Pension vs 401k

[Shewillbemine]

Bumping a 4 year old thread huh?

Must be boring where you live.

[tripods68]

Bumping the old thread....

Anyway, I am fortunate enough to be part of largest public pension system in the country (CalPers) which offer a lifetime benefit--inflation indexed at 2% per year. I left the private sector industry (Franklin Templeton & Wells Fargo) for public sector for its great benefits + retirement. Each company offered great benefits but nothing compared to what I have now. I do plan to retire between the age of 55 or 63 years old, when I do my annual pension will equal to about 75 to 95 percent (depending on exact age I retire) of what I make using my highest one-year annual pay while contributing to my 457 but no matching. I also qualify for my social security if it still around to collect at age 62.

I agree with what was said here already---most private companies rarely offer pension anymore especially now. But when you do for a company that offers pension, make sure you read the fine print first.

[matt8205]

Pension v. 401K

My company is pushing us from a traditional pension into a 401K plan. This would be fine for younger folks, but there are many of us who are nearing retirement. Most pensions, including ours, are backloaded so that you earn the most the longer you work.

Also, the past five years have made many 401K holders wish they had pensions instead. I'm in a union shop, and the union has joined the company in recommending this switch. How do I counter their attempt to steal a bit of our retirement?

Matt

[thekid]

Not sure there is much for you do do outside of collective bargaining.

That said, your earned pension benefits are normally earned (grandfathered). The 401k would apply only for the years going forward.

I'm not american so unfamiliar with the lingo. By pension, do you guys mean defined benefit or defined contribution or both? In a defined benefit plan, you earn an annuity for each year of service. In a defined contribution, your employer just has to contribute a set amount per year. Therefore, in DB the employer takes risk that market returns on contributions are not enough to pay annuity (thereby having to further fund). In DC, you take that risk (but also profit if you achieve returns higher than value of DB annuity. Which is better, really depends on the terms of the DB plan and your own risk tolerance. As to who contributes, both DB and DC plans can be of single employer contributions or joint contributions. Personally, I prefer a good DB plan but those are hard to come by.

401k sounds like an rrsp here in Canada. A tax deferred registered retirement savings plan. With matching contributions, it sounds like a DC plan only a DC plan is usually administered collectively whereas a 401k is administered by the holder. Correct?

[kv968]

My company is pushing us from a traditional pension into a 401K plan. This would be fine for younger folks, but there are many of us who are nearing retirement. Most pensions, including ours, are backloaded so that you earn the most the longer you work.

Also, the past five years have made many 401K holders wish they had pensions instead. I'm in a union shop, and the union has joined the company in recommending this switch. How do I counter their attempt to steal a bit of our retirement?

Matt

My company recently stopped our defined benefit pensions also. They did as thekid said and just froze whatever was in there for the people who had it and the new hires don't get one.

As a compensation, they bumped up their 401k match to dollar for dollar up to 5%. It used to be $0.75/dollar up to 6%. They dropped the match by a percent but added the $0.25 extra so you come out a little more ahead.

[dh1989]

I plan to work in the public/government sector at some point in the next few years. I would much rather have a 401k vs a pension. Unfortunately most public sector jobs come with a pension and mandatory contributions. A city a few miles from me went into bankruptcy a few months back and the city retirees had their pension benefits cut somewhere around 75%.

I will be writing off my mandatory pension contribution as if it were just another tax, and continuing to put away money in a Roth. If I actually get a pension someday it will just be an extra bonus rather than something I depend on.

[bennkar]

I plan to work in the public/government sector at some point in the next few years. I would much rather have a 401k vs a pension. Unfortunately most public sector jobs come with a pension and mandatory contributions. A city a few miles from me went into bankruptcy a few months back and the city retirees had their pension benefits cut somewhere around 75%.

I wouldn't discount gov't pensions, they are usually a very nice benefit. Most pension plans should do well in the future if they are funded properly. You should do reasearch and see how well the pensions are funded, and include that in your decision criteria when looking into various gov't employers. My pension is funded properly and I feel it will do fine long term. That said, I do save in a 457 plan, and I have almost $200k in it and hope to have $500k when I retire.

[BudgetSurgeon]

There are pros and cons to both, and you really can't make a generalization - the devil is in the details.

Traditional pensions are becoming more and more scarce, as more companies are moving to the contributory/matching aspects of a 401K. Further, it is no longer true that traditional Pensions are footed entirely by the company/union. Many of today's "traditional" pension plans require the employ to contribute x% of their salary towards the plan.

What I like about 401K is that all employee contributions (up to the federally stated maximum - I think it's currently 15.5K per annum) is tax deductible. Additionally, you typically have the latitude to invest your 401K funds in a range of investment vehicles, which provides you with control over your portfolio. I personally like these features.

A traditional pension plan offers nice advantages too in that you get $X/month for life, once you retire. Most private corporations no longer have this available, and these types of pensions are typically only available for employees at the local, state, and federal level.

[snafu]

As I understand it, most 'defined' employer based pensions invest a high percentage of pension capital in very conservative financial instruments like government and triple A rated Bonds. This means there is little opportunity for significant growth to fund all those retirees who are living so much longer with potential to collect benefits for 35 + years. In periods of low interest rates, the pay-out sums may endanger the over-all capital.

Younger retirement investors can absorb more volatility over a l-o-n-g time frame, investing in equities with reasonable opportunities for dividends and high appreciation levels. For example, check-out the DOW or NASDAQ index movement since 9/30/2011. When you are in control of your retirement funds, you can make adjustments for market conditions and age differentials. Even in retirement, I believe pensioners need to have some investment in equities to s-t-r-e-t-c-h their capital even if that portion can feel like a rollercoaster.

[BudgetSurgeon]

As I understand it, most 'defined' employer based pensions invest a high percentage of pension capital in very conservative financial instruments like government and triple A rated Bonds. This means there is little opportunity for significant growth to fund all those retirees who are living so much longer with potential to collect benefits for 35 + years. In periods of low interest rates, the pay-out sums may endanger the over-all capital.

Not true here in NY. The "financial gurus" for the state invested a size-able portion of pension funds in the stock market, prior to the crash. As a matter of fact, I was told that our state Comptroller invested 38% of the entire pension fund in BP stock, prior to the spill. And, of course, he got re-elected last year. Our state and local pension plans are under water here in NY, largely because the actuaries assumed a rate of growth of something like 8% per year (historical stock market yearly increase). Boy, have they screwed up big time.....

[thekid]

A 40/60 bond to equities ratio is fairly common in pensions. The main advantage of a DB, not seen it mentionned, is that you get a guaranteed return..company takes all market risk of a shorfall.

[kv968]

The main advantage of a DB, not seen it mentionned, is that you get a guaranteed return..company takes all market risk of a shorfall.

And that's why companies are dropping them like the plague.

[Gina23]

I also have both. What has been said is true... I have no control over the pension amounts that I put in, but plenty of control over the 401K. I'm not sure how I feel about the pension and the fact that they can just "disappear into thin air" but I would be stupid not to take this deal.

[dh1989]

I wouldn't discount gov't pensions, they are usually a very nice benefit. Most pension plans should do well in the future if they are funded properly. You should do reasearch and see how well the pensions are funded, and include that in your decision criteria when looking into various gov't employers. My pension is funded properly and I feel it will do fine long term. That said, I do save in a 457 plan, and I have almost $200k in it and hope to have $500k when I retire.

I certainly hope for a nice benefit when it does come time to retire. Many cities and towns in my state are facing bankruptcy if current retirees don't agree to pension benefit reductions. The state retirement system is less than 50% funded. Some local government pensions are even worse. There have been talks of moving from a defined-benefit pension (which generally guarantees 80% of salary with cost of living increases) toward a hybrid defined-benefit and 401k type system. The unions are blocking this at all costs. Hopefully the mess gets fixed without everything having to crash and burn as has already happened in one community.

[RDC_MKTG]

Private Pension is BEST

There are a lot of knowledgeable folks posting great comments in this post. I'm wondering how many of you are aware of a little thing called a private pension. Has the ability to grow tax deferred, provides tax free access, guarantees against losing your principle, growth tied to multiple indexes AND self completes should something happen to you. Now that's what I call a savings plan!