tradition pension vs 401(k)/403(b)

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I have a choice to make regarding retirement option at my job and I am hoping to get some feedback from this forum.

I work as Classified Staff at a public university in VA. Till now I have retirement benefits going into Virginia Retirement system (VRS). This is state managed tradition pension plan where one gets retirement benefits based on no. of years of service, last three years of salary etc. VRS benefit calculate is available at (http://www.varetire.org/Members/Calculator/Calculate.asp). IF I leave my job before retirement and want to transfer money out of VRS, I will get 5% of my salary for the years I worked including 4% interest on that money.

This month I am getting promotion and my position is now classified as instructor-level faculty position. Most of the benefits are the same, except choice of retirement benefits. I have to choose between tradition pension plan by VRS or 403b by fidelity or TIAA-CREF. In 403b option, my employer will put 10.4% of my yearly salary irrespective how much I put.

I am confused about which option to select. Based on my comparison, if I work for this employer till I retire (till 55-60 years), VRS will be the best option. But if I change jobs in next few years, 403b option will be better option.

What do you think I should do ? Anything I am missing here. Thank you very much for the feedback.

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A valid point, but then you would have to agree that most of his opportunities for increasing income will exist out of h... (more)

dshibb (Apr. 22, 2010 @ 11:59a) |

I always opt for 403(b), because I like to have the funds personally.

My fear with state retirement systems is the potent... (more)

mikeg1 (Apr. 22, 2010 @ 5:16p) |

Depends on the state. In California, they've already said that PERS and local retirement systems benefits are contracts ... (more)

calwatch (Apr. 24, 2010 @ 1:42a) |

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How old are you?

29 years and 6 months. Salary - 70k. Working for this employer for last 4 years.

Its a no brainer go with the 403b. If you switched over to a defined benefit pension late in life you'd make bank, but while your young they are putting a small amount away to meet the liability for you. Other better offers will come your way, and from someone who has taken part in writing golden handcuff agreements for other companies employees you better get a large payoff for agreeing at a young age to stay with a company/agency until retirement. In my opinion, any miniscule benefit(which is even debatable) in going with the pension until 65 doesn't even come close to preagreeing to turn down every good offer for the rest of your life.

Plus if you ran a comparison of doing the 403b(defined contribution) now and a pension(defined benefit) later in life against a defined benefit pension the entire time, I think you'd find that the former blows out the latter. All that means is that you seek out a defined benefit pension system when your in your 50s. In the meantime, go with the 403b.

I wouldn't say it's a no brainer. It's quite likely that the rate of return needed to match your defined benefit would be very optimistic to unrealistic. Before you make the decision, see if VRS has analytical tools that will estimate your benefits vs the rate of return required to "break even".

I'm an employee in another state's retirement system, our retirement system has these tools available on their website. In my case, it would take an average annual return in excess of 16% to break even. I don't think the investment choices offered can consistently achieve those returns.

Furthermore, you can also probably participate in your employers 403 or 457 plan (without match, or course) to supplement your pension plan.

There are lots of assumptions that need to be accounted for: Retirement Age, Years of Service, Risk Tolerance, Salary Expectations, Inflation, Likelihood of remaining in the system

At 29, with 4 years of service, you could retire at 55 with 30 years and start drawing that pension. Will you accumulate enough in the 403 to retire at 55?

Another consideration, if you select the pension plan, once vested, can you convert to the 403 plan in the future? If your plan permits that (some do), then you still have flexibility to take that killer job outside the system.

dshibb, most defined benefit plans are keyed to years of service. Why seek such a plan in your 50s? you would not accumulate the years and salary inflation that makes such a plan lucrative. Seems like the opposite would be preferred, work 30 at defined benefit, collect pension, then seek a defined contribution plan later in life.

It's very common for the defined benefit pension plans to be better deals than the defined contribution ones, given the big assumption that you plan to stay with the same employer until retirement. What you said in the OP was probably correct: 403(b) will be a better choice if you change jobs before retirement.

Not a no brainer.
What is the vesting period?
Most pension plans will have a vesting period after which you 'll receive a pension even if you leave. For example you work there 10 years with a 2.5% yearly multiplier and a 70K salary. You'd get a pension of $16,250 a year (25% of 70) when you do retire. That is way better than you'd get with any defined contribution.
I wish I had stayed with the defined benefit plan 10 years ago when I had a faculty job.
Other considerations:
can you move your defined contribution plan to an IRA after you leave? Unlike 401Ks, the plan sponsor gets decide if you can move it - mine is stuck at VALIC with 3%+ fees on index funds.
Is your plan close to funded? It is very likely in the future that public sector pension plans will need to be cut or get a huge infusion of taxpayer money. Don't forget thet state legislature can change your formula anytime they want.

Your calculator link didn't work, so I don't know your pension numbers. It looks like VA State employees are paying into SS so I can't imagine your DBP would be exceptional. It's probably similar to the FERS with ~1/3 DBP, 1/3 SS, 1/3 self. I think I would lean towards the 403b since the odds are you may switch employers in the future. I would max out a Roth, add another 5% to the 403, get an HDHP and max out the HSA and sleep very well at night.

dshibb said: Its a no brainer go with the 403b.

I disagree with this. I have a state pension in another state, and figured out that I would have needed annual returns of almost 20% on my and my employers' contributions to match the defined benefit I receive, so it was no-brainer for me to stay in the defined benefit plan.

Even if you leave, it would probably make sense to leave your contributions in the system so long as you are vested and will eventually receive a benefit.

Furthermore, the likelihood of state/local governments 'raiding' or drastically altering pension plans is very, very low (or impossible) since most states put the contributions into a constitutionally protected trust fund.

As someone who was offered the same choice (though at 9% for the 403b instead of 10.4%), here's what my thinking was:

1. If you get an offer that blows you out of the water five years from now, you're going to get a pension based on having worked X number of years at Y salary. Usually, whatever that X number is defines the percentage of Y that you will get once you've retired.

2. The 10.4% they put into your 403b is before you contribute anything at all to your own retirement accounts. If you decide to max out your Roth every year and contribute 5% to a traditional IRA, you'll be getting 6-7% (historically speaking) compound interest every year on that 15+% of your salary.

3. This is merely my opinion, but the enormous cost of pension plans and leads me to believe that at some point states won't be able to afford them. The federal pension benefit guarantee also doesn't reassure me. Money in your own IRA is your money, managed in whatever manner you choose, and should always be there for you, no matter what happens with state or federal budgets.

EDIT: Realized this had wrong info. I was 24 and I took the 403b, then ended up leaving that job by 29.

People recommending the defined benefit at such an early age do not understand the key characteristics of pensions. 1st of all they are correct that defined benefit plans usually do put away a considerably larger amount towards retirement at any age. But actually think how a defined benefit works. The company/agency has an annual income target that is equal for every participant, but they have people at different ages. So they have to fund *several times* more money for the older individuals than the younger ones because of less time for time value of money to work on that funding. That is why this is true: go through the calculation of the decision for someone 25 and 45 and the benefit for the 45 year old picking the defined benefit goes through the roof relative the younger individual.

Now realize that one offer for even a 20% increase in pay blows out all of your projections. He's way to young to pre agree to not do something that much in his interests. Now let's address the 10 year vesting example someone provided above. Run a comparison of someone who did defined contribution for the first half of their career and then went to defined benefit for their second half and someone who did defined benefit for the first half and switched to defined contribution. Its not even close.

All of your comparison models take into account that your staying with the company until retirement. Compare the benefit with someone who arrives a little later in age and starts the defined benefit you'll realize that he/she that started later is getting a substantially higher return than you are.

Either commit to staying in the job because you like the work and not because of any smart financial reasoning and select the defined benefit plan(and try to contribute more to a 403 and 457) or go with the 403b. Otherwise, you are using incomplete models to make your decision.

PMonkeyDishwasher said: ...but the enormous cost of pension plans and leads me to believe that at some point states won't be able to afford them. The federal pension benefit guarantee also doesn't reassure me...

so far, the federal governments response to back-stopping things it can't afford is just to print more money

I think the risk of not getting paid at all is slim --- but my worry would be getting delayed payment (some kind of IOU's or delayed resolution) --- and delayed payment during your retirement years may result in no payment when you need it

I think the answer here is to make sure you have both kinds of plans --- I wouldn't forgo the pension entirely

cherry3m said: dshibb, most defined benefit plans are keyed to years of service. Why seek such a plan in your 50s? you would not accumulate the years and salary inflation that makes such a plan lucrative. Seems like the opposite would be preferred, work 30 at defined benefit, collect pension, then seek a defined contribution plan later in life.
If you truly stick with the employer for long periods (most of your career) chances are the defined benefit might work out better. But the big risk is will you actually stick around 25-30 years or so? This is an individual decision.

Consider the following scenario:
John, age 50, and Jane, age 25, both start working for the state. They are both in the same pension plan: vested if you have at least 10 years of service and can retire at age 60 (with at least 10 years of service). Get paid 2% of final salary for every year of service. Let us also assume that they both make the same salary: say start with ~50k and in ten years have a salary of ~75k.

After 10 years, John is 60 and decides he wants to retire. Gets 20% of 75k = 15k in pension
After 10 years, Jane is 35 and gets a great offer and decides to join a private employer (or moves for family reasons whatever). She is vested in the pension plan and hence can get the same pension. She is entitled to 20% of 75k = 15k in pension but AFTER 25 YEARS (when she becomes 60).

John and Jane, put in the same no. of years, earned the same salary, made the same contribution (if one is required or one made by their employer) to the pension plan. But who gets the better deal?

dshibb said: ... go through the calculation of the decision for someone 25 and 45 and the benefit for the 45 year old picking the defined benefit goes through the roof relative the younger individual.
I was typing my post above before I saw this. I completely agree. The older you are, the less time you have to "wait" to get the same benefit (ETA: for a fixed no. of service years).

nmphage33 said: Not a no brainer.
What is the vesting period?
Most pension plans will have a vesting period after which you 'll receive a pension even if you leave. For example you work there 10 years with a 2.5% yearly multiplier and a 70K salary. You'd get a pension of $16,250 a year (25% of 70) when you do retire. That is way better than you'd get with any defined contribution.

For a younger individual, quitting at say 35 (having put in 10 years of service), the ~$16k has to wait several years (20-25 years). No "growth" to the pension benefits if you quit but ~16k after 20-25 years is worth much less than 16k today.

Another important consideration: the benefits formula is essentially a promise. What is the likelihood of that promise being broken?

According to the FY2009 report of the VRS (here), it's funded 84%. I.e. that retirement system has a 16% shortfall over liabilities. While it may be made whole through higher taxes, consider the possibility of benefits cuts in your risk assessment.

Defined contribution on the other hand is by definition always fully funded. There's no promise. You get what you have.

In terms of the solvency of many of these government pension plans it may not be before we retire, but one of these days either changes will have to be made to reduce benefits or they are going to just collapse by the sheer volume of funding requirements. Again that may be 50 years down the road, but I'm not taking that risk unless its my last 10 years of employment because the pbgc is a crapshoot and I don't want to be one of the unfortunate individuals who has all their retirement dreams slashed because my pension got transfered over to the pbgc.

Let me tell you something if a lot of these golden handcuffed supplemental pension plans that write for key execs of banks, credit unions, manufacturing companies, etc. had to actually forgo anything in the deal(like their match)almost none of them would take the deal. Why? They are smart ceos, cfos, presidents, etc. in their 30s, 40s, and 50s that intend to work until their 70 and who aren't very keen on having some form of compensation being only available if they stay their until retirement. The fact that it is supplemental(I.e either they want this extra benefit or they don't) is a lot of times the only reason why they allow the plan to be developed.

Now if these execs are squeemish about taking a *supplemental* pension why would you want to forgo something to get one.

uutxs said:
Consider the following scenario:

John and Jane, put in the same no. of years, earned the same salary, made the same contribution (if one is required or one made by their employer) to the pension plan. But who gets the better deal?


True, but there are a few variables not considered:

1. Some pensions (OP should check with VRS) permit a one-time second chance election to convert from the pension plan to the defined contribution plan. In your example, a participant in such a plan would walk away after ten years with a lump sum defined contribution account that they direct. The value of that conversion may be more or less than what would have accumulated under the defined contribution plan.

2. Many state university employees can transfer to other jobs anywhere within the state system and retain their service credit as an active participant. Employment options are not limited to one institution, but any institution in the state. Sure, it's a limitation, but in my state, there are 11 universities, 28 colleges, 67 county school districts, umpteen state agencies, the legislative branch, police departments, sheriffs, fire districts, and on and on. Job transfers within my system have increased my salary 833% over my 20 year career.

Under a defined contribution plan, the 10% invested when I earned $20K was $2,000 and whatever my investment choices earn, I get to keep. Under defined benefit, my benefit for that service year is an annual annuity equal to 2% of my final average salary (let's say $150,000 x 2% = $3,000) from my retirement age 55 on. That $2,000 defined contribution would have to grow to $46,117.50 over 30 years to break even, a return of over 11% per year for 30 years. I have been unable to get that kind of return on my 457 with any degree of consistency.

OP, this decision could make or cost you hundreds of thousands. Be sure you understand the provisions of each of your options and how future employment decisions would be impacted. And don't overlook the fees you'll pay on the 403 plan.

Changed "benefit" to "contribution"

cherry3m said: uutxs said:
Consider the following scenario:

John and Jane, put in the same no. of years, earned the same salary, made the same contribution (if one is required or one made by their employer) to the pension plan. But who gets the better deal?


True, but there are a few variables not considered:

1. Some pensions (OP should check with VRS) permit a one-time second chance election to convert from the pension plan to the defined benefit plan. In your example, a participant in such a plan would walk away after ten years with a lump sum defined contribution account that they direct. The value of that conversion may be more or less than what would have accumulated under the defined contribution plan.

2. Many state university employees can transfer to other jobs anywhere within the state system and retain their service credit as an active participant. Employment options are not limited to one institution, but any institution in the state. Sure, it's a limitation, but in my state, there are 11 universities, 28 colleges, 67 county school districts, umpteen state agencies, the legislative branch, police departments, sheriffs, fire districts, and on and on. Job transfers within my system have increased my salary 833% over my 20 year career.

Under a defined contribution plan, the 10% invested when I earned $20K was $2,000 and whatever my investment choices earn, I get to keep. Under defined benefit, my benefit for that service year is an annual annuity equal to 2% of my final average salary (let's say $150,000 x 2% = $3,000) from my retirement age 55 on. That $2,000 defined contribution would have to grow to $46,117.50 over 30 years to break even, a return of over 11% per year for 30 years. I have been unable to get that kind of return on my 457 with any degree of consistency.

OP, this decision could make or cost you hundreds of thousands. Be sure you understand the provisions of each of your options and how future employment decisions would be impacted. And don't overlook the fees you'll pay on the 403 plan.

Regarding (1), I believe OP said "IF I leave my job before retirement and want to transfer money out of VRS, I will get 5% of my salary for the years I worked including 4% interest on that money." That hardly sounds lucrative when OP's defined contribution option provides a 10.4% employer contribution, no employee contribution necessary. Dont know what the vesting period for that is, but it usually is shorter than that for a defined benefit plan.

Regarding (2), I understand the "portability" of state retirement plans around the state in almost any state agency and political subdivisions. But it still restricts your employment, if you want to reap the full benefits of the pension plan.

Ultimately, as I indicated earlier, this decision depends on one huge unknown, which only the individual can make: Are you likely to continue in that plan (regardless of employer) for the long haul? For younger employees, the pension plan might come out ahead if you stick around for 25-30 years (as your little example shows).

BTW, OP didn't provide much details about any employee contribution required for the pension plan. This needs to be accounted for, to do a fair comparison with a defined contribution plan. Also, OP never mentioned 2% per service year formula (unless I missed it).

Here is something I got off of their website. Dont know if all this applies to OP (bolding mine):

VRS Handbook for members
Member Contributions
VRS is funded by contributions from employers and members. The member contribution is 5 percent of your creditable compensation. Creditable compensation is your annual salary, not including any overtime pay, payments of a temporary nature, or payments for extra duties, such as pay to teachers for coaching, advising special activities and other payments not included in contracts. Many employers pay the member contribution for their employees. Member contributions are refunded to members who take a refund at termination of employment.

Employer Contributions
Covered employers pay an additional amount (called the employer contribution) based on their total payroll for active members at a rate recommended by the VRS actuary and approved by the General Assembly. Both member and employer contributions are invested to provide future benefits. Employer contributions are not credited to the member account and are not payable to the member through a refund.

I dont know if OP's employer makes this 5% employee contribution to the pension fund.



Virginia Retirement System
Benefit Calculation

The amount of the retirement benefit under VRS is 1.7 percent of average final compensation multiplied by years of service credit, with a reduction factor applied for early retirement.

Wow that is actually a really, really bad pension deal. If you participate in the pension and then leave we will refund the money you contributed to the plan plus subpar interest on that money.

Need I say again its a complete no brainer. Go with the 403b. If you want to truly get the real benefits of a defined benefit plan figure out a way to revisit this in your last 10 - 15 years of employment before you retire. That is of course if they are still good deals then. And if they aren't then you will be even more happy that you didn't get into this one now.

By the way a one time switch from the pension plan to defined benefit doesn't make any sense they are one in the same. Actually technically speaking, a defined benefit is one type of pension plans. Also the value of a conversion/rollover from a defined contribution plan will always be the same as what was accumulated in the plan. That's the whole point its a defined contribution and its your money. Your #1 doesn't make any sense from start to finish.

Slightly OT, but IIRC the PBGC only guarantees private defined benefit plans (not state ones).

Thank you very much for excellent feedback. There are two strong points made by opposite camps that I need to evaluate using benefit estimator/retirement calculator.
1) Rate of return in defined benefit vs defined contribution for 10,20,30 years of service. Based on feedback, tradition pension plan will give return that is difficult to achieve in 403b plan. This camp supports the choice of tradition pension plan.

2)Defined benefit is better choice for people who are near to their retirement age than younger people like me. As I understand, this is because defined benefit is not inflation adjusted. It is depending upon Last 3 years of average salary for Inflation. This camp supports the choice of 403b plan.

I need to think a lot about this choice. Here are few questions asked:
1) I don't contribute anything to VRS. My Employer(my department) contributes 11% of my salary towards VRS. Benefits are vested after 5 years and I have been working with this employer for 4 years now.
2) After or before vesting, for some reason, if I want to take my money out of VRS, then I only get 5% of salary (even though my dept. puts 11%) plus 4% interest. VRS doesn't kick me out. This is only if I want to roll-over to 401k/403b.

3) This is one-time not reversible choice. Except I change the job to other state job.

4) My position is 90% research + 10% teaching position. My primary skills are in IT and thus, I can try for other IT jobs in future, but I am not sure whether I can get anything better in terms of salary and benefits anywhere else. All my experience is working at research organizations and thus, I feel I may not be welcomed in corporate IT world.

5) In either of the choices, I don't contribute. Thus, I think it should not matter in calculation. Anyway, I put $5000 to Roth IRA and 5% to employee 403b account.


I will try to generate some numbers soon with some assumptions and post here for the feedback. Thanks again.

Your understanding:
1. The rate of return is only not duplicatable if its your last 10-20 years of employment. Longer periods and its a tough call if you could do 403b first and then switch.
2. Not because of it being inflation adjusted because its over a larger span of time. If a person is 50 and is going to retire in 10 year the employer needs to stuff thousands upon thousands into the plan to pay for him because the benefit is coming due so soon. If your younger they only need to put a small amount in because a) they will be putting in many years of contributions in to meet that eventual liability of x a year in retirement and b) those contributions to meet that benefit liability will have more time to grow.

Questons:
1. Ok still pull the money out and into tIRA you are walking away better than someone that was invested in the markets these last couple of years, and its just a better deal for you going forward again unless you absolutelty love the job and don't want to do anything else and your employer wouldn't agree to you being let go and rehired to switch to the defined benefit later.
2. Same as above.
3. If you love the work and plan on never changing ask your employer if you could be let go and rehired to make a 2nd decision later.
4. Dont allow an assumption that may or may not be true to remove possible future oppurtunities from you.
5. So the part mentioned above that requires 5% of salary towards the defined benefit plan isn't true?

Thanks for clarifying that employer pays your part of the 5% to the pension plan. That makes a big difference. Can you also clarify if the pension formula is 1.7% per year of service (subject to your vesting, staying for the minimum no. of years etc.).

As has been said before, one big question is, how likely are you to stay with the state job (where you can participate in VRS) for the next say 25 years? If you do stick around till normal retirement age, your pension might valuable. But if you leave in 5-10 years, the defined contribution would be much better.

Remember that you could move out of state to say another university (and still stay within the "research/teaching" field) where you will not be in VRS anymore. If you are single, or if your SO finds a great offer elsewhere, there is a very good chance you will have to move.

Would you contribute to the 403(b) otherwise, and does the employer's 403(b) contribution count against the maximum contribution you may make under the 403(b)?
Could you prospectively transfer back to the defined benefit plan once you had a better indication of where you wanted to go in your career, and buy back the time when you were in the defined contribution only plan?

One point that dshibb drives at is that it is much easier to take greater risk earlier in life. Defined benefit plans are supposed to be taking an average amount of risk for the member population. Therefore, the defined contribution plan will have better "returns" for those later in life than earlier, where it is easier to invest more aggressively. Of course, you have to be disciplined enough to do so and not crack when the value of your 403(b) drops 50%, as my 457 did during the nadir of the recession last year. You pay into Social Security, so you at least have the same defined benefit fallback that most employees have.

I don't pay into Social Security, and the contribution rate for the contributory plan was less than that what I would have paid in Social Security, so I opted for the contributory option. In addition, I max out my 457 and Roth every year, and so I would run out of tax advantaged accounts to put my savings should I have chosen the non contributory plan.)

dshibb said: By the way a one time switch from the pension plan to defined benefit doesn't make any sense they are one in the same. Actually technically speaking, a defined benefit is one type of pension plans. Also the value of a conversion/rollover from a defined contribution plan will always be the same as what was accumulated in the plan. That's the whole point its a defined contribution and its your money. Your #1 doesn't make any sense from start to finish.

Oops, my bad. I meant a one-time switch from defined benefit to defined contribution.

It's not only changing job you should consider. Pension can and will change. The defined benefit pension is highly unlikely (considering retirement plan trends) to remain the same and the terms or even existence can virtually change at any point. Many companies just phase them out by freezing them at the level of the accrued benefits at the time of closure.

Typical scenario to consider: In 5 years they freeze the plan. You're 34 having worked there 9 yrs. Your benefits are thus calculated based on 9 yr of service, and your last 3 yr of pay until that point. Fast forward 30 yrs later, that defined benefit which does not index on inflation UNTIL you retire (even if it does while in retirement), is worth maybe a third in today's dollars than it's worth at the time they froze the plan which is not much anyway. Bottom line, it'll be worth very little in pension but you'll have given away 5 more years of 403b contributions they could have made to you if you switched now.

10.4% contribution without match isn't bad at all as far as employer contributions are concerned so personally I'd switch to 403b considering the chances of changing job or having plan terminated before you retire.

I think a lot of folks are having a hard time understanding my description of how defined benefit plans work. It isn't because of different risk and return of different ages. At least that is a minor point. Allow me to make this point a little more clear.

Let's say you have a person who's worked at a company for 40 years and one that's worked there for the their last 10 years. Now person a) is going to receive 80k for the rest of their life and person b) is going to receive 40k. Now let's say time value calculator I bet they would only need to put in let's say $7k to $8k a year to meet that liability. Ok decent sized chunk for sure. But now let's take a look at person b). My guess that to raise 1 mil for a 40k a year pension requires the employer to put away at least $60,000 a year into the pension plan to meet the liability.

This example can illustrate how in a defined benefit plan a new hire in his/her 50s could be walking away with a 10 times better deal than someone who has put their whole life into a company. Because the older guy is getting offered something that would have cost him 10s of thousands to get while the person who is younger is getting a retirement deal that's a tenth as good.

Cherry, That is like the dumbest option anybody would ever select. And pension plans offer that because their are folks just dumb enough to select it and they save a lot of money if someone does.

Now if the opposite was true where there was a one time switch from defined contribution to defined benefit I'd jump on that and would even have the exact year in my mind when to make the switch.

dshibb said: Allow me to make this point a little more clear.

Let's say you have a person who's worked at a company for 40 years and one that's worked there for the their last 10 years. Now person a) is going to receive 80k for the rest of their life and person b) is going to receive 40k.


Your point is less clear.

Lets assume a and b have the same AFC of $100,000. If the plan pays 1.7% for each year of service, a receives $68k per year, b receives $17K. B's prior 401/403 would need to provide $51K per year to provide the same standard of living in retirement. The NPV of a 30 year $51K annuity at 5% discount is a whopping $784,000, and that doesn't provide cola adjustments in retirement. How confident are you that your 401/403 contributions will grow to more than $784K+ in 40 years?

It doesn't matter when/how much the employer has to put away, it only matters how much cash is flowing to me, as long as the plan is funded.

dshibb said: Cherry, That is like the dumbest option anybody would ever select. And pension plans offer that because their are folks just dumb enough to select it and they save a lot of money if someone does.

Are you saying it is dumb to switch from DB to DC? Why then, is it a no brainer for the OP to select DC?

The option exists for someone who is far from retirement age that takes a job outside the retirement system, in another state perhaps. It's likely a wise choice because, as was pointed out earlier, the AFC is frozen until you reach retirement age.

dshibb said: Now if the opposite was true where there was a one time switch from defined contribution to defined benefit I'd jump on that and would even have the exact year in my mind when to make the switch.

It's an option in my state's plan.

The major hurdle for switching from DC to DB is the employee's DC account has to be sufficient to fund the actuarially determined buy in price for their years of service/AFC/age. Hope your investments did well while you were DC, because they probably will not be sufficient to fund the buy in.

dshibb said: In terms of the solvency of many of these government pension plans it may not be before we retire, but one of these days either changes will have to be made to reduce benefits or they are going to just collapse by the sheer volume of funding requirements. Again that may be 50 years down the road, but I'm not taking that risk unless its my last 10 years of employment because the pbgc is a crapshoot and I don't want to be one of the unfortunate individuals who has all their retirement dreams slashed because my pension got transfered over to the pbgc.This is exactly what happened at my company. If everything had continued as it was (which it would have done, absent one ruinous decision by company management compounded thereafter by several absymally stupid ones) I would have retired with a modest pension to supplement my 401(K) and been perfectly comfortable. Unfortunately, we have just been cast into the untender embrace of the PBGC. Current retirees from my company are looking at a somewhat reduced benefit - and people who have decades to go before retirement are looking at being screwed.

Of course, that really doesn't affect the OP right now - under ERISA, the PBGC cannot accept liability for government-employee pensions - but I would not be surprised to see Congress set up something like the PBGC for publicly funded (municipal, state, federal) pensions. Pension costs are going to bring local governments to their knees as the boomers start to retire. Academic pensions are generous, but in many states benefits for police, fire and other public-safety employees are simply INSANE - retire after 20 years with a full pension, etc.

784,000 on a 10% of a salary match for 40 years? Easily! Run it if you want, you'd need only like a 5% average return depending on what your changes in salary would be during that period.

Your right it only matters how much cash is flowing to you, but illustrating the vast discrepencies in employer funding does show why defined benefit is a superior vehicle for late in career and defined contribution is usually better for early in the career.

Cherry!!!, your not getting it. How many times do u have to say this?? Defined benefit is a superior vehicle when someones older and defined contribution is better for someone younger. A deal to switch from defined benefit to define contribution right when define benefit is starting to catch up in value(employee is older) is dumb. So there is a huge difference between someone making the correct decision early to go with DC and someone making the wrong decision when they are older to switch from DB to DC.

Cherry, your state must be screwing you on the actuarial amount to buy into a defined benfit plan later on. It costs a pension plan a very low amount to fund the liability for a 20 something individual. If your 403/401 account earned even a small return during that time you should be able to cover that liability quite easily.

And cherry, your talking to a person that works in designing supplemental pension plans referred to as SERPs. Not to long ago we even wrote our first solo defined benefit plan for a self employed individual(granted with a considerable amount of help from some 3rd party admininstrators). You're trying to argue with someone that has looked at the internal numbers on pensions.

dshibb said: 784,000 on a 10% of a salary match for 40 years? Easily! Run it if you want, you'd need only like a 5% average return depending on what your changes in salary would be during that period.

Technically, it's only on 30 years of salary match with 10 years on hold (while B participates in the DB plan). Also, B's salary likely starts out low and increases over time, so it's actually more like 8% after fees. Possible, but not easy.

I am wondering what tax or legal issues may come into play with pension vs. 403b. Is there any reason pension income is treated differently than 403b/401k income when retired? I thought that some taxes or items related to taxes excluded pension income but I lost my pension a few years back so never looked into it.

Correct 30 years of match and 10 years - not on hold as it continues to grow, but without additional match contributions. That is how I ran it and I adjusted the pmt to 7,000(10% of 70k which is a low weighted average) to arrive at a needed return of ~5% which is a low needed return, odds are that you are going to earn at least 8%.

So yes your defined benefit simulation for those first 30 years got trounced by the defined contribution plan. Now do the OP a favor and get on board because the right decision is obvious to those that work in this field.

dshibb said: Cherry, your state must be screwing you on the actuarial amount to buy into a defined benfit plan later on. It costs a pension plan a very low amount to fund the liability for a 20 something individual. If your 403/401 account earned even a small return during that time you should be able to cover that liability quite easily.

But you're not gonna switch from DC to DB as a 20 something, you're gonna switch as a 50 something, right?

I suggest it's a matter of perspective. As a plan participant, only the cash flows and opportunity cash flows matter to me. I submit that the break even point is much closer, and the decision less obvious than you suggest. The primary variable that we cannot control is the OP's future plans. There are clear advantages and disadvantages to each vehicle, it's up to the OP to pick the one that best suits his situation.

I can advise the OP that 15 years ago I was in a very similar situation to his. I chose DB, moved around in my system for the last 20 years with great opportunities, and will hopefully retire young with a nice pension. My 457 elective deferrals over the last 20 years have woefully underperformed what would be required to replace my pension benefits.

Peace.

Skipping 23 Messages...
Depends on the state. In California, they've already said that PERS and local retirement systems benefits are contracts that cannot be broken. Even when Vallejo filed bankruptcy, their retirement obligations persisted - in terms of service credit earned previously. Also CA has reciprocity between PERS and the local retirement systems (and the county and city retirement systems themselves), so I have no problem assuming I keep my career in CA.

I don't get Social Security so I need a defined contribution leg to my retirement stool (Social Security, DC/DB plan, IRA or other personal savings). The OP pays into Social Security, so at least he shouldn't starve if the mother of all crashes comes down.



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