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Pension or 401(k)?????
Old 07-02-2008, 01:06 PM   #1
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Pension or 401(k)?????

Looks like you all may be a group to offer some advice. I'm 40yrs old and vested in my company's pension plan. The company just announced it's providing employees 40 and over with the option of remaining in the pension, with the company continuing contributions, or we can roll the vested amount over to our 401(k) savings plan, to which the company will match up to 6%. I already use the 401 at over 6% on my own. Question is, is it best to keep the pension, or roll it over to the 401? It's a one time, non-revocable decision.

Based on calculation provided to me, the pension would outperform the new 401 approach by about $300k, assuming a 6% return rate, if I retire at 65. At a 9% rate, the new 401 approach outperforms by a marginal $100k. Thus, they look pretty even to me.

I understand the pension is insured by PBGC, but what if, for some reason, the company decided to stop funding the pension? What if we are bought-out and the new suitor decides not to fund it? Can a purchaser totally eliminate the existing pension plan? The company I work for is a Fortune 500 and, like many stock companies right now, is taking a beating in the market. We are financially sound, but who knows what the future holds. I've done well in the company over the past 12 years and anticipate further success here. So, what's riskier? Roll my pension into the 401 and take my chances there with the market, or leave it with the pension?
:confused:
Thanks much!!
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Old 07-02-2008, 02:25 PM   #2
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It would be a worrisome decision to make, I may be faced with a similar one in the near future. If you haven't already done so, you might want to read up on the PBGC, and what they provide. Just google PBGC to get their website. Most pensions adminstered by PBGC were "distressed" terminations, and provide benefits far below what plan participants expected from their employers. The devil is always in the details--how big is the lump sum. You can try to evaluate that to some degree by going to a site like immediateannuities.com, or Vanguard and determine how much it would take to buy a commercial annuity equal to what your pension would provide.
(not that you would necessarily want to buy an annuity, just to evaluate the offererd amount).
Obviously, the lump-sum would be a "bird in the hand". Many large highly regarded companies have terminated their DB pensions in recent years, and more certainly will in the future.
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Old 07-02-2008, 02:29 PM   #3
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If you are immediately vested in the company match, that might tilt the decision to take the 401k option for me. Additionally, the type of investments available in the 401k, whether many options or few, high-cost or low, etc., should be considered.
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Old 07-02-2008, 02:44 PM   #4
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It seems to me the company would rid itself of a major liability if employees switch to the 401k, but it does not seem like they are offering much incentive to do so. Why only employees over 40? I suspect the younger employees were never offered the pension, but that is usually based on date of hire, not age. We have a similar situation at our company...employees hired before 2000 have pension AND 401k with 4% match, but newer hires only have 401k (with a better match).

It would depend alot on how they calculate net present value of the pension....interest rates are low right now so it should favor them tremendously to get folks to switch now. Also are you saying there is NO MATCH for the 401k contributions you are currently making "on your own"?
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Old 07-02-2008, 02:48 PM   #5
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One other point, I have found, is that commercial annuities, (right now?) give an annual payout that is somewhere around 7%. Many people on this sight subscribe to the conventional wisdom, that a safe standard annual withdrawal rate from invested funds is 4% or less. This SWR can grow with inflation, but this analysis makes the annuity look appealing in the beginning.
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Old 07-02-2008, 02:52 PM   #6
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7% sounds generous....care to sight an example?
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Old 07-02-2008, 02:54 PM   #7
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Is the pension COLA'ed? Getting 9% now may be doable but will you want the volatility required to get that when you are in the withdrawal phase?

If it's COLA'ed, I'd say it's worth the stretch to keep it.
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Old 07-02-2008, 02:56 PM   #8
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Originally Posted by mike hall View Post
One other point, I have found, is that commercial annuities, (right now?) give an annual payout that is somewhere around 7%. Many people on this sight subscribe to the conventional wisdom, that a safe standard annual withdrawal rate from invested funds is 4% or less. This SWR can grow with inflation, but this analysis makes the annuity look appealing in the beginning.
You might get one with that rate if it doesn't adjust for inflation. 10-20 years from now that payment is going to feel a lot smaller.
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Old 07-02-2008, 02:59 PM   #9
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Originally Posted by jazz4cash View Post
7% sounds generous....care to sight an example?
I have plugged numbers into immediateannuities.com and Vanguard.com
to determine how much "x" dollars invested would produce in annual income
and it seemed to be in that ballpark. What have you found?
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Old 07-02-2008, 03:11 PM   #10
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You might get one with that rate if it doesn't adjust for inflation. 10-20 years from now that payment is going to feel a lot smaller.
Yea ,that was the point I was trying to make , Thanks. The annuity can look great until you account for inflation over time.
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Old 07-02-2008, 03:36 PM   #11
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Originally Posted by jazz4cash View Post
7% sounds generous....care to sight an example?
OK, I'm beginning to catch on. The annual payout % is a function of age.
I've only ever investigated this for me personally.

Age 50 approximately 6.2% non-cola'd annuity
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Old 07-02-2008, 03:48 PM   #12
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I'd be worried about the company defaulting on it. Will the payments be the same if the PBGC had to bail it out?

Non Cola? Thats a tough one. Inflation will eat away at it.
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Old 07-02-2008, 06:03 PM   #13
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Can you outline the numbers- this would depend on many factors:

1) current value of 401k
2) current value of pension
3) contribution to 401k going forward (would this change depending on pension/401k decision)?
4) asset allocation- would the decision change the asset allocation of the 401k?
5) (and this is probably the kicker) current age vs ER age vs normal retirment age.

I think 5) trumps the other questions because time is the bigger multiplier here, not the returns or contributions.

If you are 5 years from retirement, I would think pension wins easily.
If you are 15-25 years from retirement, I could see 401k winning becomes more likely.

Could you also outline tax brackets, Roth holdings (if any) and any other tax related information (if you are in 15% bracket now and will pension put you in 25% tax bracket?).

thx
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Old 07-02-2008, 08:08 PM   #14
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Rather, look for a disclaimer in your company's benefits summary plans which usually states something to the effect that they will not guarantee continuation of any benefits and they have the right to change or cancel them at any time. Companies have long included these statements. Till the last few years, no one paid much attention to them, but now you have to believe that they mean what they say....they can change or cancel the plans at any time.

My husband's company, which is a Fortune 100 company, spun off my husband's division about 4 years ago. Pensions were frozen as of the end of the year that the companies were separated. For another year, until the new building was built for the "separate company", my husband and his coworkers continued to earn nothing on their pensions while working in the same buildings alongside employees of the older company who were still earning additional benefits. This freeze has cost us nearly one-third of the pension benefits we expected to receive. Four years later, there are still class-action lawsuits brought by some employees that have yet to be settled -- we'll probably be dead before the courts decide this one.

The new spinoff company is not offering a pension plan but is giving the transferred employees additional matching 401k money for 5 years (we are in year 4 of the "new" company so we only get another year of those additional funds). Believe me, the additional matching funds do not even begin to make up for the pension money we expected to receive.

In the year of (or the year after, can't remember which) of this spinoff, the president of the older company received a total compensation package of more than $100 million because he "saved" the company so much money by his bold action with the spinoff. Yes, they took it out of our pockets and put it into his.

Your situation may be different. Good luck with your decision.
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Old 07-02-2008, 08:41 PM   #15
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Quote:
Originally Posted by mike hall View Post
I have plugged numbers into immediateannuities.com and Vanguard.com
to determine how much "x" dollars invested would produce in annual income
and it seemed to be in that ballpark. What have you found?
Actually, I did find similar results...it seemed "generous" to me because I usually plug in a spousal benefit and/or x yrs certain benefit which lowers the monthly payment.
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Old 07-02-2008, 11:43 PM   #16
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I work for an S&P500 company and am involved in the computing of pension accruals, almost all of these offers are for the benefit of megacorp and not for the employee. The one time election applies only to you, megacorp is free to change their mind down the road.

When terminating a plan which any company can typically do when they decide to do so, benefits are frozen as of the termination date. However there are rules that must be followed in computing a lump sum value of a terminated plan. The present value of 20 years payments is computed using a goverment regulated interest rate, it was the average 30 year US treasury and over time is moving to corporate interest rate, which will result in a lower lump sum as that interest rate is higher.

However, if an employee is offered an opportunity such as you are to cancel the pension in exchange for a sum, as long as the payment amounts and values are clearly stated it does not need to be the same amount as mandated by ERISA for termination. Therefore they are most likely offering you a lower amount in the hopes you'll take it instead of terminating the plan and having to pay the federal mandated amount. Then the pension accrual for you can be reversed into income, mulitply by thousands of employees and you have a nice tidy sum for Megacorp.

I would keep the pension unless I was sure I was getting a better deal.
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Old 07-07-2008, 12:25 PM   #17
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Originally Posted by jIMOh View Post
Can you outline the numbers- this would depend on many factors:

1) current value of 401k
2) current value of pension
3) contribution to 401k going forward (would this change depending on pension/401k decision)?
4) asset allocation- would the decision change the asset allocation of the 401k?
5) (and this is probably the kicker) current age vs ER age vs normal retirment age.

I think 5) trumps the other questions because time is the bigger multiplier here, not the returns or contributions.

If you are 5 years from retirement, I would think pension wins easily.
If you are 15-25 years from retirement, I could see 401k winning becomes more likely.

Could you also outline tax brackets, Roth holdings (if any) and any other tax related information (if you are in 15% bracket now and will pension put you in 25% tax bracket?).

thx
$35k current pension value
$65k current 401k value
$7k/yr future 401k investment, at least $12k if I chose the matching 401k and dump the pension.
Asset allocation change? Probably nothing significant.
Minimal outside investments.
Currently 40, would be great to retire early, but I don't see that happening the moment, so 65 may be the best I can do. If the Mrs. goes back to her professional carrier, when the kids get a little older, which she plans on, that will help.
28% tax bracket. Changes will not impact this.

This info help tell which is potentially more beneficial?
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Old 07-07-2008, 12:42 PM   #18
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Originally Posted by Ratherbfishn' View Post
$35k current pension value
$65k current 401k value
$7k/yr future 401k investment, at least $12k if I chose the matching 401k and dump the pension.
Asset allocation change? Probably nothing significant.
Minimal outside investments.
Currently 40, would be great to retire early, but I don't see that happening the moment, so 65 may be the best I can do. If the Mrs. goes back to her professional carrier, when the kids get a little older, which she plans on, that will help.
28% tax bracket. Changes will not impact this.

This info help tell which is potentially more beneficial?
You have 25 years of compounding for the 401k to pull ahead... so 5k extra in 401k, compounded at 8% for 25 years is $690,000. Retiring early at 55 is worth about $262,000.

4% of age 65 amount is $27,600 in future dollars. Would the pension (at age 65) give $27,600 of spending power?
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Old 07-08-2008, 09:07 AM   #19
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4% of age 65 amount is $27,600 in future dollars. Would the pension (at age 65) give $27,600 of spending power?[/quote]

I'm not understanding the above comment. Would you explain it further?

Thanks again!
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Old 07-08-2008, 09:14 AM   #20
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Originally Posted by jIMOh View Post
You have 25 years of compounding for the 401k to pull ahead... so 5k extra in 401k, compounded at 8% for 25 years is $690,000. Retiring early at 55 is worth about $262,000.

4% of age 65 amount is $27,600 in future dollars. Would the pension (at age 65) give $27,600 of spending power?
You also need to factor in inflation *after* age 65.

The 4% rule allows for inflation-adjusted withdrawals, so a 4% inflation-adjusted drawdown starting at $27,600 would be much better than a $27,600 pension that has no COLA.
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