Pension Question

[LivingAlmostLarge]

Who here is in a pension plan? And if not why are so many people against sticking with a pension plan? It seems like the way most people who are comfortably retired today have pension plans. Certainly it's changing, but have you ever known anyone who contribute more to a pension than they got back?

At a minimum don't you get back what you contribute right? But i mean with the generosity of pensions, and how they are calculated most people outlive their contributions and live off the company/state. I know most teachers will get like 70% of their salary for life and with what they contribute even 10% if you calculate after like 7 years they have run through what they saved even with returns.

I don't think we've seen the impact yet of people retiring without pensions. Pensions are like a smaller version of SS. And see how well that's turning out. So how can it be better for the individual to not take advantage of a pension?

[elessar78]

Both my wife and I have pension plans through our employer, plus we also contribute to our 401(k) plans to which hers matches up to a point. It's kinda nice and I didn't realize employers still did that kind of thing. We don't pay into it, they just fund it.

[bennkar]

I have a pension that is jointly funded (employer/employee) as well as a 457 plan. I realize a pension could be cut back, but I doubt it, and it is funded very well (last I heard it was funded over 90% which in the current environment is good). I think its great to have one, but it always has the risk of getting cut, where your defined contribution plan no one should be able to take away from you (unless your stocks/funds go south on you). I have hedged my bets with both, and I certainly have no complaints.

[kv968]

I have/had a pension that was just funded by my employer which they recently froze about 2 years ago. Meaning, whatever's in there is all that I'll get. Anyone who's newly hired doesn't get one. I'm not complaining since I didn't put any money into it to begin with so whatever it is is a plus.

To "compensate" for eliminating the pension, they upped their matching contributions to the 401k plan.

[Joan.of.the.Arch]

My spouse has a pension plan as a teacher. Outliving his contributions will not mean he will be living off the state. The pension contributions are invested, not just sitting in a near-zero interest bank account. He'd be living off the investements. Employee contributions are required at 14% of earnings. In addition, they offer 403-b investing. Teachers can also, of course, use IRAs. Full time public teachers in this state do not qualify for full Social Security regardless of years paid in, but while teaching do not pay in (unless a court decision reverses that).

I do worry about my age cohort, many of whom have lived materially well, but failed to think much of their future when they could no longer bring in a salary.

[Like2Plan]

So how can it be better for the individual to not take advantage of a pension?

I think you (or your beneficiary) always get back your original pension contributions, but not any company match and generally not any earnings on the contributions.

Pensions are great as long as they are well funded and no changes are made to benefits. In addition to the employee contributions, part of the pension plan funding is from reduced compensation the employee accepts in favor of the employer's contribution to the pension plan. Sometimes that money gets "lost" in the shuffle during BK proceedings. Also, in the past some pensions have been so underfunded the company could not make good on the pension.

There have been pretty rock solid companies (when employees started the company anyway) that have gone belly up over a career--or even after the pension started. There is a Pension Benefit Guaranty Corporation, but you will not end up with the pension benefit you earned if your company goes BK.

A few years ago, companys were required to deposit more reserves into their pension funds. Pension Protection Act of 2006 They have to back up the promise of a pension with the appropriate deposits.

A pension can also be frozen if the company decides they don't want to offer a pension anymore. This is another pitfall. Depending on where you are in your career, you could end up really scrambling to make up for the loss--especially if the pension is calculated on your high earning years.

[kv968]

My spouse has a pension plan as a teacher. Outliving his contributions will not mean he will be living off the state. The pension contributions are invested, not just sitting in a near-zero interest bank account. He'd be living off the investements. Employee contributions are required at 14% of earnings.

That's also assuming that the funds will make the required return. I'm sure over the long-run the fund's values will continue to go up, but will it be enough? More and more pension funds are finding that they're having to cut their projected returns (which were basically the historic returns) sensing that we may be in a "new normal" and the old returns won't hold true. Although there's always been the "this time it's different" mentality, so hopefully they'll be wrong.

However if they aren't, then either the benefits would have to get cut or the employee and/or taxpayer would have to make up the difference. It's a tough road unfortunately for pensions and that's why employers and some public sectors are phasing them out. They'd rather match you some money and have you take the risk instead of them.

It would also help if they didn't dip their fingers in the funds as some have done in the past.

[jpg7n16]

Who here is in a pension plan? And if not why are so many people against sticking with a pension plan? It seems like the way most people who are comfortably retired today have pension plans.

That's because for those who are currently retiring, pensions (defined benefit) were the primary savings vehicle for most companies.

The pensions didn't necessarily cause the comfortable retirement, it happened to coincide for people.

For those people who ONLY have a pension, their spouse could be in a really terrible position when they pass. (As either the payment may be reduced, or stop entirely)

Certainly it's changing, but have you ever known anyone who contribute more to a pension than they got back?

That's a loaded question for sure. The individual didn't come out of pocket with the contribution to the pension, but the employer put in the funds for them (as opposed to including those extra profits in their salary). So it would seem as though the employee never put anything into the plan, and gets something for it. That's just not the case.

You could say the same about Social Security. Do you know anyone who put in more than they got back? Some people don't think about how they pay that tax and put in their funds that way. Even fewer consider that the employer puts in the same amount on their behalf.

Though when you ask people, they'll feel they're getting ripped off on SS, but not on the pension. In both cases, the employer is putting money away on their behalf. It's just that SS tells you what amount you would have had without it first (13.3% 2012 Social Security tax rate and maximum taxable earnings )

If employees knew just how much the company was contributing on their behalf to the pension, they may not feel as good about it.

At a minimum don't you get back what you contribute right? But i mean with the generosity of pensions, and how they are calculated most people outlive their contributions and live off the company/state. I know most teachers will get like 70% of their salary for life and with what they contribute even 10% if you calculate after like 7 years they have run through what they saved even with returns.

Those teachers probably didn't work for just 7 years. Most plans add 2-3% per year of service, with some sort of cap.

Besides with the growth of a portfolio, the same applies to 401ks. If you put away 15% of your income in your 401k for 30 years, you've put away 4.5 years of income. But at 8% returns, your benefit at retirement is 17 years of income. That's nearly 4 times what you put in.

(Coincidentally, that 17 years of income, at a 4% withdrawal rate, equates to 68% income replacement)

I don't think we've seen the impact yet of people retiring without pensions. Pensions are like a smaller version of SS. And see how well that's turning out. So how can it be better for the individual to not take advantage of a pension?

Technically, a 401k is a pension. It's just a matter of "are people going to fund their own pension enough to retire?"

From: Frequently Asked Questions about Pension Plans and ERISA

What are defined benefit and defined contribution pension plans?

Generally speaking, there are two types of pension plans: defined benefit plans and defined contribution plans. A defined benefit plan promises participants a specified monthly benefit at retirement. The plan may state this promised benefit as an exact dollar amount, such as $100 per month at retirement. Or, more commonly, it may calculate a benefit through a plan formula that considers such factors as salary and service - for example, 1 percent of average salary for the last 5 years of employment for every year of service with an employer.

A defined contribution plan, on the other hand, does not promise a specific amount of benefits at retirement. In these plans, the participant or the employer (or both) contribute to the participant's individual account under the plan, sometimes at a set rate, such as 5 percent of their earnings annually. These contributions generally are invested on the participant's behalf. The participant will ultimately receive the balance in their account, which is based on contributions plus or minus investment gains or losses. The value of the account will fluctuate due to changes in the value of investments. Examples of defined contribution plans include 401(k) plans, 403(b) plans, employee stock ownership plans, and profit-sharing plans. The general rules of ERISA apply to each of these types of plans, but some special rules also apply.

[Like2Plan]

That's a loaded question for sure. The individual didn't come out of pocket with the contribution to the pension, but the employer put in the funds for them (as opposed to including those extra profits in their salary). So it would seem as though the employee never put anything into the plan, and gets something for it. That's just not the case.

You could say the same about Social Security. Do you know anyone who put in more than they got back? Some people don't think about how they pay that tax and put in their funds that way. Even fewer consider that the employer puts in the same amount on their behalf.

Though when you ask people, they'll feel they're getting ripped off on SS, but not on the pension. In both cases, the employer is putting money away on their behalf. It's just that SS tells you what amount you would have had without it first (13.3% 2012 Social Security tax rate and maximum taxable earnings )

If employees knew just how much the company was contributing on their behalf to the pension, they may not feel as good about it.

That is my gripe about 401Ks. I haven't seen too many companies that have a match that would be on par with the contributions they would make to a pension system. I think with little or no company match, employees are getting ripped off up front-plus the employee takes on the all the risk.

[disneysteve]

That is my gripe about 401Ks.... the employee takes on the all the risk.

There is risk either way. With the 401k, at least the employee is in control of the risk as he controls how the money is invested. He also controls how the money is withdrawn in retirement.

With a pension, the employee has no control at all. The company could make all kinds of promises that they may or may not be able to deliver 10 or 20 or 30 years from now and there is nothing at all that the employee can do about it.

[Like2Plan]

There is risk either way. With the 401k, at least the employee is in control of the risk as he controls how the money is invested. He also controls how the money is withdrawn in retirement.

It's great to be in control, but in practice I know people for whom the last market down turn delayed their decision to retire.

With a pension, the employee has no control at all. The company could make all kinds of promises that they may or may not be able to deliver 10 or 20 or 30 years from now and there is nothing at all that the employee can do about it.

There is some risk that you will not receive the benefit that was advertised, but I think you are overstating the risk. I think the laws currently in place greatly mitigate the unfunded promises that were made in the past.

I believe that pensions will go the way of the dinosaur. It just irks me that the 401K is being touted as a superior product "because the employee controls how the money is invested". When you look behind the smoke and mirrors, the company participation in the 401K is not on par with what it would have been in a pension (or I haven't seen a lot of companies with a decent match) and the control the employee exerts may not be a benefit.

[Nika]

So how can it be better for the individual to not take advantage of a pension?

401K has been replacing pensions not because it is better for the individual, but because it is much, much cheaper for the employer than offering pension. 401K was not even originally designed to be a pension replacement or equivalent.

[disneysteve]

It just irks me that the 401K is being touted as a superior product

401K has been replacing pensions not because it is better for the individual, but because it is much, much cheaper for the employer than offering pension. 401K was not even originally designed to be a pension replacement or equivalent.

Agreed. In fact, in the past couple of years, there have been more and more articles about how the 401k system is broken. TIME did a great cover story on it a couple of years ago: Why It's Time to Retire the 401(k) - TIME.
There are absolutely issues with 401k plans and I agree that pensions are nearing extinction. Of course, you also have to keep in mind that only about half of all US workers have access to a 401k plan so as much as we hear about them, half of us don't even have one - I don't.

"Invented nearly 30 years ago as an executive perk — one more way to dodge Uncle Sam — the 401(k) was never meant to replace the employer-guaranteed pension fund, supplemented by Social Security, as the cornerstone of our nation's retirement system. But propelled by a combination of companies looking to cut costs and consumers who wanted control of their retirement destiny, that's exactly what happened."

Of course, Social Security was never intended to be the basis of people's retirement plans either. So now we've got a system where two aspects, the 401k and Social Security, are being used in ways they were never intended. With an aging population, we're starting to see the cracks in that system get larger and deeper.

[GREENBACK]

I have a 70% pension coming when I retire from the state and I think that can't be beat. I have also contributed heavily to my 457 and a roth for many years. If I had to choose one over the other it would be the pension even if I don't have complete control. I don't have the guarantees in my own investments that the pension provides.

[jpg7n16]

It's great to be in control, but in practice I know people for whom the last market down turn delayed their decision to retire.

And I know people who had pensions only, who passed early in the pension stage and left their heirs with nothing.

At least with a 401k, your heirs keep the funds when you pass.

This discussion is showing why it's important to have BOTH - guaranteed and growth assets. I think that in your blind love of pensions, you're throwing the baby out with the bath water here. 401k's have some pretty good benefits. Pensions have good benefits too.

I have a 70% pension coming when I retire from the state and I think that can't be beat. I have also contributed heavily to my 457 and a roth for many years. If I had to choose one over the other it would be the pension even if I don't have complete control. I don't have the guarantees in my own investments that the pension provides.

Except you can use your 457 plan funds to buy an income annuity and create your own pension income stream, and thus have the same guarantees in your investments that the pension provides.