Advice on Pension Choice at Megacorp

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Advice on Pension Choice at Megacorp

Post by ManhattanTrnsfr » Tue Oct 17, 2017 9:24 pm

I am an employee at a large company (an electric/gas utility, S&P200-size). Employees hired after a certain date (I meet the criteria) participate in a 'Cash Balance Pension' where the megacorp credits the employee's 'account' with a certain percentage of their quarterly earnings, and megacorp increases the balance by paying the IRS 30 year T-bill average interest on the balance, quarterly The salary percentage credited to the employee's account increases with the age and years of service, maxing out at 7% of earnings once the sum of age and years of service are 65 or greater (earnings above the SS wage base are credited at a 4% rate). The balance in the Cash Balance Pension cannot go down, and the interest credits can be no less than 3% of the total balance annually, nor more than 9% annually. There is no employee contribution to the pension, and the pension is guaranteed by the Pension Benefit Guaranty Corporation. The employee can take the cash balance in the pension if they leave the company, or at normal retirement age (65) can convert the balance to an annuity with a number of payout options, including a 50% joint survivor annuity (no Cost of Living Adjustment in any of the annuity options).

All employees at megacorp in the Cash Balance Pension are now being offered a one-time option to instead participate in a 'Defined Contribution Pension', which follows the same crediting percentage rules as the Cash Balance Pension, but which allows the employee to put the account balance in the same investments which are available in the megacorp's 401-K plan, managed by Vanguard, including access to high-quality mutual funds with stunningly low costs (0.07% e.g. for the 2030 Targeted Date fund). The employees in the Defined Contribution Pension cannot, however, select an annuity at retirement (at least not an annuity from megacorp), and the Defined Contribution Pension is not covered by the PBGC. The company does not offer the guaranteed credits on the balance in the Defined Contribution Pension either.

My question is whether to continue in the Cash Balance Plan (with its low-risk guarantee of earnings), or switch to the Defined Contribution Plan (with its access to market returns, and risk, but loss of in-company annuitization)?

Full picture of my situation:
- Married, 51 y/o (spouse same age), 10 year old child
- $215K annual salary; worked at megacorp for 12 years; planning on working for at least an additional 10 years at megacorp prior to retirement
- Live in HCOL state, with high state and local income taxes and property taxes; marginal tax rate is about 41%
- $900K balance in megacorp 401K, with an 80/20 asset allocation to equity/bond; currently maxing out on $24K maximum tax deferred contributions, with 6% of salary company match (about $9K each year); equities are in Vanguard Target Date 2030 and Primecap; bonds are in Vanguard Target Date 2030
- Risk tolerance: comfortable with the risk tolerance reflected in the Vanguard Target Date 2030 mutual fund (i.e. more conservative shift from equities into bonds as retirement age approaches)
- DW does not work, we make an annual $6.5K traditional (tax deductible) spousal IRA contribution on her behalf; DW has about $140K in this tIRA
- In addition to maxing our 401K, I make an annual $6.5K Roth IRA contribution for myself; I have about $90K in personal Roth IRA, invested 100% in equities (Vanguard FTSE Social index)
- 529 account for 10 year old is funded to about $100K, in an aggressive but 'target date' dynamic stock/bond portfolio (also managed by Vanguard)
- 6 months+ in a rainy day fund, 1/2 in cash and 1/2 in a Betterment conservative allocation portfolio (60/40 bonds/equities)
- $370K 30 year mortgage at 3.875%, 27 years to go...
- Just started doing mega back door Roth IRA, since we are approaching the individual Roth IRA salary limits and I have reached my comfort level with the amount of 529 savings (so future college contributions will go into mega back door Roth IRA); about $10K in mega back door Roth this year, hoping to hit the maximum allowed limit in the 401K plan ($60.5K?) in the next few years

My current view, based on the low risk/guaranteed bond-like return offered by the Cash Balance Pension, is that I will continue participating in the Cash Balance Pension, but adjust my asset allocation to include the Cash Balance Pension as part of my debt asset allocation (i.e. increase my equities in my 401K from where they are now). But interested to hear from others if they have a different perspective - or even if they agree with my approach. Thanks in advance for your thoughts!

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Re: Advice on Pension Choice at Megacorp

Post by dbr » Wed Oct 18, 2017 8:45 am

Pending something we don't know about the cash plan I think I would participate in the cash plan and adjust my other assets to take the overall risk and return consistent with my objectives. This assumes, for example, that if you leave the company that cash can be rolled over to an IRA (or you might even leave it as a pension at 65). It would be interesting to compare their current offer for annuitization with what can be obtained in the open market today. The decision might also be affected by how much money you have altogether in various accounts. I am not sure I would want this account to be the majority of my total wealth.

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Re: Advice on Pension Choice at Megacorp

Post by ralph124cf » Wed Oct 18, 2017 9:30 am

Since you already have a decent 401(k) balance, I would maintain the cash balance plan and consider it part of my fixed income investments. This may allow you to lean slightly more stock heavy in your 401(k).


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Re: Advice on Pension Choice at Megacorp

Post by Watty » Wed Oct 18, 2017 10:28 am

ManhattanTrnsfr wrote:
Tue Oct 17, 2017 9:24 pm
one-time option to instead participate in a 'Defined Contribution Pension', which follows the same crediting percentage rules as the Cash Balance Pension,
If you put the money into this then you could buy a long term bond fund now and then buy an annuity when you retire. The downsides that I can see are;

1) You don't get the 3% minimum guarentee
2) If interest rates go up the value of your bond fund will go down.
3) If you invest it in something other than long term bonds your investments could go down.

The lack of PBGC should not be an issue since with the new cash balance account you would have a separate account but you would want to check on that.

The big advantages I see are;
1) There is not a 9% maximum on your earnings. I can't predict the future but high inflation is not impossible.
2) It avoids the risk that the old Cash Balance plan might be changed to take away the lump sum option when you leave the company. I had a small old pension like that and because it was underfunded they were required to discontinue the lump sum option for about ten years until they were better funded.
3) You may be able to invest the money and earn more.
4) It sounds like you will be adding significant amounts to it each year so you will get the advantages of dollar cost averaging if the market dips in the near future.

I would probably choose the new defined contribution plan just because of #2 , which happened to me.


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Re: Advice on Pension Choice at Megacorp

Post by ManhattanTrnsfr » Thu Oct 19, 2017 6:27 am

Thanks all for your input. dbr, based on your comments i plan to dig more into the annuitization offered by megacorp as part of the Cash Balance Plan and try to compare with other commercial annuitization offerings.

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