understand them. But it seems to me that your primary function is that of an educator, and your readers need you. I understand closed-end funds, but not ETFs. I suppose there are a lot of people the other way around.
A No, you're not alone. The flood of weird new ETFs isn't making the learning any easier. Here are the basics.
Exchange-traded funds are neither closed-end nor open-end. They are something else. Like open-end funds, the number of fund shares can be increased or decreased at any time. Like closed-end funds, ETF shares are traded on exchanges between buyers and sellers, rather than being issued or redeemed by the investment company.
The size of the fund is managed by third parties that create or dissolve large units of the fund. If the open market price of the fund shares rises to a premium or discount to the value of the underlying ETF portfolio, these third parties can arbitrage away the price difference. That's why the premiums and discounts tend to be fairly small.
In a sense, closed-end funds are early versions of ETFs. Their shares sell on exchanges for whatever price the market will pay. That can be a premium or a discount to net asset value. The big difference is that there is no mechanism for creating or dissolving closed-end fund shares. There is a fixed number of shares.
So there is no way to arbitrage away the premiums or discounts that can develop. The only way to "cure" a closed-end fund discount is for an outsider to make a takeover bid. That's pretty violent, compared to constant creation and dissolving of units.
Closed-end funds get attention when they are an IPO. That's when the commission for selling them is largest. Since most closed-end funds sell at a discount to net asset value, no one in his right mind should buy a closed-end fund at the initial public offering.
Once issued, closed-end funds get little support from the brokerage community because:
There is a new deal this morning.
They generate very little of the profitable investment banking work that makes Wall Street rich.
So closed-end funds tend to sink to discounts to net asset value.
Open-end funds, on the other hand, have marketing budgets.
Scott Burns is a syndicated columnist. He can be reached at email@example.com.