Should I chose DB or DC retirement plan?

[km4hr]

I've been working for state government almost 5 years. When I started the job I had to chose either a DB or DC retirement plan. Not knowing how long I'd stay on the job I chose the DC plan because I could take the funds in the account with me if I left, but I had 5 years to change my mind. I'm now approaching the end of the 5th year and I'm wondering what to do.

My DC plan is worth about $38k. I'll have to pay the state $41K if I switch to the DB plan. I like the job and have no immediate desire to leave but if I retire at 5 years I will receive about $300 per month. My question is, should I stay with the DC plan or switch to the DB plan?

I've looked a some online immediate annuity calculators. It doesn't appear that a $41k annuity would pay as well as the DB plan. So what would you do? Stay with DC or switch to DB plan?

I'm currently 60 years old. I retired (was retired actually) at age 55 from a 30 year career so I have other small DB pensions (about $2k/mo) available and savings that will likely support me for the rest of my days. I have no heirs.

 

[pb4uski]

It sounds like the DB plan is a good deal only because of the favorable annuitization option. Does the DC plan have a cola? If so, I would take it.

If you select the DB plan and later retire can you take a lump sum and roll into an IRA or do you have to take the annuity?

The major benefit of the DB plan is it leave the risk of investment underperformance with the employer, at the cost of forgoing potential investment overperformance if you chose wisely under the DC plan.

 

[timo2]

Which one is more likely to be messed with by the plans administrators at a later date?

 

[km4hr]

It sounds like the DB plan is a good deal only because of the favorable annuitization option. Does the DC plan have a cola? If so, I would take it.

The DB plan does have a cola. I don't think there's been a cola adjustment for several years however. Who knows if there ever will be again? I don't think the DC plan has a cola. Whatever sum of money has accumulated in the DC account when I retire is mine to keep.

If you select the DB plan and later retire can you take a lump sum and roll into an IRA or do you have to take the annuity?

There is a lump sum option available in the DB plan. I'd get $20k if I took that option instead of $300 per month. Seems like a raw deal considering that I have to pay $41k to get into the DB plan. I'm getting this info from the state's online retirement benefit calculator. I may be using it incorrectly.

The major benefit of the DB plan is it leave the risk of investment underperformance with the employer, at the cost of forgoing potential investment overperformance if you chose wisely under the DC plan.

Thanks for your thoughts!

 

[km4hr]

Which one is more likely to be messed with by the plans administrators at a later date?

Good question. With the DC plan I get to keep all the money in the retirement account when I retire. There's no further ongoing relationship with the state like there would be in the DB plan getting a monthly check.

 

[timo2]

Good question. With the DC plan I get to keep all the money in the retirement account when I retire. There's no further ongoing relationship with the state like there would be in the DB plan getting a monthly check.

The way state governments have been going with pensions, taking the money and running away with it might be my first impulse, but every time I've invested on impulse, it's been wrong. It is the right thing to do to analyze the entire situation.

Will you get social security?

 

[Chuckanut]

Normally I would recommend the DB plan since this may be the last time in your life anybody offers you such a deal. And the COLA is nice even if it is capped or otherwise limited.

But, recent events show that corporations will wiggle out of their commitments if they can, and governments may be able to do so in the future (Detroit will be an interesting test of this.)

How well is the DB plan funded? What is their expected rate of return in the long run? Is it a reasonable rate? Do your elected leaders make the government's contributions every year? Or do they 'defer' them from time to time so they can spend the money on something else? If they defer or put off contributions, this a huge warning sign (see the state of Illinois for an example of the disaster that can become).


If the DB plan is well funded (at least 85% and preferably over 90%) and their planned rate of return is realistic (maybe 7% max) then it might be a good plan. Others will have different idea of what the numbers should be.

If in doubt, I say take the money and invest it yourself.

 

[Mulligan]

Which one is more likely to be messed with by the plans administrators at a later date?

That is the ultimate truth! But since my bed has been made with the pension, I going to have to lay in it. Still those colas are nice even if limited. I started out with a pension of little under 72k at age 45. Even with my 2% restricted cola, I will be drawing about $120k a year if I am still above the ground at age 70. That's a big difference even with a little cola.

 

[Gearhead Jim]

Is there any way to (roughly) calculate how much the DB plan would pay you at retirement, vs what the DC plan would be worth? Obviously, some assumptions would need to be made.

But I'd pay a bundle to control the money myself instead of being at the mercy of whatever lawyer/politician might find it expedient to screw you out of your retirement.