DB(k) Plan

[mickeyd]

Interesting new blending of two retirement plans.

The DB(k) melds a 401(k) savings plan with a small guaranteed income stream. “You take the best of the defined benefit concept and put it together with a 401(k) plan,” says Lynn Dudley, senior vice president for policy with the American Benefits Council. The key elements of the plan:

• A defined benefit equal to 1% of final average pay for each year of the employee’s service, up to 20 years. An automatic enrollment feature for the 401(k) portion. Unless an employee specifically opts out or changes the contribution level, 4% of pay is automatically shunted into 401(k) savings.
• An employer match of at least 50% of employee 401(k) contributions, with a maximum required match of 2% of pay.

the-dbk-pension-of-the-future.html: Personal Finance News from Yahoo! Finance

 

[kaneohe]

Sounds interesting but somebody has to fund the DB part.....I thought the reason DBs are disappearing was that employers didn't want to fund them. Is there a carrot in here for them?
edit: or perhaps they're just annuitizing part of the K ........like they're making contributions the default bc the masses would not do it by themselves?

 

[freebird5825]

It looks, at very top level, just a little like the federal FERS plan.

 

[quietman]

Where does the funding for the DB part come from? If it's part of the employer contribution, then likely this would make employers less likely to offer matches. If it's part of the employee contributions, then how much of what I put in will be redirected into the annuity that I am effectively purchasing? While I have no objection to getting MORE from my 401(k) "oh look, everything I had before PLUS a 1% per year defined benefit pension" I expect there are will be costs to provide this. Who pays and how much?

Does this mean these plans are provided by insurance companies who can offer the DB annuity part. They must love that.

 

[ats5g]

IMO, the main reason that many companies have jettisoned the DB plan is that the companies were underpricing the cost of the DB plan. For example, a fairly risk free way to fund the DB plan was to invest the plan assets and contributions in bonds [nominal bonds b/c of the nominal annuities the DB plan paid out]. Well, the companies realized that by increasing the % of the DB plan's assets to assets that offered a higher rate of return [i.e. equities, hedge funds, etc.], the company was then allowed to increase the discount rate for the DB plan's liabilities [b/c of the higher rate of return], which in turn vastly lowered the DB plan's "expected" contributions. And if the return never showed up, the DB plan could just shove the DB plan over to the PBGC.

My guess is that the DB(k) is probably another option inside the 401(k), kind of like TIAA is with TIAA-CREF's 403(b) plans. You'd basically be buying a deferred fixed annuity from an insurance company.. which is kind of a step up for most 401(k)'s. However, another guess is that the insurance companies will actually be charging rational prices for these things, and using bonds to immunize the liabilities [like the DB plans should have been using]. So, people are going to be unpleasantly surprised about the actual cost of these deferred fixed annuities.

- Alec

 

[donheff]

It looks, at very top level, just a little like the federal FERS plan.

Yes, include a somewhat limited COLA and it is FERS. Employers could consult the Fed actuaries who determine the government contribution needed to fully cover the costs.

 

[ziggy29]

Yep -- it sounded a bit like FERS to me. In truth there's nothing inherently unsustainable about DB pensions IF we're realistic about lifespan increases and for expected return on investments for *appropriate* investment mixes in the pension fund -- and if the amount the employer puts in is reasonably figured as a portion of the compensation. Being able to fall back on the PBGC and/or go back to the taxpayer for "help" with unrealistic assumptions created the morass.