Should I bother participating in DB plan?

[soupcxan]

I work for a very large, very old multinational company, one of the few that still offers a defined benefit pension plan. I am currently enrolled in our pension plan, but I'm wondering whether I should even bother. I've checked the benefits handbook for an explanation of the payout, something like "X% of your last Y years salary starting at age 60" but the formula is far more convoluted than that, so I can't readily estimate what the payout is. Even if I could, I'll be 60 in 36 years, which is a huge time/uncertainty horizon to try to discount those future cash flows. The amount I have to personally contribute each year is very small, and the pension vests 3 years from now (I expect to still be working here at that point). Obviously I'm not counting on this plan for retirement (early or otherwise) but if it doesn't cause me any pain now, and might bring extra cash later, maybe it's worth it.

Or is it more likely that the company going to punt the obligation to the PBGC in 20 years and leave me with squat? Since I started a few years ago, the company has continued to cut back on their pension plan offerings to new employees, and I wouldn't be surprised if they make an IBM type announcement in the next few years. But since I'm already in the plan, that wouldn't affect me, right?

 

[Brat]

make an IBM type announcement in the next few years. But since I'm already in the plan, that wouldn't affect me, right?

Wrong!

What you need to consider is what you would otherwise do to save for retirement. Do they offer the option of a 401k? If you are not in the DB plan could fund an IRA and if so at what level.

 

[soupcxan]

I've already got my retirement plan together, and it doesn't assume that any pension money even exists. Combination of 401k, Roth, and taxable accounts. But I wouldn't mind an extra "good guy" 30 years from now...I'm just trying to figure out if the pension plan is even worth contributing the minimum (less than a few hundred $ per year).

 

[Brat]

I've already got my retirement plan together, and it doesn't assume that any pension money even exists. Combination of 401k, Roth, and taxable accounts. But I wouldn't mind an extra "good guy" 30 years from now...I'm just trying to figure out if the pension plan is even worth contributing the minimum (less than a few hundred $ per year).

Many folks spend that much on lottery tickets. Consider it in that light.

 

[dunc0029]

What are your options if you were to leave your company?  Can you rollover the balance of the pension or does the money continue to sit in their fund?  That is an option I have.  If so, what are the odds you will be leaving the company before age 60?

I'm in a pretty similar situation, although we don't have any employee contribution so it's a no-brainer.  My company has already been tinkering with our pension plan.  Starting last year, new employees will not be eligible.  Also, our benefits after 1/1/2005 were decreased.  Of course, I'd feel a lot more comfortable if my pension balance was sitting in my retirement accounts, but I'm fairly confident I will be out of here and rolling over the balance before they have a chance to weasel out ( knock on wood ).

For a few hundred bucks, I'd say go for it...

 

[Craig]

OK, ignorant question here ... I've never personally been a participant in a pension plan, but thought I knew a fair amount about them.

I didn't know that participants could contribute to a pension plan ... I was under the impression this was always company money only, invested at an assumed rate, to produce $XX monthly benefits for future retirees.

Where do a participant's contributions come in?

 

[maddythebeagle]

yes. many have to make "employee contributions". Some of the state and federal workers are not covered by social security so they have to contribute more, also. I read that one state not covered by ss., employees were contributing 8.5% (I think it was Ohio), so that is little over and above SS.

 

[JohnP]

DW teaches in an elementary school in Ohio - She does not pay into SS - She (and the other teachers in Ohio) 'contributes' the mandatory 10% of her gross to the retirement system.

JohnP

 

[laurence]

IMHO there will be something coming to you at age 60, so I say for that small amount it costs you, go for it. Think of it as further diversification. I participate in my company's plan because it's only costing me 1.5% and the plan, as of this moment, is very well funded. Plus, my plan has an estimator on line, and they are flexible and will let you take payments starting at 55 which are very generous, then cut down by the amount you recieve from social security when you start collecting. So if SS gets whittled away, I've hedged there, too.

 

[free4now]

I don't know anything about pension plans, but I'd treat this very similarly to any other investment decision... figuring out the returns, the risks, and the limitations. It seems very likely that the defined benefit plans would strongly underperform a 401k invested in index funds, and with 36 years to go that result is all the more certain since you can weather fluctuations. Personally I'd stick with the 401k.

 

[laurence]

Do it all. 401k, roth IRA, and pension. Just like nobody should turn down the 401k company match, most pensions have more money contributed by the company than by the employee. In my case, it will take one year if withdrawals to match everything I put in. Now that's not factoring in interest/compounding/inflation (i.e. I'm talking nominal dollars here) but you get the picture. It's another leg on your retirement chair.

 

[cute fuzzy bunny]

My wifes company pays for a pension for her. No match or employee contribution to that, hers goes to a separate 403b. Obviously we'll take it if it materializes but I dont count it or social security in our planning. Should any of that materialize, its lobster money and I'll hire out all the crap I do myself now. Something tells me i'll be less excited about doing oil changes and roof repairs when I'm in my 60's. I'm not that excited about doing it now.

 

[Eagle43]

Something tells me i'll be less excited about doing oil changes and roof repairs when I'm in my 60's.  I'm not that excited about doing it now.

Yep! And mowing ain't exactly the week's highlight!

 

[cute fuzzy bunny]

Roundup is cheaper than a lawn service...

 

[REWahoo]

Roundup is cheaper than a lawn service...

In the true spirit of LBYM....rock salt.

 

[cute fuzzy bunny]

Heyyy...and a little ice and you can make ice cream on your lawn!

 

[uncledrz]

Stick with the pension, at least until you are vested, and then make your decision. You've already got some credit in, so leaving now will cost not only the loss of company contributions in the future, but company's and your contributions up to this point. Once vested, even if you leave the company, you will receive that amount.