change in pension plan

[abmitch01]

has anyone experienced going from a defined benefit pension plan (traditional type, employer puts in the money) to a defined contribution plan (employee funded and I think the employer helps)? from what I've read the employee usually loses out when this happens. I just heard word we're being switched but no details. As a nurse working for a non-profit, my pension wasn't much but I've been there 18 yrs and this switch makes me nervous. I do fund my 403B almost to the max allowed, we used to get a small match but don't any longer.

 

[pdchris]

The hospital I work at also switched. However, since I was already vested (15 years on the old pension plan), I'll still get a pension along with whatever is in my 401k.
It's difficult to say whether it's good or bad. Of course, the bad part is the employee has to contribute. Where I work, tho, the hospital matches up to 5% and also kicks in a set amount each year based on number of years worked.
One of the reasons I like about the 401k, is that if something happened to me shortly after retiring, my children would get whatever is in the 401k.
I think for a person just starting out, that 401K can build to a nice retirement depending on how much they contribute and stock market fluctutations.
What I don't like is that we're given only a set amount of mutual funds/bonds to select from.

 

[Belle599]

One significant difference is that with the DB plan, if there is a net pension liability at the end of the day, the company is on the hook to fund the deficit.
With the DC plan, the employees are on the hook to fund any pension deficit.

I would recommend that you obtain a copy of the actuary's latest valuation (there should be a valuation done on or near the date that the plan switches from DB to DC). This will tell you if the plan is underfunded or if it has a surplus at the conversion date.

You should also research whether if the plan is underfunded when it ceases to be a DB plan, does the company have to make up the shortfall at that point?

I'm not sure of the laws where you live....sorry I don't have more concrete answers.

Best of luck.

 

[dvcgirl]

Personally, I would not want a defined benefit plan in the world we live in any longer. With very few exceptions, these plans have not been run well at all by companies, non-profits, municipalities or states. Just like with Social Security, the promises made to most employees with defined benefit plans will not be kept.

What has happened to you is happening everywhere. This transition has been going on for years, but now it's taken on a new zeal with our on-going economic crisis.

Existing pensions are being frozen (in your case), and then you're started on a defined contribution plan. New hires will never have a defined benefit plan in most every case.

The latest, and for many frightening, legislation is the move by at least two states to change *existing* pensions. Most states have laws that they *have* to fund these pensions. But they can't do it....they simply don't have the money. Take Illinois for example (I live in NJ).....their state pension fund is billions in debt. Even if markets straighten out and they get fabulous returns, it will run out of money in 2018. That's their *best* case scenario. At that point a full 1/3 of the entire state budget will go towards funding current retirees pensions.

Anyone think that voters aren't going to show up at their state capitals with pitchforks and torches?

In my state, the Governor is cutting spending like crazy....and I agree with him. Our state pension plan is a mess as well....and the 3 Billion we were supposed to pay this year? Sorry, we can't do that this year. So, the pension problem gets worse. And when I saw Chris Christie (our Gov) on CNBC, he too is exploring "options" for existing pensions. This is his way of saying that he's going to try and change the law so that they can cut *existing* pensions.......

I would not want to have a state pension in NJ, NY, Ill, CA....the list goes on and on.

And so I say....take heart in the change. You are now in charge of your own destiny. And as someone who has only known the Defined Contribution world of saving and investing....I wouldn't have it any other way.

 

[clh2]

I agree that I would much rather have my own "pension" plan - not one that counts on an employer being in business in 40 years.

There was an airlines that they used the pension "monies" to help the company stay afloat. Was that TWA? I know there are other big companies - possibly related to the auto or stell industries where something happened too. Now the retirees get a teeny-tiny amount of the pension they had been promised throughout their working career.

My employer funds the penions plan with 3% of my salary per year. I think this is a little low, but it is better than nothing. And, at the end of the day, or at the end of my working career - the money is in an account with my name on it at an established mutual fund company. My advantage is - I've had similar things my whole working life. I would hate to switch from one kind to the other type of plan after I had been at an employer for 15 years. I've been in reality - planning for my retirement since I was about 24.

Now...if only those employers would cover healthcare for their reitrees...

 

[Golf4food]

Personally, I would not want a defined benefit plan in the world we live in any longer. With very few exceptions, these plans have not been run well at all by companies, non-profits, municipalities or states. Just like with Social Security, the promises made to most employees with defined benefit plans will not be kept.

What has happened to you is happening everywhere. This transition has been going on for years, but now it's taken on a new zeal with our on-going economic crisis.

Existing pensions are being frozen (in your case), and then you're started on a defined contribution plan. New hires will never have a defined benefit plan in most every case.

The latest, and for many frightening, legislation is the move by at least two states to change *existing* pensions. Most states have laws that they *have* to fund these pensions. But they can't do it....they simply don't have the money. Take Illinois for example (I live in NJ).....their state pension fund is billions in debt. Even if markets straighten out and they get fabulous returns, it will run out of money in 2018. That's their *best* case scenario. At that point a full 1/3 of the entire state budget will go towards funding current retirees pensions.

Anyone think that voters aren't going to show up at their state capitals with pitchforks and torches?

In my state, the Governor is cutting spending like crazy....and I agree with him. Our state pension plan is a mess as well....and the 3 Billion we were supposed to pay this year? Sorry, we can't do that this year. So, the pension problem gets worse. And when I saw Chris Christie (our Gov) on CNBC, he too is exploring "options" for existing pensions. This is his way of saying that he's going to try and change the law so that they can cut *existing* pensions.......

I would not want to have a state pension in NJ, NY, Ill, CA....the list goes on and on.

And so I say....take heart in the change. You are now in charge of your own destiny. And as someone who has only known the Defined Contribution world of saving and investing....I wouldn't have it any other way.

Add many cities to that list as well, not just states. Our city is rapidly on the road to bankruptcy largely thanks to the increasing costs of fire and police pensions.

Defined benefit pensions are a killer to the employer and a boon for the employee and now that people are living longer and more people are retiring they are only getting harder on the employers to maintain or fund. So people get laid off or fired and other benefits get cut all so the group who were hired under the DB plan can get their cushy pensions (maybe).

 

[eliza61]

This is one situation where it is truly hard to know what the future holds.

Like DVCgirl, I live in NJ so state and federal employees are really stressing about their pension.

I work for a huge fortune 500 company in Delaware. 5 years ago they switched for a DP (pension) to a more employee responsible plan. Since I had already been there for 12 years my first 12 years will be calculated on the old pension formula. The company increased the max matching on our 401K (it went from 50 cent on the first 3% to dollar for dollar up to 9%) as an incentive and I still have 50% of employees who say they cannot afford to participate.

Now one of the issues with self funded plans is bottom line, people DONOT do it. I'm not going to get into the argument of "Personal responsibity" and all that because if every one was "responsible" we probably would not be in the financial free for all we see now. I think currently only 28% of workers participate in their 401K's and a large # of them, withdraw for them over the case of their working lives.

Once again you can use the argument "that's their problem" if they don't save but folks, they are not going to magically disappear. Baby boomers population is about to hit full force. If they have no pension and no savings who do you think is going to pick up their tab to live?
So while we rant and rave about their "cushy" pension, we damn well better figure out what they are going to do if it runs dry because once again, it's not like these folks are going to leave our communitites any time soon.

If Christie (who I like some of the time) thinks we have a property tax problem now, wait until 60 million seniors get added to the medicade/food stamp roles in 5-7 years. U.S census data predicts that NJ's senior population will increase 22% in the next 5 years.

Very complex problem.

 

[abmitch01]

you'd think if they switch to a defned contribution that employees would have to put in something. I suppose they can't enforce it but ack, if you have no real pension except for what you contribute and your employer matches, you'd think you'd at least do the bare minimum.

I'm lucky I started contributing to my 403B right after college. They should teach this stuff in high school or college so young people entering the work force realize the importance of starting young. It's a scary future, I'm afraid. I think we're going to have a massive healthcare crisis when the boomers really start aging.

I hope we get good fund choices, that's always a bone of contention.

 

[eliza61]

you'd think if they switch to a defned contribution that employees would have to put in something. I suppose they can't enforce it but ack, if you have no real pension except for what you contribute and your employer matches, you'd think you'd at least do the bare minimum.

I'm lucky I started contributing to my 403B right after college. They should teach this stuff in high school or college so young people entering the work force realize the importance of starting young. It's a scary future, I'm afraid. I think we're going to have a massive healthcare crisis when the boomers really start aging.

I hope we get good fund choices, that's always a bone of contention.

I really admire young adults who did this. I try not to criticize people on savings simply because I'm a late bloomer. When my husband and I were first married we made well over 100K and we saved zippo, outside of an emergency fund. We figured we were in our late 20's who thinks about savings. before we had kids we travelled extensively so I can't say it was wasted but looking back I realized how much time I lost by not really saving until I had kids and I do turn a little pea green when I think of the nest egg we could have had.

It's a hard sell many times. I have people who I work with can't be convinced to save for retirement because they have college bound kids. I totally understand their argument, we're programmed to do the best we can for our kids even to the point of our own detriment. So I know couples who are shelling out 20K-40K a year on college tuition so their kids won't have huge loans. Who's wrong, who's right?

We are both of the old school where people would stick with 1 job and retire with a gold watch and a nice pension.

 

[abmitch01]

I'm hoping to be a one company person, 18 yrs down, what 27 or so more to go??? eek!

 

[dvcgirl]

This is one situation where it is truly hard to know what the future holds.

Like DVCgirl, I live in NJ so state and federal employees are really stressing about their pension.

I work for a huge fortune 500 company in Delaware. 5 years ago they switched for a DP (pension) to a more employee responsible plan. Since I had already been there for 12 years my first 12 years will be calculated on the old pension formula. The company increased the max matching on our 401K (it went from 50 cent on the first 3% to dollar for dollar up to 9%) as an incentive and I still have 50% of employees who say they cannot afford to participate.

Now one of the issues with self funded plans is bottom line, people DONOT do it. I'm not going to get into the argument of "Personal responsibity" and all that because if every one was "responsible" we probably would not be in the financial free for all we see now. I think currently only 28% of workers participate in their 401K's and a large # of them, withdraw for them over the case of their working lives.

Once again you can use the argument "that's their problem" if they don't save but folks, they are not going to magically disappear. Baby boomers population is about to hit full force. If they have no pension and no savings who do you think is going to pick up their tab to live?
So while we rant and rave about their "cushy" pension, we damn well better figure out what they are going to do if it runs dry because once again, it's not like these folks are going to leave our communitites any time soon.

If Christie (who I like some of the time) thinks we have a property tax problem now, wait until 60 million seniors get added to the medicade/food stamp roles in 5-7 years. U.S census data predicts that NJ's senior population will increase 22% in the next 5 years.

Very complex problem.

It is all very troubling, but I don't think it's hard to know what the future holds....not at all. The promises made by a lot of companies, municipalities and states will simply not be met. They can't be. The numbers just don't work. And the numbers haven't worked for years and years and the can just keeps getting kicked down the road. And when we have the kind of crisis that we've just had, all of the cracks in the wall become glaringly apparent. That's what we're seeing now. States like Illinois, NJ, NY, CA....are in big, big trouble. If I had a defined benefit plan in any of those states, I would be saving as much as I could outside that plan, opt out if I could.....because these states simply can't afford the promises that have been made.

I see the head of the Teacher's unions threatening to sue the state.....that it's the law that the pensions must be funded. That's all fine and dandy, but the state doesn't have the money. If I had a state pension I'd be extremely nervous if I hadn't saved anything outside that pension for retirement. Federal pensions are safer...because Uncle Sam has a printing press. But the states can't print money. And most of them have laws requiring them to submit balanced budgets.

Since I've been in my late 20s I've been a personal finance nut.....read tons on the subject, especially with respect to the entitlement programs. DH and I have always been very good savers and investors, but now we're to the point where we save 60% of our net income. We're lucky in that we make enough money that we can still live a nice life on the income we spend....and so I get that not everyone can do that kind of saving.

So what will happen? People are going to find that they aren't going to see the kinds of pensions that they've been promised. Others with defined contribution plans haven't saved nearly enough to retire. And so Baby Boomers are going to work much, much longer than the generation that came before them. And as a result, we're going to have a sustained period of years and years of higher unemployment.

America is just in the beginning phases of the Great Downsizing of the American Lifestyle.

 

[arminnie]

I had the best employer in the world my last 17 years of work. We had a very good defined benefit pension and a 401K that they matched 4:1. I totally lucked into this. I had no clue how important that would be when I took the job.

 

[wdwfan16]

you'd think if they switch to a defned contribution that employees would have to put in something. I suppose they can't enforce it but ack, if you have no real pension except for what you contribute and your employer matches, you'd think you'd at least do the bare minimum.

I'm lucky I started contributing to my 403B right after college. They should teach this stuff in high school or college so young people entering the work force realize the importance of starting young. It's a scary future, I'm afraid. I think we're going to have a massive healthcare crisis when the boomers really start aging.

I hope we get good fund choices, that's always a bone of contention.

Most employers have an "opt in" 401K. Others have an "opt out" 401K.

What they have found is that employees will not do anything so the "opt out" is the better 401K.

 

[abmitch01]

you what really surprised me- in a roomful of about 60 staff members, no one asked a question or batted an eye when they casually mentioned we would be losing our traditional pension. I spoke with a few people afterwards to see if they were disappointed or concerned and no one was, one woman said, "I didn't even know we had a pension," and she was an older, long term employee.

the apathy astounded me

 

[topdog]

Interesting topic in DISboard.

IMO, DB plan is a dying breed. If it wasn't because of union, pension would've been long gone.

I work for a retirement service company. We sell both DB & DC services but only for institutional clients. From what I've seen, DB plans are shrinking slowly but steady. Many company either freeze their existing pension and go with DC or convert their existing pension to DC. That really depends on the plan summary. Each plan is different. Either way has their pros and cons. For employees that has already put in many year of services, typically they do loose out a lot of revenue should their pension convert to DC. IBM was a good example. A few years ago, they convert their pension to DC. A lot of old time employees were not happy about the decision. They filed a lawsuit and IBM ends up convert those older employees back to the tradition pension plan. Verizon is another agony conversion story.

There are also 2 type of pension currently. Tradition plan or cash balance plan. Again, tradition plan can accumulate more money for people already put in minimum 10 years of service or more. Cash balance plan is good for people who only has a few years of service or start from scratch. While tradition plan might sound good but if the company your retire from goes out of business so will your pension. Cash balance might not make as much revenue as tradition, but you can take all the pension money out when you retire and put it into a tax shelter instrument. You might not make as much money but you will have control of the money.

As for why so many people won't put money into their 401k, that's just bad decision all the way around. My company spend some much time, effort and money to educate employee why they should save. That's the key. Education and communication. Even if you can't afford to save at what the maximum contribution allow, currently it is $16,500 per year. At the very least contribute to the maximum match. That's basically free money from the employer. If employees are not contribute to their full potential, their service provider should communicate and educate the employee more aggressively like setting up workshop a little more often.

How to manage the investment is another headache. It's all depends on how well your retirement service provider and your employer communicate with you on how to invest and what's your investment strategy should be. If you are young, be a little more aggressive. As you get older, be more conserve. There has to be a balance some where.

Don't forget. If you change job, in many case, you can take your 401k balance with you and put it into some kind of tax shelter instrument like IRA.

 

[kaytieeldr]

Most employers have an "opt in" 401K. Others have an "opt out" 401K.

What they have found is that employees will not do anything so the "opt out" is the better 401K.

Yep, that's what my employer has. When I worked for a company with an opt-in plan, I kept procrastinating

 

[fac]

In my state, the Governor is cutting spending like crazy....and I agree with him. Our state pension plan is a mess as well....and the 3 Billion we were supposed to pay this year? Sorry, we can't do that this year. So, the pension problem gets worse. And when I saw Chris Christie (our Gov) on CNBC, he too is exploring "options" for existing pensions. This is his way of saying that he's going to try and change the law so that they can cut *existing* pensions.......

.

I am getting to like him in particular the 2% cap on property tax.

 

[eliza61]

you what really surprised me- in a roomful of about 60 staff members, no one asked a question or batted an eye when they casually mentioned we would be losing our traditional pension. I spoke with a few people afterwards to see if they were disappointed or concerned and no one was, one woman said, "I didn't even know we had a pension," and she was an older, long term employee.

the apathy astounded me

Don't be to hard on your coworkers. In General, we Americans are a product of our environment.

My parents and grandparents were fresh off of a depression and a couple of wars. The mentality of the 50, 60's and early 70's was save. Remember when you use to get a gift for opening a savings account?

Then came the mid 70's, we entered into a period of prosperity and relative peace. After years of Vietnam, civil rights upheavel and stress from the cold war, Americans lost their collective financial minds. Mentally as a country we simply entered into a "more, more, more" pysche. It invaded every thing.
Prior to this financial meltdown savings rate were in the negative, average American was 7,000 bucks in cc debt and people had the mind set that the NEEDED an expensive vacation or 3500 square foot house as a starter home.
Now you get the gift for opening up a new line of credit.

Unfortunately like DVC girl said it pretty much was on phoney money and cannot be maintained.

My bud dvcgirl has been into finances way longer than me, but I'm an amature sociologist and my concern is I really don't see a change in our collective attitudes. We still have this spend now, save later attitude.

Right now, people will still fund their wdw vacations before their pension and according to financial gurus, after 2 years of an almost depression most working adults (60%) still don't have 3 months emergency cash saved.

Also remember for many people, talking about investments is like talking about the mating habits of the African wilderbeast. Their eyes glaze over. Heck most folks don't read their credit card statements. How many stories do we hear of college students that don't know the terms of their student loans?

We've got to start making this information standard required training.

 

[eliza61]

I am getting to like him in particular the 2% cap on property tax.

I dunno, I think that was political blowing smoke. we'll get the 2% cap but we've lost our property tax rebate. pretty much a wash.

Beside the fact, in my township (Washington & Gloucester) school funding is based on property tax. So as it stands now, when he cuts the educational funding school boards will try and raise property taxes. Camden which is the poorest city in America has already won a lawsuit to prevent the Govenor from cutting it's school funding. In NJ every kid must have the same amount of cash spent on his education ( I think it's 7000 per child), since Camden does not have a tax base (relatively speaking) the state is required to fund it.

So unfortunately he's still got financial obligations that are going to have to be made.

 

[QVCshopper]

I used to work at one of the big mutual fund companies and write the material to convert the DB plans to DC. In most cases, the companies tried their best to be fair to the employee; it's really just a way to protect the future of the company. In some cases, I thought the employee was getting a better deal with the DC, and some veterans also still got some of the DB or a higher conversion. But, it's up to the employee to save on their own. Most companies are moving to the "opt out" plan--b/c people often do nothing, so this way they are saving a little at least. A lot of these changes took place after the ENRON disaster.

IMHO, it's not realistic to rely only on a DB for retirement, unless you're retiring very soon or are already retired and have SS and your own savings to fall back on. For the younger folks, we can't count on SS or a company anymore--look at Bethlehem Steel in PA. We need to sock away everything that we can as soon as we can. I opened my IRA just graduating after college and socked away up to 25%-35% into my 401K as soon as I could, trying to hit the $15K limit. I'm only 33, and have about double what my parents have saved for retirement. My dad is 65 and may be downsized soon, but he doesn't have enough to take the early retirement.

If you get a match, be sure to take it fully. Right now, I get matched for the first 6% I put into a 401K. This is a great match. At my old mutual fund company, it was even better. I got a 4% match, as well as a 10% retirement payment that I was fully vested in after 7 years.