Pensions....

[Like2Plan]

The 401K employer contributions made me wonder--how much did employers contribute to pensions?

I found this article by AARP (it's not dated, so I am not sure when it was written), but the article said,"On average, public sector employees contribute 5% of each paycheck to their pension. Employers contribute 7%. In the private sector, employers contribute 8% and employees do not contribute."

https://assets.aarp.org/www.aarp.org_/articles/work/contribution-requirements.pdf

Now, I get why employers are happy to be rid of the pension obligations. But, it seems like getting rid of the pension plan they are saving money on the defined benefit contributions they had been making (and no more pension obligation) vs what they contribute to match on the defined contribution model.

I was surprised to read (in a different article) that there are about 15-17% of private companies that still offer pensions.

[corn18]

The biggest problem with pensions is the ongoing funding. Our $16B company had adjustments to GAAP accounting on a quarterly basis in the tens of millions because of pension obligations. Inflation, interest rates, law changes, market performance, etc... could all change the pension obligation by a lot. And it never ends. Matching 401k contributions is a one and done and a lot more predictable. One thing that investors hate is surprises during the earnings call. Adjusting earnings per share down or up because of pension obligations made it look like you didn't know how to manage your money.

If the market (i.e. employees) demanded higher match to take a position or stay, employers would increase the match. It's all part of the compensation analysis we do to hire and retain good employees. Turnover costs are very high in the defense world, so if we have to pay 10% match to reduce turnover by 10%, that would be a good move. Unfortunately, 401k match is not much of an attraction to young folks. I could match at 25% and that wouldn't move the needle on hiring and retention. The young folks want to get hired, work 2-3 years and then shop their skills for a higher salary/stock/bonus somewhere else. I can even match the new comp package and they still want to move on. They get bored if they stay put too long.

[bennkar]

I guess my situation is pretty average. Public sector worker - I contribute 5% towards the pension. The employer changes the amount based on how well it is funded. Its varied from 2% up to 20%. Not sure where it is now, but I would guess maybe 10%.

[ua_guy]

That sounds about right.

Where I worked, you had to make a choice upon hire between two options. A defined-benefit (true pension) retirement, or a hybrid. Part of it was a defined benefit, and the other part was a defined contribution. The true pension plan had a variable contribution depending on funding needs. The defined contribution part was similar to 40x plans where you contribute and invest, and the performance is yours. The biggest difference was, if you chose Plan 2 and left before vesting, you took nothing with you. If you left before vesting in Plan 3 (hybrid), you take all your contributions and matching with you.

The railroad and public sector still offers pensions, but I can't name another industry off the top of my head that does. Less and less common these days.

[LivingAlmostLarge]

it's because you have to count on people dying and people are living longer than ever as well. Lots of people living to 80s/90s and that was never factored into pensions. So like SS you have payouts far exceeding the amount put in. I think it'll change even in the public sector soon enough. If we are having problems with SS i can't imagine pensions in public sector will be any better. I think only military?

[Fishindude77]

Many unions still offer pensions, and many of them are grossly underfunded due to retirees living too long, and also do to mismanagement of the pension funds. At some point many of these unions are going to have to face the music that they will not be able to pay out the amounts promised, unless the feds (or somebody) steps in and bails them out. A pension is great if you can get it, but in this day and age, I'd be doing my own retirement investing outside of the pension as well, or risk what could be a disappointing retirement.

[LivingAlmostLarge]

Correct the pensions are underfunded because of living longer and mismanagement.

[Like2Plan]

If the market (i.e. employees) demanded higher match to take a position or stay, employers would increase the match. It's all part of the compensation analysis we do to hire and retain good employees. Turnover costs are very high in the defense world, so if we have to pay 10% match to reduce turnover by 10%, that would be a good move. Unfortunately, 401k match is not much of an attraction to young folks. I could match at 25% and that wouldn't move the needle on hiring and retention. The young folks want to get hired, work 2-3 years and then shop their skills for a higher salary/stock/bonus somewhere else. I can even match the new comp package and they still want to move on. They get bored if they stay put too long.

To be fair, though, there is a lot of bureaucracy baked into the 401k plans. For example, you could not negotiate a higher match on an individual basis because the rules are applied across the board. In a way, it puts managers at arms length from this aspect of negotiation.

But, I do get your point about the younger workers. DH worked for a private company that froze the pension after he worked for them for 10 years. He expected to see torches and pitch forks when he went into the office, but instead there was barely a peep. To test the waters, the company made an additional match in the 401k (that was deposited in the first quarter after the year closed out). The company said they would evaluate this additional match on a year to year basis (they did it one year and that was it). I figured they didn't get much feedback.

But, we figured the frozen pension represented a 30% decrease in DH's compensation because it was a pretty generous pension. We figured we would have to put a lot more in savings in order to make up the difference. While DH was under their pension system he was less inclined to go to work for someone else--even though they had a policy of no more than 5% increase in salary. Once the pension was frozen, DH felt like a free agent.

[Like2Plan]

A lot of companies froze their pensions at about the same time as DH’s company. One reason was the companies had to deposit a higher reserve amount if they were covered by the pension benefit guarantee corporation (there was some concern of companies defaulting on the pension and cleaning out the PBGC and Congress having to bail them out.)

I think that really accelerated the number of companies no longer offering pensions.

But. anyway- sure the tail end obligation makes it tough on the company, but why aren’t companies putting the same amount they were contributing to the pension — into the 401k?

[LivingAlmostLarge]

A lot of companies froze their pensions at about the same time as DH’s company. One reason was the companies had to deposit a higher reserve amount if they were covered by the pension benefit guarantee corporation (there was some concern of companies defaulting on the pension and cleaning out the PBGC and Congress having to bail them out.)

I think that really accelerated the number of companies no longer offering pensions.

But. anyway- sure the tail end obligation makes it tough on the company, but why aren’t companies putting the same amount they were contributing to the pension — into the 401k?

Because no one is. I mean seriously I would love a 15% match or even 10%. But the most we ever go was like 6% which seems to be employer standard.

[Like2Plan]

Because no one is. I mean seriously I would love a 15% match or even 10%. But the most we ever go was like 6% which seems to be employer standard.

I guess if you look at it another way—conventional wisdom is pensions are at risk of being underfunded and mismanaged, but how are 401K s going to be more successful than pensions when they receive less funding (from employers) and they run the same (or higher) mismanagement risk. (By mismanagement, I mean poor investment choices -for example such as 100% cash position or on the other hand too much risk). Or, taking an early distribution. As in cash out on every job change.

The problem with any retirement system (I think) is that it is not something you really feel the effects from it until much later.

[ua_guy]

Because no one is. I mean seriously I would love a 15% match or even 10%. But the most we ever go was like 6% which seems to be employer standard.

Finding a 6% match is pure gold.

Many are now doing only 3% contribution. A ton who are doing 50% matching up to the first 3%.

The bottom of the barrel are now doing year-end matching, only, or not contributing at all. They will match your annual contribution up to 3%, if and only if you are employed with them on the last day of the year. Nickel and dimes here and there to reduce their obligations.

There used to be an expectation that if you worked a long time for an employer and spent so many of the best, most prime hours of your life with them, they would help you to have a pot to pee in when you were old and worn out.

Now you pay for it. You assume all the risk. Salary should have seen a commensurate increase, but that didn't happen either. A lot of people are finding themselves in the position of paying to support themselves now, and neglecting retirement planning all together. Many are set to arrive in retirement with almost nothing. As we all know, work involves not only time and effort, but also sacrifice. Wages do not cover the latter. Hell they barely cover the former.

There is no rule that says we do not deserve these things. Fight, fight, fight.

[LivingAlmostLarge]

I guess if you look at it another way—conventional wisdom is pensions are at risk of being underfunded and mismanaged, but how are 401K s going to be more successful than pensions when they receive less funding (from employers) and they run the same (or higher) mismanagement risk. (By mismanagement, I mean poor investment choices -for example such as 100% cash position or on the other hand too much risk). Or, taking an early distribution. As in cash out on every job change.

The problem with any retirement system (I think) is that it is not something you really feel the effects from it until much later.

It's not on the company. Now we will blame the person for not saving enough.

[Like2Plan]

But, do you think that is fair?

I don’t know much about the overall success rate of 401ks percentage wise, but I can think of quite a few anecdotal examples where the 401k did not work out as expected. (I guess because I am retirement age, I hear more about it).

A lot of people don’t give retirement much thought when they begin their careers. But, investing in retirement is not something you learn in a 30 sec sound bite. You have a choice of researching it yourself or seeking help from a professional (for a “cut”). The professional could be good or bad. They could give good or bad advice. They could be inordinately expensive on top of all of that (further reducing your chance at successfully funding retirement).

Then, you have to make elections and overcome any potential emotional baggage you might have. Like going to 100% bonds on dips. Or, staying 100% bonds because of fear of loss while ignoring inflation. (That was me when starting out).

It is too bad we couldn’t have something that takes the best part of all these different ways of saving for retirement.
Like put the company match in your account, but you can’t take distribution until you retire. The company match invested in a low expense target retirement date fund. And, maybe a bigger focus on the company match - like in the initial employment offer or something like that it would make companies more competitive. (I always study DH’s compensation offers when he is offered a job and the details of the 401Ks are sometimes difficult to figure out prior to onboarding. It makes it difficult to evaluate 2 offers side by side.)

[LivingAlmostLarge]

But, do you think that is fair?

I don’t know much about the overall success rate of 401ks percentage wise, but I can think of quite a few anecdotal examples where the 401k did not work out as expected. (I guess because I am retirement age, I hear more about it).

A lot of people don’t give retirement much thought when they begin their careers. But, investing in retirement is not something you learn in a 30 sec sound bite. You have a choice of researching it yourself or seeking help from a professional (for a “cut”). The professional could be good or bad. They could give good or bad advice. They could be inordinately expensive on top of all of that (further reducing your chance at successfully funding retirement).

Then, you have to make elections and overcome any potential emotional baggage you might have. Like going to 100% bonds on dips. Or, staying 100% bonds because of fear of loss while ignoring inflation. (That was me when starting out).

It is too bad we couldn’t have something that takes the best part of all these different ways of saving for retirement.
Like put the company match in your account, but you can’t take distribution until you retire. The company match invested in a low expense target retirement date fund. And, maybe a bigger focus on the company match - like in the initial employment offer or something like that it would make companies more competitive. (I always study DH’s compensation offers when he is offered a job and the details of the 401Ks are sometimes difficult to figure out prior to onboarding. It makes it difficult to evaluate 2 offers side by side.)

No I do not think that it's fair. But then again we are all about "personal responsibility." And so many are not about being responsible. There will be a huge problem when the majority people retire and do not have a pension defined benefit plan. I think it won't hit for another 10-15 years.