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Pension Plan cuts
Old 12-10-2014, 11:43 AM   #1
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Pension Plan cuts

Interesting. Been trying to decide how/if to continue contributing what I can to tax deferred accounts with 13 1/2 yrs til I can start withdrawals @ 59 1/2.

The approval of the PP cuts made my decision for me. If they can touch that theres no stopping them in the future with other retirement funds. I have a running yrly debate with our accountant that there will be a time when they touch our 401k $. He says no way. With so many yrs to go I do believe I will see it in my lifetime. Personally I'll keep what we have in retirement accounts invested but don't plan on further contributions. Wife will (might?) get some kind of small pension yrs later. Luckily we live in a state that believes in LBYM!
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Old 12-10-2014, 11:52 AM   #2
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What's PP?
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Old 12-10-2014, 12:00 PM   #3
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Not sure what you mean by "touch" your 401k but I think you mean the government absconding it. Under current law those funds are tax deferred and taxable when withdrawn or converted to a Roth. I don't see that changing.

But if you're paranoid that they will abscond your 401k, then I hate to break it to you but they could also probably do the same thing with your taxable accounts so your only safe play is to keep a huge wad of cash in your mattress.
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Old 12-10-2014, 12:13 PM   #4
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The pension plan changes are because the multi-employer plans were severely underfunded by billions of dollars and based on happy thoughts accounting. I don't have a crystal ball on 401Ks, but I don't see how a change to make PBGC covered plans solvent directly leads to changes in 401K taxation laws.

You can give up thousands in tax benefits now with perhaps a 100% probability of being beneficial, for the possibility that they will be taxed more in the future with an unknown probability of future increased taxation changes. Or perhaps the future changes in taxation may even benefit you or stay the same. Or as pb4uski noted, future tax changes could be implemented more on after tax accounts. The government has a vested interest in encouraging people to save more, not less for retirement.

The future is unknowable. I do not see the direct link from making multi-employer pension plans solvent to increases in taxes on an individual's 401K plan. If anything, the action taken, by allowing benefit cuts, means the multi-employer plans would not need a taxpayer funded bailout, and would lower the necessity of future increases in income taxes in general.

I don't know understand what you mean by a state that believes in LBYMs or how that relates to the proposed law changes. The pension law changes only impact multi-employer private plans guaranteed by the PBGC, not state funded public pensions.
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Old 12-10-2014, 12:15 PM   #5
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Not sure what you mean by "touch" your 401k but I think you mean the government absconding it.
Such a move might prove to be un Constitutional, but who knows for sure what the SC will rule.

If (and I think it is a big 'if') they decide to get at retirement money, I think it is more likely they will find a way to tax Roth accounts, both IRA and 401k. Most likely they will start indirectly by using the Roth withdrawals to increase one's tax bracket, but not directly taxing the Roth money. No doubt it will be done in the name of 'fairness'. You know, all those LBYM people who unfairly accumulated wealth while the people around them were spending freely. Such scoundrals!!

Gosh, I hope I am not really getting that cynical.
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Old 12-10-2014, 12:32 PM   #6
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I strongly recommend a different title for this thread. Nobody except a few evil ex-wives will get excited to learn about "PP cuts."
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Old 12-10-2014, 01:48 PM   #7
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Hyper,

I am also quite upset about the Kline-Miller proposed removal of the anti-cutback ERISA rule for multiemployer pensions allowing pension boards to reduce employee/retiree's accrued benefits while the plan is still solvent.

If this goes through, I could see it spreading to other DB pension types.

I was happy to see this morning that the proposal was removed from the budget bill and will at least be voted on separately.

FWIW, I tried to start a discussion of this over at this thread but it seems to have died on the vine.

-gauss
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Old 12-10-2014, 02:07 PM   #8
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gauss, can you briefly elaborate as to what you and Hyper are concerned about for those of us who have not been following the issue?
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Old 12-10-2014, 02:10 PM   #9
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Such a move might prove to be un Constitutional, but who knows for sure what the SC will rule.

If (and I think it is a big 'if') they decide to get at retirement money, I think it is more likely they will find a way to tax Roth accounts, both IRA and 401k. Most likely they will start indirectly by using the Roth withdrawals to increase one's tax bracket, but not directly taxing the Roth money. No doubt it will be done in the name of 'fairness'. You know, all those LBYM people who unfairly accumulated wealth while the people around them were spending freely. Such scoundrals!!

Gosh, I hope I am not really getting that cynical.
I don't think this forum if voting on the same issues before SCOTUS would be any more in agreement than the SCOTUS. They vote 5-4 all the time on what is or isn't constitutional. They are supposed to be the experts.
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Old 12-10-2014, 02:15 PM   #10
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If this goes through, I could see it spreading to other DB pension types.
Many DB pension plans are insolvent and destined to default to the government guarantee. Maximum benefits are capped but that only impacts a small percentage of participants (airline pilots were flogged severely).

The problem is that the premiums continue to rise as healthy plans terminate and purchase insurance company provided annuities with their reserves. They are no longer subject to the rising insurance rates for the pensions. Sick plans can't afford comparable annuities. Several years ago I commented that I don't know why any company continues to offer a DB pension with all the inherent liability it entails. Defined contriubtion plans are far more beneficial to most employees if they are as generous as the prior pension plan.

Something has got to give. Either the organizations that promised more than they can deliver (frequently due to fraud in the case of union run pensions) or Uncle Sugar gets a new unfunded mandate to pay for. What about the unfunded state and municipal pensions? There's no way everyone is going to get every dollar they think they deserve.
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Old 12-10-2014, 02:32 PM   #11
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Many DB pension plans are insolvent and destined to default to the government guarantee. Maximum benefits are capped but that only impacts a small percentage of participants (airline pilots were flogged severely).

Agreed for normal age retirees.

Early Retirees and those that have temporary pension supplements until SS age, however, get wacked under the single-employer PBGC rules. Still not as bad as the haircut that the multi-employer PBGC rules deliver.


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The problem is that the premiums continue to rise as healthy plans terminate and purchase insurance company provided annuities with their reserves. Sick plans can't afford comparable annuities. Several years ago I commented that I don't know why any company continues to offer a DB pension with all the inherent liability it entails. Defined contriubtion plans are far more beneficial to most employees if they are as generous as the prior pension plan.
I was worried a few years ago when my former employer decide to "de-risk" the balance sheet by transferring many of the pensions to a private annuity provider and terminate the plan. The issue was that the state annuity guarantee associations have caps that are quite often less than the NPV of the annuities. The fact that my particular pension is below my states cap has me now rethinking that maybe this pension de-risking would not be such a bad thing in my case.

The fundamental problem behind all this is the manipulation of the rules that do not require pension funds to be 100% funded and marked to market on a yearly basis. Another contributing factor was allowing sponsors to remove "excess" pension funds during the boom years.
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Old 12-10-2014, 02:51 PM   #12
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Old 12-10-2014, 03:11 PM   #13
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...The fundamental problem behind all this is the manipulation of the rules that do not require pension funds to be 100% funded and marked to market on a yearly basis. ...
WADR, 100% funding and mark to market requirements would kill the few remaining DB plans and IMO be overkill. Not even sure what you mean on mark to market since most pension plan assets are already marked to market (other than annuities IIRC which are at account value).
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Old 12-10-2014, 03:29 PM   #14
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I strongly recommend a different title for this thread. Nobody except a few evil ex-wives will get excited to learn about "PP cuts."
LOL
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Old 12-10-2014, 03:49 PM   #15
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WADR, 100% funding and mark to market requirements would kill the few remaining DB plans and IMO be overkill. Not even sure what you mean on mark to market since most pension plan assets are already marked to market (other than annuities IIRC which are at account value).
Okay, I was using the mark-to-market terminology as an analogy to how my "Futures" account functioned in the past. Positions were valued daily and cash flowed back and forth based upon these valuations daily. No one was left holding the bag when the other party failed to perform.

When you say 100% funding would kill the few remaining DB plans, do you mean that they will stop future accruals but pay out what has already been earned?

In the above scenario, an employee could make an informed decision if they wished to continue employment there without the pension (this was basically my personal scenario in the workplace).

Would this not be a better scenario than continuing to accrue credits but then defaulting and leaving someone with a 60% haircut in their 60s 70s etc?

In the past my downside planning scenarios assumed the DB plans would default and my payments would be reduced to the single-employer PBGC guaranteed amount (fully covered in my case if default doesn't happen until age 65).

With the recent activities in Washington, I am concerned that this may have been a grave modeling error on my part.

An analogy to the proposed PBGC changes would be if someone had their 401k in an FDIC-insured bank account and the bank proceeded to fail. Due to deficits in the FDIC fund, depositers would only be paid 40 cents on the dollar. The government would then not honor the FDIC guarantee because that would be considered a bailout.
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Old 12-10-2014, 04:21 PM   #16
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It is amazing how people can read something and not even know what they hell they are reading or talking about. Two of my friends have already contacted me about congress "is gonna screw us out of our pension". I have to explain to them not only is our system not distressed it isn't even applicable to us as we are not part of the PBGC. But then I have to tell them don't get too excited because if our system goes bankrupt we have no backstop or SS benefits either. That really made them feel better!


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Old 12-10-2014, 04:30 PM   #17
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At first I thought this was a circumcision thread.
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Old 12-10-2014, 04:35 PM   #18
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At first I thought this was a circumcision thread.

Well Travelover, in case your curious since you were interested in this thread for that reason.... I just read this week that a study just proved that it is beneficial still to have the procedure.


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Old 12-10-2014, 04:53 PM   #19
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Okay, I was using the mark-to-market terminology as an analogy to how my "Futures" account functioned in the past. Positions were valued daily and cash flowed back and forth based upon these valuations daily. No one was left holding the bag when the other party failed to perform.

When you say 100% funding would kill the few remaining DB plans, do you mean that they will stop future accruals but pay out what has already been earned?

In the above scenario, an employee could make an informed decision if they wished to continue employment there without the pension (this was basically my personal scenario in the workplace).

Would this not be a better scenario than continuing to accrue credits but then defaulting and leaving someone with a 60% haircut in their 60s 70s etc?

In the past my downside planning scenarios assumed the DB plans would default and my payments would be reduced to the single-employer PBGC guaranteed amount (fully covered in my case if default doesn't happen until age 65).

With the recent activities in Washington, I am concerned that this may have been a grave modeling error on my part.

An analogy to the proposed PBGC changes would be if someone had their 401k in an FDIC-insured bank account and the bank proceeded to fail. Due to deficits in the FDIC fund, depositers would only be paid 40 cents on the dollar. The government would then not honor the FDIC guarantee because that would be considered a bailout.
If 100% funding was required, even if phased in over a decade, I think it would tip most companies to curtail their current DB plans since IMO in most cases they are not keen on these DB plans to begin with so 100% funding would be the straw that breaks the camel's back. Besides, 100% funding is not really necessary.

And of course, given that we no longer have involuntary servitude employees could vote with their feet if they chose to. Though I suspect that many employers that curtail a DB plan would simply replace it with a new or enhanced DC plan that might even be expense neutral. Even if the cost was neutral, it would take the investment risk on the employee rather than the employer (which is the predominant reason why we have seen a trend away from DB plans).

I think the number of plans that end up defaulting are relatively low in relation to the total plans out there but are obviously devastating to affected employees.

The PBGC is a joke, but as a practical reality will probably ultimately need to be bailed out by taxpayers. See http://www.wsj.com/articles/alex-j-p...oke-1417387173 I have a small DB pension but luckily the plan sponsor is a solid, well-run company and the plan is well funded.

I have no doubt that some DB participants will not receive the benefits that they have been promised because their plans have not been adequately funded and managed and the PBGC will fail and a taxpayer bailout is most likely but participants will get a lot less than what they were promised. However, to my knowledge, there will be many, many successful plans that are well funded and well managed and will deliver the promised benefits.
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Old 12-10-2014, 05:17 PM   #20
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