What Would You Do

**reason** · July 16th, 2008, 08:13 PM

This is kind of a puzzle. What choice would you make?

My company is one of a dying breed where it offers employees a defined pension plan, meaning based on years of employment and highest average salary over 5 of the last 10 years, a lump sum or monthly payments will be offered at age 60 at the earliest. I assume age 65 with a lump sum.

We are being given a ONE TIME, nonrevokable option of leaving the plan and entering a 401k matching program, where the company will match up to 6% of my salary.

There are many things to consider:

*If I die before age 60, the pension money is gone. It goes back into the plan. In the 401k, the money belongs to the estate.

*If I die after 60 and I'm married, 50% in monthly payments would go to my spouse but there would be no lump sum.

*If both me and my spouse die before age 60, children would not get anything. The money goes back into the plan. With the 401k, my children would inherit the proceeds.

*Benefits cease when both employee and spouse die in the pension, if one opts for the monthly payment instead of the lump sum.

*The pension is backed by the US government, the 401k is not.

*The pension return is guaranteed; the return is not guaranteed with a 401k.

* I would have to earn roughly 8% on my 401K with matching at current levels of contribution in order to surpass what I'd get on my pension.

*I get to control the investment options in my 401K, I do not with the pension.

*If I quit my company, the monies in my 401k go with me; it does not with the pension, where it stays until I retire.

*With the 401k, I must contribute out of pocket; with the pension, nothing comes out of pocket. So if I stop contributing due to financial difficulties, I miss out on any compounding due to the time value of money. With the pension, the contribution is made as long as I am employed.

*I can borrow against a 401k; I cannot borrow against a pension.

That's all I can think of off the top of my head.

We've had a lot of internal conversations at work about different scenarios and it has been kind of interesting. Not sure if that interest would carry over to here, but I'll give it a long shot...

[ July 16, 2008 05:17 PM: Message edited by: The Big Sexy ]

**Sean Pa** · July 17th, 2008, 08:20 AM

Stay with the final salary, as you say they are rare, same over here. Are they closing the final salary to new recruits??
Why are they offering this deal, is there a funding shortfall?
Final salary is not at the mercy of any stockmarket waves(these are uncertain times), You know what you are getting.

**LanDroid** · July 17th, 2008, 09:24 AM

You should consult a financial pro on this but since you was axing, gut feel sez keep the pension AND put 6% of your salary into an IRA. That way you'd have both vehicles going. No matching on the IRA, but you would be contributing more towards retirement, can't rely on the "free ride" from a pension. That 8% figure would be extremely difficult to beat. In fact your 401K or IRA could easily drop 20% in a down market! And uhhhh, shouldn't you cross out those concerns about a spouse and children? Don't get distracted. [img]wink.gif[/img]

[ July 17, 2008 06:27 AM: Message edited by: LanDroid ]

**cincygreg** · July 17th, 2008, 11:01 AM

Tell them that you think you deserve better, then ask for a 402 K instead! [img]graemlins/hmmm.gif[/img] [img]graemlins/sure.gif[/img] [img]graemlins/wonder.gif[/img]

Hey, lots of people have 401K's, but how many do you know that have a 402?!?!?!?!??!?!?

**Beachcomber** · July 17th, 2008, 11:37 AM

I think you should quit and then go find a publicity hound attorney and sue them for infringing on your "rights" since you will never have a "wife". Unless Ohio recognizes same sex marriage now?

*If I die after 60 and I'm married, 50% in monthly payments would go to my spouse but there would be no lump sum.

*If both me and my spouse die before age 60, children would not get anything.

**reason** · July 17th, 2008, 11:47 AM

Originally posted by Sean Pa:
Stay with the final salary, as you say they are rare, same over here. Are they closing the final salary to new recruits??
Why are they offering this deal, is there a funding shortfall?
Final salary is not at the mercy of any stockmarket waves(these are uncertain times), You know what you are getting.

They are discontinuing the pension. Anyone under 40 has to go to the 401k with matching. Those over 40 get a choice.

**reason** · July 17th, 2008, 12:00 PM

Originally posted by LanDroid:
You should consult a financial pro on this but since you was axing, gut feel sez keep the pension AND put 6% of your salary into an IRA. That way you'd have both vehicles going. No matching on the IRA, but you would be contributing more towards retirement, can't rely on the "free ride" from a pension. That 8% figure would be extremely difficult to beat. In fact your 401K or IRA could easily drop 20% in a down market! And uhhhh, shouldn't you cross out those concerns about a spouse and children? Don't get distracted. [img]wink.gif[/img]

[ July 17, 2008 06:27 AM: Message edited by: LanDroid ]

I bring this up because I work with a bunch of CFA's (Chartered Financial Analysts) and this topic has created literally hours of conversation - and confusion - even though they have better than average understanding of the concepts involved. I can't imagine what it's like for others in the company who don't even understand the program as it currently exists. There's no "right" answer, so I've found this to be a very interesting scenario.

About the kids. Most of the people I work with have kids and the lack of transfer of accumulated benefits from the pension to the kids if the parents die before 60 is a major concern. With regards to me, I can get married in California - and soon probably in Massachusetts - and I'm dating someone who has two children.

My mind changes daily, but I'll probably go your route because it's pretty much what I'm doing now, except I deduct 10% from my salary for the 401k. While there's a risk I'll never see the pension money if I die early, I'm thinkin' the prize is pretty nice if I don't, and I don't have to worry about a stinkin' thing along the way, except for...

There *are* risks involved with the pension, like if my company gets bought out or they decide to discontinue the pension and they do a lump sum payment to buy me out, there is interest rate risk, which will affect the rate at which they discount the payment, and that would suck. That is a very real possibility.

One more thing: I don't think I mentioned it, but if I opt for the 401K, I get a lump sum equal to the present value of the benefits due at age 65. I can roll this lump sum over into my IRA. It's not an enormous amount, but it can grow into six figures in 20 years with moderately conservative investing.

[ July 17, 2008 09:19 AM: Message edited by: The Big Sexy ]

**gae** · July 17th, 2008, 01:37 PM

Reason, one thing you didn't address is how solvent your company is. (From what I know it's OK fine, but last year GM was too.) Is the pension plan going to be there when you're 60 or 65? Lotsa folks have counted on such things and have been disappointed.

Damnit all to hell! I have to agree with Lan!

gut feel sez keep the pension AND put 6% of your salary into an IRA. That way you'd have both vehicles going

Lan, when did you step into my brain? (Iz Caturday yet?)

reason said

One more thing: I don't think I mentioned it, but if I opt for the 401K, I get a lump sum equal to the present value of the benefits due at age 65. I can roll this lump sum over into my IRA. It's not an enormous amount, but it can grow into six figures in 20 years with moderately conservative investing.

When Trav left PW/UT that's what he did. I can (honestly and truly) give you the name and phone of a really good financial planner if you don't have one. You know how to reach me.

**reason** · July 17th, 2008, 01:54 PM

Originally posted by gae:
Reason, one thing you didn't address is how solvent your company is. (From what I know it's OK fine, but last year GM was too.) Is the pension plan going to be there when you're 60 or 65? Lotsa folks have counted on such things and have been disappointed.

Damnit all to hell! I have to agree with Lan! <blockquote>quote:<hr />gut feel sez keep the pension AND put 6% of your salary into an IRA. That way you'd have both vehicles going

Lan, when did you step into my brain? (Iz Caturday yet?)

reason said

One more thing: I don't think I mentioned it, but if I opt for the 401K, I get a lump sum equal to the present value of the benefits due at age 65. I can roll this lump sum over into my IRA. It's not an enormous amount, but it can grow into six figures in 20 years with moderately conservative investing.

When Trav left PW/UT that's what he did. I can (honestly and truly) give you the name and phone of a really good financial planner if you don't have one. You know how to reach me.<hr /></blockquote>The gubmint guarantees corporate pension plans. So if my company goes belly up - anything's possible - all I have to worry about is the ability of the folks in Washington to print more money.

**reason** · July 17th, 2008, 02:05 PM

While I can't comment directly about my company, takeover is always a possibility, and has been mentioned over the years. (Stock price is half of what it was a year ago and we are trading around 80% of book value - yikes.)

Do I see it being around in 20 years? Actually, I'd be surprised if it were.

From what I understand, at takeover I'd probably get a lump sum as the acquirer would most likely not have a pension plan.

This I would not like because the amount of the lump sum takes its biggest jump between 60 and 65 (it's remarkable, actually how much it increases). So if we get bought out before that time, I miss the full pot of gold at the end of the rainbow.

[ July 17, 2008 11:06 AM: Message edited by: The Big Sexy ]

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