Why all the praises for DB pension plans?
Why all the praises for DB pension plans?
I've noticed that quite a number of Bogleheads praise the DB pensions of yesteryear as being generous and good, and many lament on how DB pensions have shifted to DC retirement plans in the last few decades. There's something that I don't understand... DB pensions plan to be seem to be very risky and have many downsides. Amongst the top reasons I can think of:
1) DB pension plans are usually not portable and require you to stay with one employer to "max out" the benefits. This is not realistic in today's economy where the lack of job mobility can be a bad thing.
2) DB pensions run the risk of having the benefits "cut" whenever things go bad, and dare I say won't have the benefits adjusted up when things go better. We've already seen this in Europe, and probably soon in the US. In the worst case scenario, what happens if the employer goes bankrupt? Again, it seems that there is a concentrated systemic risk of at least partial-default of obligation.
3) DB pensions can go bankrupt. I remember reading one article on how some UK retirees sued some company for cutting their pensions. They won the lawsuit and did not get reduced benefit, but the company itself went bankrupt after 3 years and then nobody got anything. I'm still trying to find the link to that report...
So am I missing out something as to why DB pensions are quite highly regarded on this forum? If I were offered a DB pension, I doubt I will accept (assuming I choose between that and a good 401k match). Not to mention that SS is already considered like a DB pension, and having all retirement money from pensions seems really undiversified.
1) DB pension plans are usually not portable and require you to stay with one employer to "max out" the benefits. This is not realistic in today's economy where the lack of job mobility can be a bad thing.
2) DB pensions run the risk of having the benefits "cut" whenever things go bad, and dare I say won't have the benefits adjusted up when things go better. We've already seen this in Europe, and probably soon in the US. In the worst case scenario, what happens if the employer goes bankrupt? Again, it seems that there is a concentrated systemic risk of at least partial-default of obligation.
3) DB pensions can go bankrupt. I remember reading one article on how some UK retirees sued some company for cutting their pensions. They won the lawsuit and did not get reduced benefit, but the company itself went bankrupt after 3 years and then nobody got anything. I'm still trying to find the link to that report...
So am I missing out something as to why DB pensions are quite highly regarded on this forum? If I were offered a DB pension, I doubt I will accept (assuming I choose between that and a good 401k match). Not to mention that SS is already considered like a DB pension, and having all retirement money from pensions seems really undiversified.
Another disadvantage of DB plans is that they generally end at death of the owner or the surviving spouse leaving nothing for the heirs.
One compensating fact is that in the US, there is some lower level protection against company bankruptcy by some federal related agency. If you are a high level earner like an airline pilot, this will compensate for only a fraction of the DB but lower level earners can be protected for much or all of the DB.
I don't know any of the data, but perhaps it just has to do w/ the "goodness" of the employer contribution and the fact that the risk for performance falls on the employer rather than the employee. Again, I don't know the numbers, but some of our local police/fire guys are said to get DB pensions for 80-90% of salary..........have no idea how much of that they had contribute but perhaps that's the figure of merit.
As you point out a good matching 401K can be quite good but if the "match" on the DB side was better, that might tip the scales the other way.
An extreme example.....wife and I get (very small) DB for which we contributed nothing so it is easy to see that even if we had to contribute, if the payout was good enough, the DB might be better. Simply depends on the numbers..........
One compensating fact is that in the US, there is some lower level protection against company bankruptcy by some federal related agency. If you are a high level earner like an airline pilot, this will compensate for only a fraction of the DB but lower level earners can be protected for much or all of the DB.
I don't know any of the data, but perhaps it just has to do w/ the "goodness" of the employer contribution and the fact that the risk for performance falls on the employer rather than the employee. Again, I don't know the numbers, but some of our local police/fire guys are said to get DB pensions for 80-90% of salary..........have no idea how much of that they had contribute but perhaps that's the figure of merit.
As you point out a good matching 401K can be quite good but if the "match" on the DB side was better, that might tip the scales the other way.
An extreme example.....wife and I get (very small) DB for which we contributed nothing so it is easy to see that even if we had to contribute, if the payout was good enough, the DB might be better. Simply depends on the numbers..........
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Re: Why all the praises for DB pension plans?
AndroAsc wrote:If I were offered a DB pension, I doubt I will accept (assuming I choose between that and a good 401k match).
But the reality is the typical employer has gone from contributing maybe 10-12% of payroll to a DB pension plan to contributing maybe 3% of your pay to a 401K (provided that you are putting in 6% of pay).
Why all the praises for DB pension plans?
one of the praises is that the employee gets a pension, usually without doing anything. Many people say that they cannot afford to contribute into a 401k, and many employers will only provide a 'match' to the 401k, not an employer contribution.
the same as, the pension ends at death - it also continues in a long life, so that the person does not run out of money (at least pension funds).
the same as, the pension ends at death - it also continues in a long life, so that the person does not run out of money (at least pension funds).
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My wife will get two small pensions when she turns 65. She will be taking single life only (I get no benefit if she dies) per our planning.
However, most pensions that I have seen (including two that I was enrolled in, but will not get due to job change and pension elimination) had survivor benefits. It's simply that the monthly payment is a bit reduced to cover the survivor. Nothing different than what a vehicle such as an SPIA (which we have) would do, for that option.
BTW, I for one would prefer a pension (e.g. defined benefit) over the 401(k) that replaced it for the company I retired from (after almost 30 years).
They took the risk, and I did not have to reduce my lifestyle while the pension was in force; that came to a quick halt when I had to contribute to ensure my own retirement income. Of course, that is just in my case. My wife has relatives that worked for large companies that went out of business after many years and their pensions were taken over by the Pension Benefits Corp. - at a greatly reduced benefit rate.
I would think that there are that (like Adrian) who have a “combined plan”; that is a traditional pension (in his case, from a government job) along with supplemental investments.
- Ron
However, most pensions that I have seen (including two that I was enrolled in, but will not get due to job change and pension elimination) had survivor benefits. It's simply that the monthly payment is a bit reduced to cover the survivor. Nothing different than what a vehicle such as an SPIA (which we have) would do, for that option.
BTW, I for one would prefer a pension (e.g. defined benefit) over the 401(k) that replaced it for the company I retired from (after almost 30 years).
They took the risk, and I did not have to reduce my lifestyle while the pension was in force; that came to a quick halt when I had to contribute to ensure my own retirement income. Of course, that is just in my case. My wife has relatives that worked for large companies that went out of business after many years and their pensions were taken over by the Pension Benefits Corp. - at a greatly reduced benefit rate.
I would think that there are that (like Adrian) who have a “combined plan”; that is a traditional pension (in his case, from a government job) along with supplemental investments.
- Ron
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I always thought the longing for DBs was an expression of a yearning for simpler times now long past. Essentially, life long employment in a company that had assured income streams.
But some of those DBs were back end weighted on years of service. If you left early (before 35 years on the job ...), the pension wasn't as good. So, you were at a disadvantage to recruiting good young talent. So the employers fiddled with the formulas. Then pension costs became an issue. So the employers fiddled some more with the formulas until they just threw in the towel and went to 401(k)s.
Maybe, it was always an illusion.
Of course, simpler times for me were back in the early 70s.
But some of those DBs were back end weighted on years of service. If you left early (before 35 years on the job ...), the pension wasn't as good. So, you were at a disadvantage to recruiting good young talent. So the employers fiddled with the formulas. Then pension costs became an issue. So the employers fiddled some more with the formulas until they just threw in the towel and went to 401(k)s.
Maybe, it was always an illusion.
Of course, simpler times for me were back in the early 70s.
FI is the best revenge. LBYM. Invest the rest. Stay the course. Die anyway. - PS: The cavalry isn't coming, kids. You are on your own.
Re: Why all the praises for DB pension plans?
I agree that pension plans are not feasible unless job security is very high, and you can spend most of your career with the same company. In my field (IT), many of my coworkers don't stay at a company for more than a few years.jeffyscott wrote:But the reality is the typical employer has gone from contributing maybe 10-12% of payroll to a DB pension plan to contributing maybe 3% of your pay to a 401K (provided that you are putting in 6% of pay).
However, Jeffy makes a huge point. In many cases, companies haven't really moved from one form of retirement benefit to another, they've eliminated it altogether. It's one thing if they switched to a 401K and continued funding it on your behalf, but when a company match is less than 5%, the employees not only become responsible for managing the money, but funding most of it.
I've been with the same company for 15 years. When I began, we had what was called a "money purchase" retirement plan. It was like a 401K without pre-tax contributions. Once you were with the company for 2 years, they would contribute 15% of your annual salary to your account. You could make after-tax contributions of your own, but that didn't affect the 15% from the company. We've since switched to a 401K with a 3% contribution with up to an addition 4.5% match if you contribute 9% on your own. I only get 7.5% because I was grandfathered in; new employees max out at 5%.
My retirement benefit has been cut 50% since I was hired. New employees only get a 1/3 of what we used to receive.
Re: Why all the praises for DB pension plans?
My employer had both a DB pension plan as well as an excellent 401k with Vanguard with a 6% match. No employee contributions were required for the pension although you did have an option of buying more credits to build-up a larger pension. So it wasn't one or the other, but both. I would have preferred just a portable 401k with a 15-20% match.jeffyscott wrote:AndroAsc wrote:If I were offered a DB pension, I doubt I will accept (assuming I choose between that and a good 401k match).
But the reality is the typical employer has gone from contributing maybe 10-12% of payroll to a DB pension plan to contributing maybe 3% of your pay to a 401K (provided that you are putting in 6% of pay).
But I liked having both. Much rarer these days.
Last edited by Prokofiev on Thu Jan 20, 2011 9:11 am, edited 1 time in total.
Everything should be made as simple as possible, but not simpler - Einstein
On the surface, a DB plan looks great. The employer gets to promise the employee more than it will ever be able to pay them down the road in exchange for lower present wages. The employee feels safe and secure and no longer has the responsibility of saving. When the company has over-promised or under-funded the DB plan, the gov't steps in. I don't think that the gov't typically fully funds these, so ultimately, the joke is on the employee.RadAudit wrote:I always thought the longing for DBs was an expression of a yearning for simpler times now long past. Essentially, life long employment in a company that had assured income streams.
My opinion is that DB plans create a disincentive for employees to save and an incentive for employers to over-promise and under deliver. Therefore, they are not a good thing.
Would I want one? Probably not. If I did join, I would still save as a result of the uncertain nature of DB plans - to me, they have the feel of a Ponzi scheme. You want to get in while the gettin's good and get out before the last people get left holding the bag.
JT
- Adrian Nenu
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http://forums.leoaffairs.com/viewforum.php?f=44
http://forums.leoaffairs.com/viewforum.php?f=48
It might be interesting to put this question up on these forums in order to get some answers from the people who took on the jobs in order to have DB pensions.
Adrian
anenu@tampabay.rr.com
http://forums.leoaffairs.com/viewforum.php?f=48
It might be interesting to put this question up on these forums in order to get some answers from the people who took on the jobs in order to have DB pensions.
Adrian
anenu@tampabay.rr.com
- jeffyscott
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Re: Why all the praises for DB pension plans?
My theory as that things have gone in that direction because most people when offered two alternatives such as:ScottW wrote:My retirement benefit has been cut 50% since I was hired. New employees only get a 1/3 of what we used to receive.
A. This job will pay you $5000 per month.
Also the employer will put $500 per month into a pension plan for you, the employer will pay the full $1000 per month cost for your health insurance, the employer will provide 4 weeks of paid vacation, 10 paid holidays, and 10 days of sick leave per year.
B. This job will pay you $6000 per month.
Also the employer will contribute $180 per month to your 401K "pension plan", health insurance costs are shared the employer pays $700 and you pay $300, there is no paid vacation, holidays, or sick leave.
will take something that is more like job B over one that is more like job A.
compensation
It is all compensation, whether immediate (salary) or deferred (retirement benefits).
Business has saved labor costs by shifting retirement funding responsibility to the employee. That was inevitable in our system.
DB pensions were a reaction from the Depression. People who had grown up on farms went to work in factories that failed during the Depression. Their children wanted job and retirement security so business offered DB plans to attract the best workers in the booming economy after WWII. Now the grandchildren of the DB generation get annual bonuses and matching to portable retirement plans which fits the current labor market.
Business has saved labor costs by shifting retirement funding responsibility to the employee. That was inevitable in our system.
DB pensions were a reaction from the Depression. People who had grown up on farms went to work in factories that failed during the Depression. Their children wanted job and retirement security so business offered DB plans to attract the best workers in the booming economy after WWII. Now the grandchildren of the DB generation get annual bonuses and matching to portable retirement plans which fits the current labor market.
Re: compensation
I'm not exactly an expert, but I don't think this is the case. I believe that DB plans were a reaction to wage controls imposed by the gov't during the war years. DB plans weren't considered wages - much like health insurance - so employers started compensating employees in such a way to get around the law.heyyou wrote:It is all compensation, whether immediate (salary) or deferred (retirement benefits).
Business has saved labor costs by shifting retirement funding responsibility to the employee. That was inevitable in our system.
DB pensions were a reaction from the Depression. People who had grown up on farms went to work in factories that failed during the Depression. Their children wanted job and retirement security so business offered DB plans to attract the best workers in the booming economy after WWII. Now the grandchildren of the DB generation get annual bonuses and matching to portable retirement plans which fits the current labor market.
JT
Pros & Cons of DB and DC Pensions
Here are the strengths and weaknesses of DB pensions and DC pensions as I see it. (This is part of a short presentation on pensions that I made at last Sunday's DC Diehards meeting.)
Pension Plans
Two Main Types
Defined Benefit (DB) Pension Plans
Retirement benefit is determined by length of service and some average of highest salary years.
Pros-
1) Output is annuity.
2) Risk is assessed by financial professionals, not by the worker.
3) Very good for long-term employees, given how benefits are structured.
Cons-
1) Serves employers poorly by weighting them down with unpredictable costs and significant long-term financial liability.
2) Not portable.
3) Worker has no discretion.
4) Retirement income stream, unlike Social Security, is not inflation indexed.
Defined Contribution (DC) Pension Plans
401k, 403b, 457, Thrift Savings Plan
Tax advantaged investment accounts provided by employer in which the worker makes investment choices, typically among an array of mutual funds. At retirement the net worth of the account can be used by the worker to provide financial resources for his/her retirement.
Pros-
1) Does not saddle employers with significant long-term costs or liabilities.
2) Plan is portable.
3) Worker has discretion over how much he or she wants to save.
Cons-
1) Plans in general serve workers poorly.
a) Risk is not assessed by professionals, but instead by participant.
b) Encumbers workers with responsibility for making important and technically complex micro-financial decisions – such as detailed asset allocation and estimates of the optimal level of saving for retirement – decisions that they did not have to make in the past, are not trained to make in the present, and are not likely to execute efficiently in the future, even with attempts at education.
2) Pension is lump sum, not annuity stream.
There have been several proposals to modify DC plans to blend the strengths and minimize the weaknesses of stand alone DB or DC plans. In general such plans are called Structured DC pension plans.
Generic Structured DC Plan
Attempts to meld the best aspects of a DB pension with the best aspects of a DC pension when using a DC plan.
Like DB plan
a) Output is an annuity.
b) Risk is assessed by professionals, not employee.
Like DC plan
a) Portable.
b) Employee has some discretion.
Like Social Security pension is inflation-indexed instead of nominal.
BobK
Pension Plans
Two Main Types
Defined Benefit (DB) Pension Plans
Retirement benefit is determined by length of service and some average of highest salary years.
Pros-
1) Output is annuity.
2) Risk is assessed by financial professionals, not by the worker.
3) Very good for long-term employees, given how benefits are structured.
Cons-
1) Serves employers poorly by weighting them down with unpredictable costs and significant long-term financial liability.
2) Not portable.
3) Worker has no discretion.
4) Retirement income stream, unlike Social Security, is not inflation indexed.
Defined Contribution (DC) Pension Plans
401k, 403b, 457, Thrift Savings Plan
Tax advantaged investment accounts provided by employer in which the worker makes investment choices, typically among an array of mutual funds. At retirement the net worth of the account can be used by the worker to provide financial resources for his/her retirement.
Pros-
1) Does not saddle employers with significant long-term costs or liabilities.
2) Plan is portable.
3) Worker has discretion over how much he or she wants to save.
Cons-
1) Plans in general serve workers poorly.
a) Risk is not assessed by professionals, but instead by participant.
b) Encumbers workers with responsibility for making important and technically complex micro-financial decisions – such as detailed asset allocation and estimates of the optimal level of saving for retirement – decisions that they did not have to make in the past, are not trained to make in the present, and are not likely to execute efficiently in the future, even with attempts at education.
2) Pension is lump sum, not annuity stream.
There have been several proposals to modify DC plans to blend the strengths and minimize the weaknesses of stand alone DB or DC plans. In general such plans are called Structured DC pension plans.
Generic Structured DC Plan
Attempts to meld the best aspects of a DB pension with the best aspects of a DC pension when using a DC plan.
Like DB plan
a) Output is an annuity.
b) Risk is assessed by professionals, not employee.
Like DC plan
a) Portable.
b) Employee has some discretion.
Like Social Security pension is inflation-indexed instead of nominal.
BobK
In finance risk is defined as uncertainty that is consequential (nontrivial). |
The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.
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you can love or hate DB plans depending on the spin. are we rewarding brave civil servants or are municipal bureaucrats milking taxpayers? the question I always have is whether any given strategy is sustainable or not. the sustainable DB plans may be less lucrative than the unsustainable ones; we generally only hear salacious stories regarding the latter, so they seem praiseworthy from the perspective of the recipient.
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I retired from my job of 25 years in 2009 with a DB plan. I also had a 401k which I choose to fully fund, knowing the company would match 80%. I also started IRA as soon as I could. I choose to take my DB as cash. We still receive health insurance coverage at a very fare monthly rate. I felt I could do better investing it in index funds/ETFs than the cash they offered me monthly. My wife also has a DB. She will take the monthly offerings rather than the cash. We felt that this would give us the most flexibility, while protecting us if the market crashed. We can live off her DB monthly income and only tap mine if it's needed. We might not have to take SS right away as a result.
Even educators need education. And some can be hard headed to the point of needing time out.
- Taylor Larimore
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Take pension or cash ?
Hi Rusty:
Why did you choose to take your retirement income to invest yourself?
Thank you.
Taking a company retirement plan in cash is usually the worst option because we immediately lose a large portion to the tax man. Also, the pension plan income is usually a larger (and safer) amount than we can rationally expect by investing ourselves.I choose to take my DB as cash.
Why did you choose to take your retirement income to invest yourself?
Thank you.
"Simplicity is the master key to financial success." -- Jack Bogle
I am currently collecting two DB plans. I would feel a lot better about them if the company had had to make contributions to them no matter how good the market was doing. A couple of shaky years over the last ten results in a plan going from 'well funded' at about 110% of future requirements to shaky at <80%.
If regulations had been in place that required the company take reasonable assumptions about future growth, say 4% rather letting the company pick 8 or 9% if they chose to do so, and if the company could only withhold contributions if the plan was 200% funded rather than 80 or 90% as was encouraged by Congress in the 90s DB would have been golden and there would have been no need for PBGC.
401ks were to be icing on the cake. For many years my company offered to match 3 and then 4% on up to 7% of my contributions. But when they ended the DB program and went to a 7% match for new hires and tried to get long term employees to switch it was time to leave. The PV on the 401k match might approach the DB plan if you consistently got a 10+% return, but those years have been rather few and far between as of late.
As the years went by the one thing I could point to regardless of how the stock market and my limited choice 401k was doing was that time was the friend of my DB plan.
If regulations had been in place that required the company take reasonable assumptions about future growth, say 4% rather letting the company pick 8 or 9% if they chose to do so, and if the company could only withhold contributions if the plan was 200% funded rather than 80 or 90% as was encouraged by Congress in the 90s DB would have been golden and there would have been no need for PBGC.
401ks were to be icing on the cake. For many years my company offered to match 3 and then 4% on up to 7% of my contributions. But when they ended the DB program and went to a 7% match for new hires and tried to get long term employees to switch it was time to leave. The PV on the 401k match might approach the DB plan if you consistently got a 10+% return, but those years have been rather few and far between as of late.
As the years went by the one thing I could point to regardless of how the stock market and my limited choice 401k was doing was that time was the friend of my DB plan.
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Current federal employees are enrolled in a combined plan. They contribute .8% of their pay for a FERS pension. They receive 1% of their highest three years of earnings for every year they work for the government. Those who work for 40 years or more get 1.1% of their High 3.Ron wrote:My wife will get two small pensions when she turns 65. She will be taking single life only (I get no benefit if she dies) per our planning.
However, most pensions that I have seen (including two that I was enrolled in, but will not get due to job change and pension elimination) had survivor benefits. It's simply that the monthly payment is a bit reduced to cover the survivor. Nothing different than what a vehicle such as an SPIA (which we have) would do, for that option.
BTW, I for one would prefer a pension (e.g. defined benefit) over the 401(k) that replaced it for the company I retired from (after almost 30 years).
They took the risk, and I did not have to reduce my lifestyle while the pension was in force; that came to a quick halt when I had to contribute to ensure my own retirement income. Of course, that is just in my case. My wife has relatives that worked for large companies that went out of business after many years and their pensions were taken over by the Pension Benefits Corp. - at a greatly reduced benefit rate.
I would think that there are that (like Adrian) who have a “combined plan”; that is a traditional pension (in his case, from a government job) along with supplemental investments.
- Ron
In addition the government matches up to 5% of base pay for contributions to the TSP, which is essentially the 401k plan for federal employees.
While not as lucrative as the old CSRS pensions the plan is still one of the better ones offered in the private or public industries. There are certain states, like New York, that still offer the old school defined pensions that payout close to 100% of a long term employees salary in retirement.
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Re: Why all the praises for DB pension plans?
[quote="AndroAsc"]I've noticed that quite a number of Bogleheads praise the DB pensions of yesteryear as being generous and good, and many lament on how DB pensions have shifted to DC retirement plans in the last few decades. There's something that I don't understand... DB pensions plan to be seem to be very risky and have many downsides. Amongst the top reasons I can think of:
1) DB pension plans are usually not portable and require you to stay with one employer to "max out" the benefits. This is not realistic in today's economy where the lack of job mobility can be a bad thing. Big con of the DB... however a universal DB plan that employers pay into while the ee is under their employ is something that could be done.
2) DB pensions run the risk of having the benefits "cut" whenever things go bad, and dare I say won't have the benefits adjusted up when things go better. We've already seen this in Europe, and probably soon in the US. In the worst case scenario, what happens if the employer goes bankrupt? Again, it seems that there is a concentrated systemic risk of at least partial-default of obligation. They can cut going forward, but they can't do so retroactively. That's why many of the current public pension situations are a disaster... and even if the taxpayers rise up they still have accumulated a liability that won't be overcome short of the printing presses running.
3) DB pensions can go bankrupt. I remember reading one article on how some UK retirees sued some company for cutting their pensions. They won the lawsuit and did not get reduced benefit, but the company itself went bankrupt after 3 years and then nobody got anything. I'm still trying to find the link to that report... PBGC insures the plans. Sure they can be terrible and sure the PBGC itself is way underfunded, but the vast majority are kept whole when the PBGC takes over.
So am I missing out something as to why DB pensions are quite highly regarded on this forum? If I were offered a DB pension, I doubt I will accept (assuming I choose between that and a good 401k match). Not to mention that SS is already considered like a DB pension, and having all retirement money from pensions seems really undiversified. It's all about risk. With proper management and a more conservative investment allocation than many companies took on starting in the 90's, DB should not be that big of a deal to a company - especially the larger companies. When the next 2008/2009 comes around, just ask yourself how you'd feel knowing that your pension hasn't lost a penny while the 401(k) millionaire next door might be out $300K - $400K.
Just my .02 on the subject...
1) DB pension plans are usually not portable and require you to stay with one employer to "max out" the benefits. This is not realistic in today's economy where the lack of job mobility can be a bad thing. Big con of the DB... however a universal DB plan that employers pay into while the ee is under their employ is something that could be done.
2) DB pensions run the risk of having the benefits "cut" whenever things go bad, and dare I say won't have the benefits adjusted up when things go better. We've already seen this in Europe, and probably soon in the US. In the worst case scenario, what happens if the employer goes bankrupt? Again, it seems that there is a concentrated systemic risk of at least partial-default of obligation. They can cut going forward, but they can't do so retroactively. That's why many of the current public pension situations are a disaster... and even if the taxpayers rise up they still have accumulated a liability that won't be overcome short of the printing presses running.
3) DB pensions can go bankrupt. I remember reading one article on how some UK retirees sued some company for cutting their pensions. They won the lawsuit and did not get reduced benefit, but the company itself went bankrupt after 3 years and then nobody got anything. I'm still trying to find the link to that report... PBGC insures the plans. Sure they can be terrible and sure the PBGC itself is way underfunded, but the vast majority are kept whole when the PBGC takes over.
So am I missing out something as to why DB pensions are quite highly regarded on this forum? If I were offered a DB pension, I doubt I will accept (assuming I choose between that and a good 401k match). Not to mention that SS is already considered like a DB pension, and having all retirement money from pensions seems really undiversified. It's all about risk. With proper management and a more conservative investment allocation than many companies took on starting in the 90's, DB should not be that big of a deal to a company - especially the larger companies. When the next 2008/2009 comes around, just ask yourself how you'd feel knowing that your pension hasn't lost a penny while the 401(k) millionaire next door might be out $300K - $400K.
Just my .02 on the subject...
Re: Why all the praises for DB pension plans?
I suspect some people view a DB as a free benefit. Personally, I view it as part of total compensation. I may have a salary of 100 and a DB as well. My neighbor may have a salary of 100 but no DB. The proper way to view it would be the neighbor has lower compensation. My neighbor should view his salary as 92, and put 8 into a retirement fund each year. When we both retire, I get my DB and he buys a fixed annuity for the exact same monthly payment.AndroAsc wrote:So am I missing out something as to why DB pensions are quite highly regarded on this forum?
If my neighbor spends all of his 100 salary, he will be jealous of my DB - thinking it was a free benefit that he missed out on.
Best wishes.
Andy
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Re: Why all the praises for DB pension plans?
True - I did. I contributed nothing to my DB (e.g. pension) when it was promised to me. Upon the DB pension termination (replaced by a 401(k)) the "benefit" was not equal at all.Wagnerjb wrote:I suspect some people view a DB as a free benefit.
I had to "give to get" (e.g. any sort of match, which was reduced over the years). My salary was not adjusted for any reducion in what the company did not have to pay, due to the conversion to the 401(k) program.
As for my wife's two small DB pensions? She never contributed a cent to what she will be getting in the future. Much better than her later 401(k) plan.
- Ron
One other thing to consider is that many companies cut or eliminated any 401k match when the economy hit the skids in 2008. So DC plans are also not immune to changes in what was promised when you were hired. In fact, I would suggest that it is easier for employers to change DC plans than to change DB plans.
Re: Take pension or cash ?
Most plans that have a lump-sum option allow you to roll-over the amount into a 401k or IRA. I agree, actually taking it as a cash distribution is usually a tax mistake - but I suspect he meant cash-out as a lump-sum. Maybe not.Taylor Larimore wrote:Hi Rusty:
Taking a company retirement plan in cash is usually the worst option because we immediately lose a large portion to the tax man. Also, the pension plan income is usually a larger (and safer) amount than we can rationally expect by investing ourselves.I choose to take my DB as cash.
Why did you choose to take your retirement income to invest yourself?
Thank you.
Before accepting my lump-sum I looked at the equivalent yield needed over my lifetime to equal the annuity. Back in 2001 that rate for me was 4%. At the time I could find long-term CDs yielding more than 4%. Virtually everyone in our company selected a lump-sum. And despite losing money in 2002 and 2008, over the past 9 years that money has compounded at around 7.5%/yr in a diversified account.
Everything should be made as simple as possible, but not simpler - Einstein
basically comes down to "time shifting" the risk in reality.
Superficially:
One gets to use the word "guaranteed" which is guaranteed to make people feel good.
One gets to say the risk is transferred from the employee to the business.
Reality:
there is no guarantee.
The risk is still with the employee largely, just displaced tens of years down the road. If the company goes bankrupt, the employee is in trouble. risk is still there.
Ultimate Reality:
There is no way to get rid of risk. 14 trillion debt, 14 trillion GDP. Our ultimate insurer plate is pretty full. SS payments are not guaranteed. Individual companies, AIG, or whoever, cannot guarantee anything.
Its basically a shell game. Where fees are taken out now. Money is in a commingled pot. Actuary fees to even do a wild guess as to what will happen. Perverse incentives to continue taking out as much as possible (current retirees) when the pot gets decimated in a market decline= higher bankruptcy risk of fund. Normally, one would cut back during a downturn withdrawing funds if things look iffy, not so in a DBP.
Throw in some "stable value" where the company backing the stable value, agrees to take money off the top when times are good. and in theory, guarantees income when times are bad.... But like AIG. When times are bad for tens of years...... Where does the money come from??????? The CEO have jets, the shareholders have dividends (commingled pot expenses), the money is NOT coming in from stock market.......Where does the money come from? The same place the money came from the companies that insured CDOs, turning junk to AAA. Nowhere. The money has to be produced from something. Stocks and bonds primarily. maybe some timber and MLP, but on scale, its stocks and bonds. If that money is not made, the word "guarantee" just means sorry, we are bankrupt. There is not any money to back up the real downside risk from companies.
The ultimate guarantee in bad times is US government, then see debt/GDP above. See state pensions 1 trillion assets 3 trillion liabilities. medicare, medicaid, SS. etc. Big liabilities, much smaller assets.
Costly, complex, commingled funds. Bankrupt. Bailout.
Its a great idea, but with most things, when benefits are far down the road, and fees are now, the benefits get overpromised, the fees are higher, and the endgame 20 years hence, does not end up looking pretty. Its merely a question of scale, the bigger the scale, the longer the reckoning is delayed.
Superficially:
One gets to use the word "guaranteed" which is guaranteed to make people feel good.
One gets to say the risk is transferred from the employee to the business.
Reality:
there is no guarantee.
The risk is still with the employee largely, just displaced tens of years down the road. If the company goes bankrupt, the employee is in trouble. risk is still there.
Ultimate Reality:
There is no way to get rid of risk. 14 trillion debt, 14 trillion GDP. Our ultimate insurer plate is pretty full. SS payments are not guaranteed. Individual companies, AIG, or whoever, cannot guarantee anything.
Its basically a shell game. Where fees are taken out now. Money is in a commingled pot. Actuary fees to even do a wild guess as to what will happen. Perverse incentives to continue taking out as much as possible (current retirees) when the pot gets decimated in a market decline= higher bankruptcy risk of fund. Normally, one would cut back during a downturn withdrawing funds if things look iffy, not so in a DBP.
Throw in some "stable value" where the company backing the stable value, agrees to take money off the top when times are good. and in theory, guarantees income when times are bad.... But like AIG. When times are bad for tens of years...... Where does the money come from??????? The CEO have jets, the shareholders have dividends (commingled pot expenses), the money is NOT coming in from stock market.......Where does the money come from? The same place the money came from the companies that insured CDOs, turning junk to AAA. Nowhere. The money has to be produced from something. Stocks and bonds primarily. maybe some timber and MLP, but on scale, its stocks and bonds. If that money is not made, the word "guarantee" just means sorry, we are bankrupt. There is not any money to back up the real downside risk from companies.
The ultimate guarantee in bad times is US government, then see debt/GDP above. See state pensions 1 trillion assets 3 trillion liabilities. medicare, medicaid, SS. etc. Big liabilities, much smaller assets.
Costly, complex, commingled funds. Bankrupt. Bailout.
Its a great idea, but with most things, when benefits are far down the road, and fees are now, the benefits get overpromised, the fees are higher, and the endgame 20 years hence, does not end up looking pretty. Its merely a question of scale, the bigger the scale, the longer the reckoning is delayed.
Re: Why all the praises for DB pension plans?
Personally, here's my analysisjeffyscott wrote:My theory as that things have gone in that direction because most people when offered two alternatives such as:ScottW wrote:My retirement benefit has been cut 50% since I was hired. New employees only get a 1/3 of what we used to receive.
A. This job will pay you $5000 per month.
Also the employer will put $500 per month into a pension plan for you, the employer will pay the full $1000 per month cost for your health insurance, the employer will provide 4 weeks of paid vacation, 10 paid holidays, and 10 days of sick leave per year.
B. This job will pay you $6000 per month.
Also the employer will contribute $180 per month to your 401K "pension plan", health insurance costs are shared the employer pays $700 and you pay $300, there is no paid vacation, holidays, or sick leave.
will take something that is more like job B over one that is more like job A.
Net compensation of A = $5000 + $500 = $5500/mth
Net compensation of B = $6000 + $180 - $300 = $5880/mth
Plan B wins. I do not factor in the vacation time as I feel that it is not realistic for one plan to offer super-vacation and another comparable one not to.
As for the rest of the points raised, I can understand them, but my opinion is that the "transfer of risk" to the employer seems to be an assumption, and probably a dangerous one. Of course, one can cite that it is insured by some third-party (e.g. PBGC), but the truth is it has never been tested in history where there is a mass default of pension payments. I guess my question will be: who's going to insure the insurer of the pension plan?
Additionally, there have been several posts of pension plans being cut or modified... which makes me very uncomfortable. Why bother with a DB pension when the employer can unilaterally decide to cut benefits or modify the formula for calculating benefits?
I do acknowledge the point that many have pointed out that when shifting from DB pension to 401k the employer has not put in as much money as they should, which is something I didn't know.
In any case, if given a choice of DB pension plan vs 401k with the same amount of employer contribution/matching, which one would you choose?
Re: Why all the praises for DB pension plans?
I think your math is screwy.AndroAsc wrote:Personally, here's my analysisjeffyscott wrote:My theory as that things have gone in that direction because most people when offered two alternatives such as:ScottW wrote:My retirement benefit has been cut 50% since I was hired. New employees only get a 1/3 of what we used to receive.
A. This job will pay you $5000 per month.
Also the employer will put $500 per month into a pension plan for you, the employer will pay the full $1000 per month cost for your health insurance, the employer will provide 4 weeks of paid vacation, 10 paid holidays, and 10 days of sick leave per year.
B. This job will pay you $6000 per month.
Also the employer will contribute $180 per month to your 401K "pension plan", health insurance costs are shared the employer pays $700 and you pay $300, there is no paid vacation, holidays, or sick leave.
will take something that is more like job B over one that is more like job A.
Net compensation of A = $5000 + $500 = $5500/mth
Net compensation of B = $6000 + $180 - $300 = $5880/mth
Plan B wins. I do not factor in the vacation time as I feel that it is not realistic for one plan to offer super-vacation and another comparable one not to.
Net compensation of A = $5000 + $500 + 1000 + vac/etc.
Net compensation of B = $6000 + $180 + 700
"It is difficult to get a man to understand something, when his salary depends upon his not understanding it!" - Upton Sinclair
I see some people making guesses about the history of pension plans in the private sector, so here are some major phases in private pension history:
Pension plans arose among the railroads in the latter part of the 19th century to address the problem of workers no longer physically capable of doing their jobs. Shifting them to less taxing work was done, but there were only so many night watchman jobs available, so there was a need for a mechanism to retire their employees.
Moving into the early 20th century, as a major population shift from agrarian to industrial work was maturing, other private sectors began offering plans for the same reason. Older workers were not as profitable for their firms, yet needed to work as the family safety net had disappeared along with the agrarian society, so there was a need for orderly retirement.
Social pressures for government programs had been occurring in the same time period (going back to Bismarck in 1880s Germany) and when Social Security was enacted in the 1930s, it made it easier for firms to offer plans to supplement the difference -- the number of plans grew.
Up until WWII, pensions were viewed more as generosity from firms towards valued employees (and also served as a retention tool, since employees needed to stay to the end or get nothing). But immediately post-war, there were lawsuits, resulting in a landmark 1949 decision establishing that pensions could be collectively bargained.
At that point, pensions exploded and became part of the general consciousness as being a necessary part of compensation -- and continued to serve the needs of the employer as a way to manage their workforce by retiring employees as they became less effective.
This growth continued until the early 1970s, when major pension plan failures prompted government action requiring funding and insurance of plans. While this greatly increased the security of the pension benefit, it made the plans less desirable for employers and was the start of the downward trend. When new plans were established thereafter, they were more typically DC plans.
Many smaller DB plans shut down over the next couple of decades (and a few notable larger ones) but very many continued, largely for the original reason of having an orderly way to retire employees (especially since post-60s there were age discrimination concerns as well).
In the past decade or so, firms have been taking increasing notice of the financial impact of their plans, and many have frozen them. Firms have been balancing their needs to be financially viable against their needs to manage their workforce, with the recognition that the value of the benefit may not be fully perceived in the 401k era.
So now employees (who haven't saved anywhere near as much as was saved for the couple of generations prior by their employers) are facing uncertain retirements, employers have lost some ability to manage their workforces, and nobody really knows how this is going to shake out!
Pension plans arose among the railroads in the latter part of the 19th century to address the problem of workers no longer physically capable of doing their jobs. Shifting them to less taxing work was done, but there were only so many night watchman jobs available, so there was a need for a mechanism to retire their employees.
Moving into the early 20th century, as a major population shift from agrarian to industrial work was maturing, other private sectors began offering plans for the same reason. Older workers were not as profitable for their firms, yet needed to work as the family safety net had disappeared along with the agrarian society, so there was a need for orderly retirement.
Social pressures for government programs had been occurring in the same time period (going back to Bismarck in 1880s Germany) and when Social Security was enacted in the 1930s, it made it easier for firms to offer plans to supplement the difference -- the number of plans grew.
Up until WWII, pensions were viewed more as generosity from firms towards valued employees (and also served as a retention tool, since employees needed to stay to the end or get nothing). But immediately post-war, there were lawsuits, resulting in a landmark 1949 decision establishing that pensions could be collectively bargained.
At that point, pensions exploded and became part of the general consciousness as being a necessary part of compensation -- and continued to serve the needs of the employer as a way to manage their workforce by retiring employees as they became less effective.
This growth continued until the early 1970s, when major pension plan failures prompted government action requiring funding and insurance of plans. While this greatly increased the security of the pension benefit, it made the plans less desirable for employers and was the start of the downward trend. When new plans were established thereafter, they were more typically DC plans.
Many smaller DB plans shut down over the next couple of decades (and a few notable larger ones) but very many continued, largely for the original reason of having an orderly way to retire employees (especially since post-60s there were age discrimination concerns as well).
In the past decade or so, firms have been taking increasing notice of the financial impact of their plans, and many have frozen them. Firms have been balancing their needs to be financially viable against their needs to manage their workforce, with the recognition that the value of the benefit may not be fully perceived in the 401k era.
So now employees (who haven't saved anywhere near as much as was saved for the couple of generations prior by their employers) are facing uncertain retirements, employers have lost some ability to manage their workforces, and nobody really knows how this is going to shake out!
Last edited by Harold on Thu Jan 20, 2011 8:58 pm, edited 1 time in total.
I think there is a major aspect which has not been covered. Many self-employed people in high-income brackets can create a DB plan and fund it along with a 401k. This allows them to sock away tremendous amounts pretax, knocking down their taxable income.
Even counting the inflexibility and carrying costs, this is a huge advantage over taking the taxable income and contributing to a nondeductible IRA.
Even counting the inflexibility and carrying costs, this is a huge advantage over taking the taxable income and contributing to a nondeductible IRA.
The cure shouldn't be worse than the disease.
I have worked for only 2 companies in 34 years, neither with a DB pension plan. Both were small when I started. My current employer has grown considerably and is owned by a Fortune 500 company.
At one time I was really envious of those with DB plans. Looking at it now at age 55, my outlook is different.
Having a DC plan has forced me to look out for my own interests, not only in the day to day aspect of my career (and year to year), but also well into the future. This forced me not only to save (contibution to 401k), but also to educate myself as to how to allocate those funds. It also forced me to take a stand last year against a plan with very high costs. Result is a new plan with costs about 1/4 of the old plan.
There is not a week that goes by that I do not review my financial situation, both retirement and non retirement. Some might say that is spending way too much time doing this, but I consider my financial assets to be my business...and I keep an eye on it as if it were my company.
DB pensions are not a safe plan at this time. Those that have them should feel beneficial...but also have a plan.
Those of us that dont, well we are in control of our own future...plain and simple.
ed
At one time I was really envious of those with DB plans. Looking at it now at age 55, my outlook is different.
Having a DC plan has forced me to look out for my own interests, not only in the day to day aspect of my career (and year to year), but also well into the future. This forced me not only to save (contibution to 401k), but also to educate myself as to how to allocate those funds. It also forced me to take a stand last year against a plan with very high costs. Result is a new plan with costs about 1/4 of the old plan.
There is not a week that goes by that I do not review my financial situation, both retirement and non retirement. Some might say that is spending way too much time doing this, but I consider my financial assets to be my business...and I keep an eye on it as if it were my company.
DB pensions are not a safe plan at this time. Those that have them should feel beneficial...but also have a plan.
Those of us that dont, well we are in control of our own future...plain and simple.
ed
Re: Why all the praises for DB pension plans?
I would not count the $1000 per month insurance as part of net compensation since I cannot decide how to spend that money. And as I said, I do not factor in the vacation because I think your example is highly biased.alec wrote:I think your math is screwy.AndroAsc wrote:
Personally, here's my analysis
Net compensation of A = $5000 + $500 = $5500/mth
Net compensation of B = $6000 + $180 - $300 = $5880/mth
Plan B wins. I do not factor in the vacation time as I feel that it is not realistic for one plan to offer super-vacation and another comparable one not to.
Net compensation of A = $5000 + $500 + 1000 + vac/etc.
Net compensation of B = $6000 + $180 + 700
Employers exist to make profits for themselves. Nobody is making you work for them. Employers have to beat competition - in the marketplace with the goods and services they offer both to their customers and to their employees to attract the best ones. With the world economy getting more and more integrated, the paradigms will change. DBs just don't make sense considering companies get bought and sold more and more. Employer's responsibility is to pay you wage and not guaranteeing your retirement. There are structural changes happening in economies all over the world and these changes will modify compensation practices accordingly.
This is an illustrative example that happened recently, with out naming names and by no means applicable over all scenarios:
A small tiny market exists for a particular software service. There are two major competitors. One is public with generous stock options, DB, 401k match and it is the larger one. Other is small private and with a 401k and no match.
In the down turn both suffer. The larger public one lays off 30% of employees and the smaller one 15%.
If we assume other factors equal, one sees how things get affected for employees.
Just saying. There is no free lunch.
This is an illustrative example that happened recently, with out naming names and by no means applicable over all scenarios:
A small tiny market exists for a particular software service. There are two major competitors. One is public with generous stock options, DB, 401k match and it is the larger one. Other is small private and with a 401k and no match.
In the down turn both suffer. The larger public one lays off 30% of employees and the smaller one 15%.
If we assume other factors equal, one sees how things get affected for employees.
Just saying. There is no free lunch.
Re: Why all the praises for DB pension plans?
LOL! You can certainly decided how to spend it, it just has to be spent on healtcare. Anyway, it's still compensation whether you like it or not.AndroAsc wrote:I would not count the $1000 per month insurance as part of net compensation since I cannot decide how to spend that money. And as I said, I do not factor in the vacation because I think your example is highly biased.alec wrote:I think your math is screwy.AndroAsc wrote:
Personally, here's my analysis
Net compensation of A = $5000 + $500 = $5500/mth
Net compensation of B = $6000 + $180 - $300 = $5880/mth
Plan B wins. I do not factor in the vacation time as I feel that it is not realistic for one plan to offer super-vacation and another comparable one not to.
Net compensation of A = $5000 + $500 + 1000 + vac/etc.
Net compensation of B = $6000 + $180 + 700
"It is difficult to get a man to understand something, when his salary depends upon his not understanding it!" - Upton Sinclair
- jeffyscott
- Posts: 13438
- Joined: Tue Feb 27, 2007 8:12 am
Re: Why all the praises for DB pension plans?
Biased? Extreme perhaps, but how is it "biased"?AndroAsc wrote:I do not factor in the vacation because I think your example is highly biased.
Some jobs do offer more paid leave time than others some even offer none and those that are self-employed also get none. Only a work-a-holic would not factor in the difference in vacation time when comparing two jobs .
So employer contributions to health insurance have zero value to you? You would prefer $5100 per month with no health insurance to $5000 per month with the employer paying 100% of health insurance premiums?I would not count the $1000 per month insurance as part of net compensation since I cannot decide how to spend that money.
Your response demonstrates my point about under-valuing benefits over cash pay.
- rcshouldis
- Posts: 673
- Joined: Thu Oct 02, 2008 10:28 am
Re: Take pension or cash ?
Is it possible to rollover a DB cash pension directly into a 401k or IRA without paying taxes?Taylor Larimore wrote:Hi Rusty:
Taking a company retirement plan in cash is usually the worst option because we immediately lose a large portion to the tax man. Also, the pension plan income is usually a larger (and safer) amount than we can rationally expect by investing ourselves.I choose to take my DB as cash.
Why did you choose to take your retirement income to invest yourself?
Thank you.
- rcshouldis
- Posts: 673
- Joined: Thu Oct 02, 2008 10:28 am
Don't agree with a word you say. All have a social responsibility.kd2008 wrote:Employers exist to make profits for themselves. Nobody is making you work for them. Employers have to beat competition - in the marketplace with the goods and services they offer both to their customers and to their employees to attract the best ones. With the world economy getting more and more integrated, the paradigms will change. DBs just don't make sense considering companies get bought and sold more and more. Employer's responsibility is to pay you wage and not guaranteeing your retirement. There are structural changes happening in economies all over the world and these changes will modify compensation practices accordingly.
This is an illustrative example that happened recently, with out naming names and by no means applicable over all scenarios:
A small tiny market exists for a particular software service. There are two major competitors. One is public with generous stock options, DB, 401k match and it is the larger one. Other is small private and with a 401k and no match.
In the down turn both suffer. The larger public one lays off 30% of employees and the smaller one 15%.
If we assume other factors equal, one sees how things get affected for employees.
Just saying. There is no free lunch.
- White Coat Investor
- Posts: 17338
- Joined: Fri Mar 02, 2007 8:11 pm
- Location: Greatest Snow On Earth
I think the average person is better off with a lower salary and a good defined benefit pension. For a well-informed investor, it shouldn't make a difference whether you have a high salary, a moderate salary with a decent defined contribution plan with a reasonable match, or a low salary with a nice defined benefit pension. They're all interchangeable if you have some discipline and know what you're doing. The average person, IMHO, neither knows how to make them interchangeable nor has the discipline to do it.
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4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course