Illinois pension vs. 457b, 403b

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effillus
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Illinois pension vs. 457b, 403b

Post by effillus » Thu May 26, 2011 9:28 pm

I have the dubious distinction of working at a public university in Illinois. I'm sure you've all heard of the mess in which the state's pension system finds itself due to the legislature failing to fully fund it over the years. A bill was introduced in the General Assembly today to increase the amount we employees have to contribute to our pensions from the current 8 percent to 16 percent if we want to maintain our traditional post-retirement benefits. (The alternative is not to contribute more and instead go into a new defined contribution system.)For me, that means deducting an additional $280 per month from my check and handing it over to the State University Retirement System.

I currently put about 80 percent of my gross pay into a 457b and 403b (yes, I'm frugal) so I can swing the extra $280, but here's my question: Would I be taking an inordinate amount of risk is putting even more of my money in a retirement system that is the worst-funded in the nation in order to maintain my current generous retirement benefits? After all, it could still go broke in the future. Or would I be better off keeping the money going into the 457?

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IlliniGuy
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Post by IlliniGuy » Thu May 26, 2011 9:48 pm

I think you are right to be wary of putting significantly more of your salary into the obscenely underfunded Illinois pension fund. Not knowing all of the details of your two options, the 8% plus the 457 sounds good to me.

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jeffyscott
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Post by jeffyscott » Thu May 26, 2011 9:51 pm

The other question is whether your pension would be worth the 16% of pay that you will have to pay? I think your system promises somewhat more than the fully funded system in WI does, but our fully funded system has run at a total cost of 11-12% of payroll for at least the last 20-25 years. So I wonder if the 16% is partly paying for the past underfunding, rather than only funding the benefits that you will earn by paying it?

I assume you would still keep whatever DB benefits you have already earned, if you choose not to pay the 16%?
press on, regardless - John C. Bogle

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BruceM
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Post by BruceM » Thu May 26, 2011 9:52 pm

To accurately answer this would require more information. But based on what you've provided, let me offer this....

There are many other states than IL with this problem, and all are faced with DBP funding issues. But as is the case with your state, increased employee contributions to the DBP seems to be one of the more common remedies.

And I doubt you are contributing 80% of your gross to your 403(b)/457(b), as at a minimum, 10% of your gross would go to fed tax, about 5% to IL and 7.65% to FICA, which at 27.65% exceeds 20% :-)

To calculate whether you'd be better off foregoing the state DBP contribution and putting that into your IRA ($280 X 12 = 3,360/yr), would require taking into account your accrued benefit formula, the plan's full retirement age, any annual inflation adjusters and if it includes a joint survivor benefit (and if so, what %).

As a general rule, I am suspicious of 403(b) and 457(b) plans, as these have long histories of poor investment alternatives and hidden costs that often work together to negate the tax deferred benefit they offer. But this will depend on the plans.

BruceM

555
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Post by 555 » Fri May 27, 2011 12:17 am

BruceM wrote:"And I doubt you are contributing 80% of your gross to your 403(b)/457(b), as at a minimum, 10% of your gross would go to fed tax, about 5% to IL and 7.65% to FICA, which at 27.65% exceeds 20% :-)"
--rude remark deleted-- OP's taxable income would be too low to pay fed tax, and OP would not pay FICA since OP has a state pension instead of social security.

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OnFire
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Post by OnFire » Fri May 27, 2011 12:48 am

I am in the same boat. I am a firefighter with six years on the job and 20 to 25 to go. (Although I could retire with 50% pay at twenty years.) I have a 1 year old and another baby on the way. I highly doubt I can retire with kids still going through college. I am required to live in the city. Chicago high schools are a joke and HS tuition for each child is currently 10K each year.

In order to answer your question, we need to know how long you've been employed for, how much longer you plan to work, what the benefits are and the survivor benefits.

For me, I am 37, have 6 years in, plan to work until age 60 when I will be able to retire with a pension that pays 75% of the average of the highest three years of my salary for the rest of my life, with 50% benefit to survivor spouse, plus benefits to children if we both go. I was saving 12K a year in my 403b until we started to save aggressively for a new house.

If this comes to fruition, here will be a mass exodus of employees before it kicks in. I am leaning heavily towards paying the 16%.
Where are all the customers yachts? | | “The most powerful force in the Universe is compound interest.” -Albert Einstein

am
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Post by am » Sun May 29, 2011 10:46 am

Illinois retirement plan is guaranteed by the state constitution. If the plan goes away, I think that there will be bigger problems than your pension. Illinois retirement plan is an incredible deal and contributing as much as possible to it is the best plan. Much less risk than pouring your hard earned money into the stock and bond markets.

Valuethinker
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Post by Valuethinker » Sun May 29, 2011 11:09 am

OnFire wrote:I am in the same boat. I am a firefighter with six years on the job and 20 to 25 to go. (Although I could retire with 50% pay at twenty years.) I have a 1 year old and another baby on the way. I highly doubt I can retire with kids still going through college. I am required to live in the city. Chicago high schools are a joke and HS tuition for each child is currently 10K each year.

In order to answer your question, we need to know how long you've been employed for, how much longer you plan to work, what the benefits are and the survivor benefits.

For me, I am 37, have 6 years in, plan to work until age 60 when I will be able to retire with a pension that pays 75% of the average of the highest three years of my salary for the rest of my life, with 50% benefit to survivor spouse, plus benefits to children if we both go. I was saving 12K a year in my 403b until we started to save aggressively for a new house.

If this comes to fruition, here will be a mass exodus of employees before it kicks in. I am leaning heavily towards paying the 16%.
The funding issue is of a concern.

But for the moment, I would stay with it, unless you have really strong analysis (eg from your union) as to why not.

Eventually Illinois will sort this out, by contribution rises and by benefit cuts. Eventually they may simply close the scheme to accruals and transfer you en masse to a DB scheme (that's the sort of thing that has happened in the private sector). But your existing benefits would be protected in that.

But until you *really* know how it's going to play out, these union negotiated public sector schemes are a gold standard.

And a DB pension scheme, especially CPI linked, is a huge diversifier against all other financial assets.

Firemen earn my greatest respect: not an easy job- it's a fireman's job to go into places a sane person doesn't go and do things a sane person doesn't do, and when you think that the firemen are always called to a highway accident to cut away the wreckage..... I am sorry you are faced with issues like this.

staythecourse
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Post by staythecourse » Sun May 29, 2011 11:26 am

My wife works for Illinois as well and have read through some of hub bub regarding the SURS package.

It is true in 1970 the constituition of the state protects the pension plan once the contract has been entered. So, I don't see how it will be dissolved.

I think the bigger question will be changing of contributions and/ or reduction of promised benefits.

Unless you have another option job wise there is no point talking about it. I would continue to invest in the 403b as well that they offer and hope for the best.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

effillus
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Post by effillus » Sun May 29, 2011 12:03 pm

Here's my big concern: By requiring higher employee contributions to stay in the tradtional defined benefit pension plan, the state is going to force some employees to abandon this option. I'm five to seven years from retirement, so I think I could gut out having the extra contribution forced upon me. An employee who has just a couple of years in will not be able to bear the extra cost and will opt out for the defined contritbution option. The result will be that, going forward, there wll be fewer employees putting money into the traditonal defined benefit plan, thus less funding for the plan, thus the plan will go broke even faster than it is going broke now. And that makes me wonder if my money would be safer if I put it in the my own 457 and 403 prorams.

staythecourse
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Post by staythecourse » Sun May 29, 2011 4:10 pm

effillus wrote:Here's my big concern: By requiring higher employee contributions to stay in the tradtional defined benefit pension plan, the state is going to force some employees to abandon this option. I'm five to seven years from retirement, so I think I could gut out having the extra contribution forced upon me. An employee who has just a couple of years in will not be able to bear the extra cost and will opt out for the defined contritbution option. The result will be that, going forward, there wll be fewer employees putting money into the traditonal defined benefit plan, thus less funding for the plan, thus the plan will go broke even faster than it is going broke now. And that makes me wonder if my money would be safer if I put it in the my own 457 and 403 prorams.
If you are talking about the SURS package an employee CAN NOT change which option they chose when they first started working. Meaning you cannot go from a DB to the portable DC option whenever you want.

They would never allow that as they need that extra money from those early workers to fund the now retirees. This sounds partially like a ponzi scheme and it is. Not sure how that is allowed, but it is just like social security and medicare.

If you have just 7 years at most don't worry about it. There will be changes (as they need to to fund the program), but the options are too vast too worry about it until the final decisions are made.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

JimInIllinois
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Post by JimInIllinois » Sun May 29, 2011 11:23 pm

555 wrote:
BruceM wrote:"And I doubt you are contributing 80% of your gross to your 403(b)/457(b), as at a minimum, 10% of your gross would go to fed tax, about 5% to IL and 7.65% to FICA, which at 27.65% exceeds 20% :-)"
--rude remark deleted-- OP's taxable income would be too low to pay fed tax, and OP would not pay FICA since OP has a state pension instead of social security.
I hope that's a Roth 403(b) so OP is getting those taxes out of the way at his low marginal rate.

-Jim

am
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Post by am » Mon May 30, 2011 8:38 am

So with SURS, your yearly payout at retirement is 75% of the average of the best 3 years? This is if you retire at 62 instead of 55?

staythecourse
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Post by staythecourse » Mon May 30, 2011 9:22 am

am wrote:So with SURS, your yearly payout at retirement is 75% of the average of the best 3 years? This is if you retire at 62 instead of 55?
I would have to look back again so don't quote me, but believe it something like:

x% (40-80%) based on 1. either average of salary last couple years OR average of highest consective 4 yr. period during employment and 2. duration of time working.

I thought the loophole was the option of averaging the highest earned 4 yr. period basically allowing one to go partime to accumulate duration of employment and still get the maximum benefits even with a lower salary parttime.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

jack1719
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Post by jack1719 » Wed Jun 08, 2011 7:23 pm

http://capitolfax.com/2011/01/24/fitch- ... is-rating/

Illonis was upgraded in Jan 2011 on its debt & pension outlook..

I am sure that 66% personal income tax increase(and 45% corporate increase) that passed helped alot..along with the big stock market gains of past two years,(almost 70% of pension funding comes from investments gains)

even as one of the lower rated pension states(IL) the picture is looking alot rosier..

jack1719
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Post by jack1719 » Thu Jun 09, 2011 6:48 am

http://www.ncpers.org/Files/2011_06_ncp ... _study.pdf

Here is PDF file of one of the most recent & extensive Pension studies(done in March & April of 2011) ,it's pretty extensive & through,they did alot of homework.

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Teetlebaum
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Post by Teetlebaum » Mon Aug 22, 2011 10:44 am

I would strongly advise against putting any money in a 403b. Their fees are higher. Also, there are a couple of Vanguard index funds available in the SURS 457, and as they are institutional funds, they have even lower fees than similar funds available directly through Vanguard.

On a separate note, I was very comfortable with all that money that I see in my own 457, but I just realized that once I start post-retirement withdrawals, a big chunk of it is going to Uncle Sam. :roll:

JimInIllinois
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Post by JimInIllinois » Mon Aug 22, 2011 11:31 am

The Fidelity Spartan funds in the 403b are dirt cheap and cover a wider variety of asset classes than the 457 index choices. Plus you have the option of a Roth 403b, unlike the 457.

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ofcmetz
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Post by ofcmetz » Tue Aug 23, 2011 9:30 am

I would stay with the pension for now if it were me even at the cost of reducing my 403B contributions slightly. There is an extremely high chance that we all will received promised benefits up to this point with the chance that future accrued benefits will be decreased by acts of legislature.

I keep up with our underfunded state pension here in Louisiana and they are constantly making changes each year to secure up the pension. Our benefits are also protected by state constitution. As I understand it we are just a little better funded than you all are.

Changes we are making here and that I'm seeing around the country for new hires into public pensions are:

1. Increase in employee contributions.

2. Increase from a 3 year average of final compensation to a 5 year average of final compensation.

3. Slight decrease in the percentage multiplier. ex. 2.5% per year to maybe 2.25% or 2% a year.

4. Increase in retirement age from 55 to 60 or from 60 to 62.

5. Getting away from the 25 year or 30 year at any age and going to a only a set retirement age. (Hazardous duty plans for police and firefighters seem to be retaining the 25 year at any age retirements).

There has also been a big push to make current pension members to pay an increasing percentage of their salary each year. We currently pay 7.5% or 8% for regular members and 9.5% for hazardous duty members like me. One benefit of certain state pensions is that you are opted out of social security and therefore the first 6.2% of your pension payment is "free". ;)

States know they are on the hook for these costs and are moving in a positive direction IMO. I'm still waiting for a state to not honor their pension up to promised benefits and have a lawsuit make it to the supreme court.

I also disagree that all 403B's are bad. I have some pretty decent options in mine and I would encourage any public employee to diversify their pension by contributing to a 403B, 457B, or ROTH IRA's.
Never underestimate the power of the force of low cost index funds.

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dmcmahon
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Post by dmcmahon » Tue Aug 23, 2011 10:10 am

How long until you can being drawing the DB pension? If you stop contributing to it now, will you still get benefits from it on some sort of pro-rata basis? If not, what happens to all your past contributions?

civi68
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pensions

Post by civi68 » Tue Aug 23, 2011 6:26 pm

I am a state employee in PA. We have a shortfall of 18 billion. PA raised the retirement age to 65 for new hires and new employees pay more with the option of increased payments by new employees if the fund goes too low. Legislation will be introduced in the fall to freeze the plan for legislators in 2014 and then for all employees at a later date after 2014. All future earnings would be in a 403b with the state matching a miserly 4%.
If I were you, I would continue with the plan. State DB plans will give you much more when you retire than any money you could save in a 403B DC plan. That is why they are struggling. You would probably have to max out your 403b plan yearly for your money to match the state's plan. And when I mean max out, I mean the largest amount allowed of $16500 a year. The worst that might happen is that they could someday freeze the plan but you would still receive the years you earned. State DB plans are the best retirement plans out there and the primary reason state employees stay so long at their job is these plans.

Atilla
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Post by Atilla » Tue Aug 23, 2011 6:43 pm

Tough choice. Illinois is currently a basket case. You take your pick of corruption/incompetence/chance of the Illinois constitution being ignored, gotten around or amended.

Me - I always pick the option that at least leaves me the illusion of greater control. There is no free ride in the long run, and Illinois' chickens are coming home to roost.

Really - a tough choice. I wouldn't put a dime more into the pension system than necessary. The political corruption in that state is a legend unto itself. Two consecutive governors convicted?

They don't call it a "machine" for nothing.

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Teetlebaum
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Post by Teetlebaum » Wed Aug 24, 2011 8:55 am

Atilla wrote:They don't call it a "machine" for nothing.
The machine is broke(n).

jack1719
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Post by jack1719 » Thu Aug 25, 2011 9:21 pm

I am sure that 66% personal income tax increase(and 45% corporate increase) that passed helped alot..along with the big stock market gains of past two years,(almost 70% of pension funding comes from investments gains)

well broken or not..the taxpayers in the state are paying the price for the better/upgraded outlook in the state...

effillus
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Post by effillus » Thu Aug 25, 2011 9:39 pm

The legislature will likely take up the issue again during the fall veto session. Who knows what will result.

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