Presenting a case for Pension vs. 403b

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crazylightgirl
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Presenting a case for Pension vs. 403b

Post by crazylightgirl » Sun Feb 11, 2018 11:55 pm

Our union contract is up for renewal and I would like to present a case for a better retirement plan. I would really appreciate some help from bogleheads on how to argue this case....specifically on what is a reasonable alternative retirement plan.


Here's the scenario...

I work for a company that has 2 different retirement plans for employees depending on which year they were hired. Lets say 2014.
For those hired BEFORE 2014, a pension plan and 403b are offered:
403b: 1.25% matching contribution
Pension: 1.45% x final salary x number of years worked (.e.g., base salary 150k x 1.45% x 30 years = 62,250). This is assuming you work until 65 which gives you 100% of the pension. Each year you retire earlier than 65 will cause a 5% reduction in the pension plan

For those hired AFTER 2014, no pension plan however they get, in addition to the 403b described above, a supplemental retirement plan that provides a 6% employer contribution. So for example, if base salary is 150k, the employer contributes $9k per year regardless if you voluntarily contribute to this plan. The funds available are the same funds as the 403b

If, for example, an employee hired before 2014 has the pension plan starting at age 35 and retiring at age 65 (life expectancy 85), they would end up with 1.3M in additional retirement savings. If, however, they were hired after 2014 and just got the supplemental plan, they would end up with roughly $505,000 (based on a conservative 4% rate of return)

Of course I'm not arguing to have a pension because this ain't 34th street so miracles are not happening. I would at least like to present an argument for something better than 6%, but I'm not sure how to present a compelling argument and rebuttal if it comes down to that. Here in this field we all do the same type of work ( more senior employees do not have more knowledge or skills in this job function. Not being rude; just stating it how it is). Us newbies already have a slightly lower salary, less favorable schedule, and less vacation time. Though I'm totally in favor of them having slightly higher pay, vacation, etc due to their seniority, I feel that the discrepancy between the two plans is large enough for me to at least try to fight for a better alternative. Maybe > 6% contribution or higher matching contribution?

Any ideas, suggestions, correction of my calculations :) are much appreciated.

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Pajamas
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Re: Presenting a case for Pension vs. 403b

Post by Pajamas » Mon Feb 12, 2018 12:23 am

Be aware that 7.25% is significantly above average. (According to this article, the average is 4.7% http://www.chicagotribune.com/business/ ... olumn.html)

A higher matching contribution which would probably be more appealing to the employer than a higher automatic contribution as it is likely not all employees contribute to get the match. (Only about 75-80% of employees participate to get the full match even though more than half of employers now auto-enroll employees.)

Don't forget that the employer is also paying 6.2% for Social Security, the same as your contribution for Social Security. That plus the 7.25% they contribute to your 403(b) is a total of 13.45%. They might very well raise that point in any discussions, and might even bring up Medicare taxes.

Personally I prefer defined-contribution plans over defined-benefit plans since there have been incidences of pension plans being reduced or eliminated due to financial problems. Even some government employees have seen benefit cuts and more are being considered. Managing your own also means that you can control taxes to some degree as well as leave assets to heirs. Another important benefit for me was not being locked into an employer for the long-term.

crazylightgirl
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Re: Presenting a case for Pension vs. 403b

Post by crazylightgirl » Sun Feb 18, 2018 3:56 pm

I'm definitely aware and content with defined contribution plan (btw it's 6% of base salary plus 1.25% of the matching program (18.5K) so ~ 11K)

The question comes down to how do I present a case for a defined contribution plan that is as reasonable as the pension plan. After all, it's a 1M difference in retirement.

What % match would sound reasonable compared to the current 1.25% or maybe can I argue for a greater than 6% base salary contribution?

Thanks for the input :)

gostars
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Re: Presenting a case for Pension vs. 403b

Post by gostars » Sun Feb 18, 2018 10:26 pm

I don't know that you have a case to make. The pension was most likely eliminated because of the wildly excessive costs compared to the standard for whatever industry you're in, and 6% base + 1.25% match is still a good bit more than what most people are getting in anything other than high tech. And I seriously doubt you're going to get the union to go to bat for the newbies since the old timers are the ones who approved the current plan in the first place. Seniority sucks if you ain't senior.

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Artful Dodger
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Re: Presenting a case for Pension vs. 403b

Post by Artful Dodger » Sun Feb 18, 2018 11:22 pm

Let's look at a more realistic comparison.

You have two options - you have left out inflation which makes it easier to compare. You also don't mention what happens with a survivor. With a DC plan, you have continuation of benefits based on investment account; DB plan allows several options with 50% survivor option fairly common. For simplicity, we'll just assume you're single.

Option 1 - DB plan - benefit at age 65 = $62,250. You seem to think this is worth $1.3M. It is worth $62,250 for each year you live past 65. $1.3M is approx 21 years at $62,250. How do you arrive at this figure? I don't know your age, but since you're using 35 as a starter, I will too. For a male born in 1983, average life expectancy is 71 years. Since you are Carzylightgirl, I'll just go with the female life expectancy of 78 years, so your projected retirement benefit with the DB plan is 13 X $62,250 or $809,250.

Option 2 - DC plan - you use a 4% rate of return and come up with accumulated benefits of $505,000. Average long term market returns are 10%. Let's back off and use 8%. $9000 invested each year for 30 years will generate $1,070,000 in accumulated benefits. If you buy an immediate life annuity at age 65, even at today's low rates, it will generate $66,228 in annual income, better than the $62,250 from the DB plan. You can probably do better just withdrawing 5-5.5% and adjusting with market returns. You'll likely decrease your balance slowly over time, but still leave money to your heirs, which definitely won't happen in a DB plan.

forgeblast
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Re: Presenting a case for Pension vs. 403b

Post by forgeblast » Mon Feb 19, 2018 9:51 am

Just wondering though with the DB plan (mine anyway) allows me to name one person to get my monthly payment for the rest of their life.
There are four different options with our pension,
1. full monthly payment no death benift
2. (cant remember it did not apply to me)
3. reduced monthly payment but 100% of death benefit
4. reduced monthly 50% of death benefit.

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WoodSpinner
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Re: Presenting a case for Pension vs. 403b

Post by WoodSpinner » Mon Feb 19, 2018 11:04 am

crazylightgirl wrote:
Sun Feb 18, 2018 3:56 pm
I'm definitely aware and content with defined contribution plan (btw it's 6% of base salary plus 1.25% of the matching program (18.5K) so ~ 11K)

The question comes down to how do I present a case for a defined contribution plan that is as reasonable as the pension plan. After all, it's a 1M difference in retirement.

What % match would sound reasonable compared to the current 1.25% or maybe can I argue for a greater than 6% base salary contribution?

Thanks for the input :)
One aspect you might focus on is the fund selection to insure a number of high quality low ER funds....

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