Need Help Deciding on Defined Benefit Pension Plan

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nsn838660
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Joined: Sat Aug 25, 2012 12:24 am

Need Help Deciding on Defined Benefit Pension Plan

Post by nsn838660 »

I just started a new job with my state government. State employees have two retirement options: Defined Benefit and Defined Contribution.

In the Defined Benefit plan, I make an 8% pre-tax contribution, the state matches at 10%. The defined benefit is 2.5 @ 58 of the average of my 3 highest yearly salaries (i.e 58 is the earliest I could retire and 2.5 is the multiplier. I'm 27 now, so at 58 I would have worked 31 years. 31x2.5 = 77.5% of my highest salary). Contributions accure at 3% if I don't make it to retirement. My understanding is that in this case, I can roll over the contributed funds into a 401(k).

In the Defined Contribution plan, the contributions are the same (8% and 10%, respectively), but I can treat it as a 401(k) and manage its investment.

I simply have no idea how to approach this choice. Your thoughts are appreciated.

Some info that might be useful: I love my job and will likely stay for a long time. Plus, if I stay for 10 years, my huge law school student laws are forgiven. That said, I'm not sure I would stay in this exact postion my entire career and may leave state government for some similar public sector postion down the road (e.g. federal). I am in my late twenties.

Thanks in advance for your help.
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BolderBoy
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Location: Colorado

Re: Need Help Deciding on Defined Benefit Pension Plan

Post by BolderBoy »

Is this in addition to SS?

Hands down, go for the DB plan.
ShowMeTheER
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Re: Need Help Deciding on Defined Benefit Pension Plan

Post by ShowMeTheER »

DBs don't get much more valuable than that.

Given your outlook and the fact that you are still getting a 3% accrual if leaving early, Id say go DB and don't look back.
Muchtolearn
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Re: Need Help Deciding on Defined Benefit Pension Plan

Post by Muchtolearn »

OP, good question. Those who have followed what I write hear know what I will say. First, nothing you are told now will necessarily be in place in 30 years. Or even 10. To me the riskiest situation would be a defined benefit state plan. No chance in this earth it will be payed at 100%. Probably half at best. You are just starting so it will likely get pared well before you even think of the big numbers. They can never take your defined contributions from you. Believe me, they won't be matching 10% forever, probably half of that or nothing depending on the budget, but they will never take from you. A no brainer to me.
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Duckie
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Re: Need Help Deciding on Defined Benefit Pension Plan

Post by Duckie »

1. Choose the Defined Benefit plan. Even if things change in the future, your 8% contributions are yours.

2. Do you pay Social Security taxes (everyone pays Medicare taxes)? If not, you have to take that into consideration when planning for retirement.

3. Does your job also have an optional plan like a 457b plan? If so, you may want to contribute to that, too (especially if you won't be paying in Social Security).
donall
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Re: Need Help Deciding on Defined Benefit Pension Plan

Post by donall »

Duckie wrote:1. Choose the Defined Benefit plan. Even if things change in the future, your 8% contributions plus 3% accrual are yours.

2. Do you pay Social Security taxes (everyone pays Medicare taxes)? If not, you have to take that into consideration when planning for retirement.

3. Does your job also have an optional plan like a 457b plan? If so, you may want to contribute to that, too (especially if you won't be paying in Social Security).
Take your chances with the Defined Benefit plan, use the 457b plan for back-up. Do you get health insurance with the Defined Benefit plan? Things may change in the future with the DB plan, but I think it is well worth it.
af895
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Re: Need Help Deciding on Defined Benefit Pension Plan

Post by af895 »

nsn838660,
Can you look into how the DB plan is managed? Some DB plans appear to be sustainable. (look at the Canadian Federal Public Service DB plan, and the Canada Pension Plan) I've heard some (CalPERS?) are unsustainable.
Topic Author
nsn838660
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Joined: Sat Aug 25, 2012 12:24 am

Re: Need Help Deciding on Defined Benefit Pension Plan

Post by nsn838660 »

Thank you all for your responses so far.

To answer some the questions:

1. Either plan is in lue of Social Security. I won't be making SS contributions while working, and thus can't receive benefits based on my time employed here.

2. In addition to the DB plan, I can take advantage of a 401(k) and a 457 plan. My understanding is that the maximum contributions to both plans are no longer tied together.

3. There are several health plan options that I could choose from if I were a retiree now. The presumption is that there also will be something in 30 years.

4. The plan is Colorado's PERA and is managed by a board of trustees. Aside from that, I don't think I would even know how to assess if it's being managed in a sustainable way.
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g$$
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Re: Need Help Deciding on Defined Benefit Pension Plan

Post by g$$ »

I haven't looked into the details but i can tell you that 2.5%*service at age 58 is very valuable. Most plans are more like 1.5%*service at age 65. The multiplier alone (2.5%) is extremely generous.

I would go with the DB plan.

EDIT: You said age 58 is the earliest you could retire. Do you know if there is a reduction for early retirement? In otherwords, do you know what the "Normal Retirement Age" is defined to be in this plan?
If the 2.5% multiplier is unreduced at age 58 then I think you would be hard pressed to find a better deal.
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midareff
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Re: Need Help Deciding on Defined Benefit Pension Plan

Post by midareff »

Absolutely DB. I seem to have missed whether the plan has a COLA for retirees but in either cse a 2.5% accumulator is fabuluous. Hit the 457 as well as hard as you can, time and age r on your side.
Valuethinker
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Re: Need Help Deciding on Defined Benefit Pension Plan

Post by Valuethinker »

[edited- misread post]
Last edited by Valuethinker on Sun Aug 26, 2012 6:45 am, edited 2 times in total.
Valuethinker
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Re: Need Help Deciding on Defined Benefit Pension Plan

Post by Valuethinker »

As per all others join the DB scheme, without question.

In general DB schemes are great, because they provide diversification. A risk free stream of cash flows, in the public sector case usually CPI indexed, post retirement. That allows investors to take greater risks (ie more equity) with other investments that they make.

Inevitably many such schemes will have benefits cut, or may be converted into DC schemes. However the nature of the union negotiations (and I presume US pension law?) is that existing contributions and benefits will tend to be protected, it will be accrual of benefits that is changed. Such changes are likely, nearly certain, in fact, in most schemes, but the actual nature of them is not predictable in advance.

But the more you have accrued, the more you have which will be protected.

It's great to love your job. That's a thing to keep in mind.
civi68
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Re: Need Help Deciding on Defined Benefit Pension Plan

Post by civi68 »

The DB plan wins hands down. If you chose the DC plan, you would regret it when you get older. Choosing the DC plan means you will have to work to age 65 or longer and never be able to match what you would have gotten in the DB plan. Although never say never, it is highly unlikely that states will take away what you already earned in your plan. They may freeze future contributions, give no COLA's, increase your contributions, or raise your retirement age, but taking away from what people already earned is protected by state law. So, the worst that may happen is that you are only given the years that you earned before any changes. So far, Rhode Island has taken the most away from state workers than any other state. But the worst they did was raise the retirement age and increase employee contributions for all state workers. And one the reason they could do this was it was allowed in their state constitution. You will read about cities and counties getting out from under their pensions but that is because they are able to file for bankruptcy.
Some states offer a DC plan in the hopes that you will choose it over the DB. When the market was doing well, some people chose the DC plan thinking they would make more than the DB. We all know what happend there. With all of the gloom and doom talk, state pensions are salvageable and the problems will slowly be solved by the above changes I mentioned above. Even with any of these changes, the DB plan still is the better choice. Try to remember that states are not so worried about current retirement funding, but future. We will either have all state workers someday getting changes to their plans by having more come out of our checks, working longer, or getting future years frozen. Or we will have a two tier system of new employees getting less than us or a 401k. Already, some states require new employees to pay more with the option of the state being able to increase the employee contribution even higher based upon the plan's health. It may not be fair and it is another example of older people getting more than younger, but that is what is happening.
Ne'er-do-well
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Re: Need Help Deciding on Defined Benefit Pension Plan

Post by Ne'er-do-well »

Find the rating of your state's pension system at the Pew Center on the Stateswebsite. The link below is for Texas but you can use it to enter your state's name in its search box:
http://www.pewstates.org/research/state ... 5899399334


Also, file an open records request for all fees, costs, and administrative fees ( a kick back) associated with the define contribution program. Find out how often they put the program up for bid to achieve the lowest cost provider. Do the same before you enroll in a deferred compansation program that may be allowed/offered in addition to the defined contribution program. The information you receive may be an eye opener.
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BolderBoy
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Re: Need Help Deciding on Defined Benefit Pension Plan

Post by BolderBoy »

Since you mentioned that you are in Colorado (and you're a lawyer), I'll add a bit more to my post.

Realize that the Colorado Constitution prohibits the state going into hoc to pay public pension benefits. This has supposedly been litigated many times with the same result - prohibited by the Colo Con. In that sense, it is more sustainable than CalPERS which I understand could actually collapse due to the way it is set up.

Since this is in lieu of SS, I would make sure that you max out the 401k and 457 plans as much as you can, in addition to taking the DB option.
Muchtolearn
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Re: Need Help Deciding on Defined Benefit Pension Plan

Post by Muchtolearn »

I just reread OPs post. On its face, the defined benefit plan is an oxymoron. A defined benefit means you get paid a defined benefit. OP states that he would contribute 8% and the state would match 10%. There's the rub. If the benefit is defined there should not be a state match. Because the state would pay whatever is needed. So by making this "match" the state is basically telling you that, barring excessive returns in the fund which is unlikely, you aren't getting what you think you are.

I will also attribute this to youthful enthusiasm and inexperience. OP, you are 27 years old. You are an intelligent lawyer. it is ludicrous to think about what the state of things will be in 31 years. The odds are overwhelming that you will quit of lose your job long before then.

I just point out these matters because the best made plans are iffy 5 years away. 31 years away and dependent on a state pension system --- no, no.

By the way, I admire that you are interested in the non-profit sector as you can do a lot of good for society. I point out the obvious, that there are areas other than government that are non-profit where you might find increased opportunities for personal creativity and growth as government jobs can be quite beaurocratic.
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