Defined Benefit Vs. Defined Contribution Pension

[Spanky]

According to this research paper (beow) from Wharton, the DC plan may be more beneficial for younger employees and those who prefer to handle their own money and switch jobs. The actual expenses to employers between the DB and DC plans are similar. Please do not shoot me since I am only the messager.


Understanding the Defined Benefit (DB) versus Defined Contribution (DC) Choice:
www.pensions-institute.org/workingpapers/WP2005-4.pdf

 

[Brat]

IMHO we are in a transition phase for pensions.  Many Americans are learning that defined ben plans cannot be trusted.  The transition from DB to DC will be easy for younger workers, unfortunately workers in late middle age are in a squeeze.

We really have two economic groups: skilled workers and unskilled workers.  Skilled workers will save and manage money from defined contribution plans.  Unskilled workers rarely save for retirement for economic and/or behaviorial reasons.  Unless our society is willing to let the unskilled aged live on the streets some kind of social safety net will be necessary, which is why Bush's plan for SS will never work. 

 

[mickeyd]

DB vs DC?

It's all speculation at this point, but you will find very few beneficiaries of DB plans that are not very content with their retitement plan that is supplimented by their 401(k) plan and IRA.

 

[Brat]

Perhaps the approach that will meet the needs of employees and business is a program that includes a modest DB with a DC. 

The advantage of DB plans for employers is a golden handcuff for hard to find skill sets but, given the frequency that DB plans are going bust, they may not achieve that goal.  The other aspect of DB plans (and vesting of employer contributions in DC plans), that few know about is that actuaries forcast the number of employees who don't vest - in the 'good old days' young women.  Firms like AT&T made big promises, then came the 60s and 70s when female turnover dropped and created significant under-funding.

 

[jug]

We really have two economic groups: skilled workers and unskilled workers.  Skilled workers will save and manage money from defined contribution plans.  Unskilled workers rarely save for retirement for economic and/or behaviorial reasons.  Unless our society is willing to let the unskilled aged live on the streets some kind of social safety net will be necessary, which is why Bush's plan for SS will never work. 

My question is what is "skilled" and " unskilled" ?  I'm not trying to be contentious, but do you mean educated and non-educated.  I work with many "educated" people, and as far as I'm concerned, especially those in management of this whitecollar government wage-slave establishment, they are relatively unskilled and lack competence in what they do, so they become managers of people who do know what to do.

But Im digressing, I guess you would mean low income as compared to middle to upper income.  For instance, someone who shovels horse crap all day at 8 bucks an hour would be considered unskilled, but someone who sells stocks and bonds for 200K a year would be considered skilled due to difference in income.

To me they are doing the same thing, except the guy who cleans up the crap is more essential.  Skill is a relative term, there are many doing skilled work who cannot seem to make much of a wage.  Taking care of old sick people to me takes skill and persevarance that is gained with experience but yet the person is lowly paid. 

I think what we should say is rather low wage vs. middle and high wage.  Its simply a matter of what comes in, and what goes out.  Some of us here were able to plan their lives for ER, some here werent due to circumstances, such as marriage, kids, bad kids, worse kids, kids that bankrupt you, you get the picture.  Im still trying to get my 27 year old off of my "payroll".  He is currently freaking out about my impending ER.

BTW, my wife and I are starting a club "Seniors gone wild".  Our motto is simple "screw all the hangers on and ball breakers in our lives"

If you work at McDonalds for 30 years, pay rent, and utilities, you may not have much to contribute to a DCP.  But you are quite skilled at running that shop.

To be honest, there are currently different classes of people and what Ive seen living on the streets are mostly mentally ill people, skilled and unskilled.

Those without much in pension in old age will end up in a room or government project somewhere, to do otherwise would cause a huge uproar in this country.

I dont think things are going to change much, just that more money is going into the pockets of the big guys taking from the wage-slaves, but eventually the pendulum will swing back when the big boys realize the wage-slaves have had enough and call for their "heads" on a pole.  History always repeats itself.
jug

 

[Brat]

By 'skilled worker' am describing a person who has a basic financial education and who earns enough money to put some aside for retirement. I have met 'skilled workers' who have no financial education and who save not a dime. A 'skilled worker' can be an electrician or a CFO. I have met both at each extreme.

The reality is that few unskilled workers have the opportunity to save for retirement because their earnings are sufficient only to meet basic life expenses. Whether we like it or not society will be covering their substance in old age, even if they worked for an employer with a DB plan it is rarely sufficient.

 

[jug]

The reality is that few unskilled workers have the opportunity to save for retirement because their earnings are sufficient only to meet basic life expenses.  Whether we like it or not society will be covering their substance in old age, even if they worked for an employer with a DB plan it is rarely sufficient.

I agree with you on all of this, but what you are speaking about in the future is what is happening now.  Those whose wages werent barely sufficient, or those who pissed away every dime or those who had severe circumstances were not able to put away enough to sustain the life they prefere.

These people are barely making it, with health problems covered by medicare/caid, getting food stamps, section 8 housing subsidies.  They are living from check to check.  It all exists today, and will exist more or less in the future. This is the reality of how you treated life or in probably just as many cases, how life treated you.

There is an old saying "Man plans, G-d laughs"  All of your good life plans about FIRE can go away in a snap when life throws you a curveball
jug

 

[HFWR]

My definition of skilled v. unskilled: nearly anyone can shovel manure or flip burgers. Not everyone can run a spreadsheet, design a circuit, blah, blah, blah.

Though I've met my share of "skilled" workers who shovel a great deal of horse ****!! :

 

[Brat]

My definition of skilled v. unskilled: nearly anyone can shovel manure or flip burgers. Not everyone can run a spreadsheet, design a circuit, blah, blah, blah.

Though I've met my share of "skilled" workers who shovel a great deal of horse ****!!  :

Absolutely!!! 

A significant % of those who are able to save for retirement are living in the now.  You don't need to be able to run a spreadsheet or design a circut to prepare for retirement, but you do need to save and invest prudently. 

When I started at a Fortune 500 company I was shocked at the portion of the workforce who weren't participating in the 401k - including many in HR!  I did what I could to change that, the pep talk at hire isn't enough.

 

[yakers]

I think the original post about DC plans being potentially better than DB plans is spot on. When the Federal Govt switched from DB to DC in the 1980s I looked at the plan and *if* a young employee put away the max contributions then they would beat the previous DB plan. But this is based on a long term analysis of the market. It would be possible to catch a long negative market and not do so well. And the market fluctuations can be stomach churning. But the better potential is there.
And since we are mostly rational people we adjust to the incentives of each system the incentive under the DB was to get a "high three" regardless of overall career earnings. This reinforces the seniority concept. Under the DC program the incentive is to get as high a grade as possible as young as possible. Under this the reward for jumping to new jobs and relocating for promotions is increased.
But probably the biggest change in work motivations comes from the portability of the retireent funds to new employeers (and in and out of the Fed Govt system) which may be one of the causes of decreased loyalty which is sometimes discussed on these boards.

 

[tozz]

Hmmmm...  The consensus at my former workplace was that the federal CSRS DB plan was considerably better than the newer FERS hybrid DB/DC plan.  Of course, you had to stick with one employer for the duration.  And my gut check reaction is that the DB plan was dropped in 1984 to save the federal government money, not to benefit employees. 

When I was offered an early retirement package last years, only the CSRS types were able to take it.  I don't know all the particulars, but the FERS folks got killed with the under-55 penalties. 

I think the original post about DC plans being potentially better than DB plans is spot on. When the Federal Govt switched from DB to DC in the 1980s I looked at the plan and *if* a young employee put away the max contributions then they would beat the previous DB plan. But this is based on a long term analysis of the market. It would be possible to catch a long negative market and not do so well. And the market fluctuations can be stomach churning. But the better potential is there.

 

[SteveR]

Absolutely!!! 

A significant % of those who are able to save for retirement are living in the now.  You don't need to be able to run a spreadsheet or design a circut to prepare for retirement, but you do need to save and invest prudently. 

When I started at a Fortune 500 company I was shocked at the portion of the workforce who weren't participating in the 401k - including many in HR!  I did what I could to change that, the pep talk at hire isn't enough.

Skilled vs unskilled may not really be the issue. It is smart vs no so smart with respect to living within your means and understanding that if you live through today you will have to deal with tomorrow. I know many folks who might be considered in either group that make good money but live only for today. The color of their collar is not the significant factor it is the wish to be "the ant vs the grasshopper."

 

[alphabet soup]

SteveR, I agree with you up to a point. My wife and I always earned incomes that were slightly above average and saved one income throughout our working careers.

This enabled us to retire at age 49 with a very good likelihood we would be comfortable.

A DB pension and healthcare certainly helped. As did discipline and focus.

My problem is that we are moving towards a workforce reality of lower wages and minimal benefits. Millions won't have the opportunity to save and invest sufficient amounts to bring them to "critical mass." The powers that be, and their neocon cheerleaders, seem to have a "screw you" attitude.

I guess the issue is fairness, equity and a level playing field. Going to school, getting skills and perserverence doesn't help when your company shuts down and reopens the plant in Bangladesh.

Comments?...

 

[HFWR]

Where's my ten-foot pole...

The issue is so complex it's hard to find an answer. Don't have the numbers at my fingertips, but the participation rates of 401k-type plans are low, and the balances for those that do participate are low, and the typical investment mix is either ultra-conservative - GIC or some such, or ultra-risky - growth, tech, etc.

Folks spend like there's no tomorrow, carry tons of high-interest debt, and generally have an ostrich-like approach to savings, investing, and retirement.

My older brother is a prime example of a highly-compensated techie, with only some under-water stock options to show for a lifetime of work. He does have a 'Vette, though...

 

[jug]

Absolutely!!! 

A significant % of those who are able to save for retirement are living in the now.  You don't need to be able to run a spreadsheet or design a circut to prepare for retirement, but you do need to save and invest prudently. 

When I started at a Fortune 500 company I was shocked at the portion of the workforce who weren't participating in the 401k - including many in HR!  I did what I could to change that, the pep talk at hire isn't enough.

In my own case I managed to score a job over 25 years ago with a DBP, but about 20 years ago they start a 457 plan, I guess and I was asked to particiate.

I told them I dont need to "defer" income, I need to "prefer" it, meaning I was just getting by.  This is due to circumstances, I never lived above my means, but my wife refused to do meaningful work since she had a difficult child to raise.

Ive always lived by the notion that you spend some and save some. Ive spent alot of money on what I love and that is travel, and yes it could have went into the deffered comp plan, but I would have forgone a pleasure of life, and even though I have less money, perhaps 100K less, I am glad I took those trips, and experienced things and satisfied my curiousity.

Many people just dont earn enough to put in 401K plans, I dont begrudge them.  Life is lived once, and you can stash away all of your life, putting off things you want to experience in the name of financial safety and security, and then you retire with that big number, and bingo, the curve ball hits you.

Life is about living it, spend some, save some,  Saving too much is just as bad as spending too much.

My wife is now kicking herself that she did not listen to me and take a state or city job with benefits.  That is called "being stubborn"
jug

 

[Spanky]

jug,

You are right. The key word is balanced. That is, we should not save every penny at the expense of doing things that we want to do now. However, we should not spend every penny for fun now.

P.S. I have been advising my daughter to take a government job.

Spanky

 

[New Thinking]

The real problem with these studies, as I see it, is that the academics assume that people annuitize their DC balances at retirement. This does not happen, and people pay an arm and a leg for fund expenses, financial planning, and trading costs..It all will come out of their income..You guys know that you are the "unique ones" who figures out how to manage a SWR Its the others that we should worry about. Not everyone is as enthusiastic about managing their retirement income as you folks.

 

[rmark]

I wield my shovel with skill!

 

[LEX]

As interest rates have declined over the past five years, defined benefit pension plans are increasingly expensive — as plan sponsors are well aware. Plan participants, on the other hand, often do not fully understand or appreciate how much their defined benefit plans are worth. This study has good metrics as to just how valuable the certainty of a Defined Benefeit Plan can be. Their annuity value is at least a rational means to guage their value as they provide important certainty of cash flow in retirement. In August 2000, a deferred annuity for a 60-year-old man that would start paying out $1,000/month at age 65 cost about $74,000. Buying the same annuity today would cost about $145,000 — roughly 97 percent more. The increase was even steeper for younger participants.


http://www.watsonwyatt.com/us/pubs/insider/showarticle.asp?ArticleID=15206

 

[jug]

jug,

You are right. The key word is balanced. That is, we should not save every penny at the expense of doing things that we want to do now.
P.S. I have been advising my daughter to take a government job.

Spanky

Spank, this topic about being a civil serpent has been discussed ad finitum many times with a civil serpent buddy of mine.

About 5 or 6 years ago, as we watched the market go up, with the layoffs from top companies, the erosion of the DBP, we discussed the civil serpent career and we agreed that it was insane to have some schmuck decide whether or not you can pay your mortgage and raise your family being this said schmuck, a boss, can fire you at will.

Civil serpentry in my neck of the woods as well as other places is a "reasonably" guarrented place to hang your hat and hide for about 20-30 years.

Civil serpentry is not for everyone, such as very indenpendent people who are self starters, dont have people depending on them, or those who simply enjoy flitting for place to place.

Its important early on that you have to know yourself. I realized that I could not be a Yes man, could not suck up, and had a mind of my own. Civil Service gave me the security I needed, people depended on me, and I knew Im the type who speaks his mind and would get sacked or a nervous breakdown working for some schmuck.

I do believe that many of us subconsciously choose to ER since we are listening to our inner real selves telling us that we cannot play the game out there, its not natural to us, so we make a plan to split.

My plan is simple, when and if I sell my house, I split for somethig new, and try to go back to where I was when I was a child and follow my dreams. First I have to heal my busted brain and body.

Civil Serpentry was good to me, gave me a pension, good bennies, and a livable income after a few promotions. It did not however let me be innovative, think for myself and be my own man.

Currently we are at a "mexican standoff" in my place, I am placed in the corner of the office, out of sight, out of mind, drink cawfee, and the bosses leave me alone. The fun part is over, may as well leave this insane asylum and go to the outdoors and just flit about until I settle myself into a place, whether working or voluntaring.

What I am saying is that we were meant to live more or less spontaneously and not be burdeoned by all sorts of worrying or micromanaging of our existance, Hmm, kinda digressed, but perhaps someone will get my drift.
jug

 

[dlhanson]

As interest rates have declined over the past five years, defined benefit pension plans are increasingly expensive — as plan sponsors are well aware. Plan participants, on the other hand, often do not fully understand or appreciate how much their defined benefit plans are worth.

I am very much aware of this since this is why I decided 2-1/2 years ago to take my DB pension as a lump sum instead of taking it as a non-COLA annuity either now or later. I am almost 55 - when I was 49, the company's benefit calculations said that the lump sum value at 55 would not even be $100,000. When I took it out at 52-1/2, I was able to roll over $330,000 to an IRA (most of the increase was due to lower 30 year Treasure interest rates and part of it was due to a benefit calculation change in the employees' favor). This rollover IRA has subsequently grown to $460,000.

 

[jug]

As interest rates have declined over the past five years, defined benefit pension plans are increasingly expensive — as plan sponsors are well aware. Plan participants, on the other hand, often do not fully understand or appreciate how much their defined benefit plans are worth. This study has good metrics as to just how valuable the certainty of a Defined Benefeit Plan can be. Their annuity value is at least a rational means to guage their value as they provide important certainty of cash flow in retirement. In August 2000, a deferred annuity for a 60-year-old man that would start paying out $1,000/month at age 65 cost about $74,000. Buying the same annuity today would cost about $145,000 — roughly 97 percent more. The increase was even steeper for younger participants.

The average person getting a DB pension doesnt really have to know how it is annuitized via actuarial methods and with projected interest rates. He just has to know he is getting x amount each year for life, cola or non-cola, thats it.

When we turn on the tap for some nice cool water, do we care where it came from, no, we simply enjoy the drink. Means jack spit to the average Joe, just dole out the bucks, all there is to know. We cant analyze everything, takes the fun out of life.

Jug,

Not to know where the Beavers came from, just be sure to be at Broad to watch them, yummmmmmmy!!!!!!!!!

 

[haha]

I visited the land of civil servants today when I went to apply for Medicare at my local SS office.

If I had had to go to that place day in and day out, I wouldn't have made it to age 30. It was almost like chlorine gas enveloped me when I walked in the door, went through the barrier, read about 100 signs-NO WEAPONS!  NO KNIVES! NO BEVERAGES!, and asked the guard-"Is this the place to sign up for Medicare?

"Medicare? I wouldn't know about that." Or anything else, I daresay.

Ha

 

[Jarhead*]

I visited the land of civil servants today when I went to apply for Medicare at my local SS office.

Ha: Make sure you keep that damn medicare card tucked away, and out of sight.

As in, Ha to "Salsa Girl", "Mid 50's here, but don't feel a day over 40."

"Salsa Girl" to Ha: "Whose Medicare card is that in your wallet?"

If your picture that you sent in a while back was recent, you can probably pull it off.

Jarhead, a fellow "Geriatric"

 

[Eagle43]

The local SS office amazed me. I was the oldest person in the room, this being when I applied for my social security benefits last year. Could all of the people in there have some sort of disability? There were long waiting lines. This must be a method to disguise welfare, which we "reformed" a few years ago.