Defined benefit vs. Defined contribution pensions

[Plan B]

Can we discuss the relative advantages/disadvantages of defined benefit vs. defined contribution plans?

As I see it there are just too many problems with defined benefit plans to ever make them worth the risk. Right now we have big financial problems at Ford and GM, at least partially because of the obligations they've taken on with their defined benefit pensions and health care plans. I think I read that when you buy a new GM car $1500 of the cost is for retiree medical care. There are also big problems with the airlines. And the city of San Diego. And NY state. And Social Security.

The problem IMHO is with the basic format. You can pay employees for labor this year with promises of income and health care thirty or forty years from now. Now even if the directors of the company are the most decent people you could find they could still wind up in the same situation as GM or United Airlines. A new company opens for business with young employees, no retirement costs for a long time and you have to compete with them on price. Good luck.

With local and federal governments it's probably worse. It's very easy to buy the votes of municipal employees by making promises for deep in the future.

And with the life expectancy getting longer and longer there's no reasonable way to calculate how much money should ever be set aside. Not that corporations or governments are capable of setting aside money for people anyway.

The defined benefit plans seem much safer. The employee contributes. The employer contributes. The employee then has his own personal "lockbox," to borrow Al Gore's phrase. He does not have to worry about who's running the company. He doesn't have to worry about what Congress will decide to give him as his SS payment.

I'd like to hear the opposite point of view. Why would anyone, especially liberals, want to take so much power from the little guy and give it to the big guy?

[pool]

It all depends on which side you are on. If you are the employee, you obviously want the defined benefit plan and the employer wants the defined contribution plan. The danger of the benefit plan to the company is that there are so many variables: number of years worked, the employee's highest salary, how long the employee lives after retirement, and how the investments in the pension fund perform. With the benefit plan the employer could end up paying for a lot more than they bargained for, but with contribution at least they know how much they will have to pay out.

[Cheesesteak]

Of course, pool, if you're the employee, and GM goes bankrupt 10 years before you retire, your defined benefits could be $0. You are trusting them to be financially responsible when you reach retirement age, that may not happen. There is also the possibility of the company changing the rules sometime in the next 20 years, so your benefit changes.

The defined contribution method can be considered less risky because the money is actually there, in an account with your name on it, in safe investments (you hope).

[Happy Scrappy Hero Pup]

Pension fund administrator checking in here.

Of course, pool, if you're the employee, and GM goes bankrupt 10 years before you retire, your defined benefits could be $0. You are trusting them to be financially responsible when you reach retirement age, that may not happen. There is also the possibility of the company changing the rules sometime in the next 20 years, so your benefit changes.


Actually, if the company goes under, you've got the Pension Benefit Guaranty Corporation (http://www.pbgc.gov/) to pick up most of the slack. Your benefit may be reduced, but you've still got insurance. Which isn't the case if your company decides to Enronize its portfolio.

In addition, at least with a unionized company, there are trustees on both the labor and the management side, each of whom has a fiduciary duty to the side he represents. The company cannot unilaterally change benefits in order to make its own burden easier.


And, if I may pontificate for a minute, the defined benefit plan is, in my mind, superior. If you're in contract negotiations and your employer is hesitant to commit to wage increases or fully-funded healthcare premiums, the pension option allows for the employer to make minimal (or even NO) up-front contributions, because a plan that is fully funded can generate enough interest to pay full benefits even if every eligible member retired tomorrow. A well-run pension plan can generate dollars' worth of benefits for pennies, and is fiscally advantageous in negotiations when money has to be saved NOW.


If I had to choose between betting on the financial stability of my employer with the government as its backer (defined benefit) or betting on the integrity of that emplyer with the stock market as its backer (defined contribution), I'm going with the former.

[Mama Zappa]

Another angle to look at is that with a defined *benefit* plan, you're rewarded for staying longer at a job. Oftentimes if you leave before, say, 5 years, you get nothing. And the final benefit is calculated based on a formula involving your highest-earning years, and the total number of years you worked for that company. That was great in the days when someone typically worked for the same company all his career.

With today's job-hopping trends, defined contributions can result in a better deal. I don't recall what the vesting laws are these days but you may be more likely to get something after a shorter time. My company's policy was (IIRC) a step-vesting plan so you got some of their contributions if you left in as lttle as 3 years; may be faster these days (I've been there long enough to be fully vested regardless so haven't been paying attention to the details).

Defined benefit is great, IF the company is doing an adequate job of funding the pension fund. Many do not. Even the US Government's plans are underfunded, for their civilian employees' funds (CSRS / FERS; not talking about Social Security). I imagine we're looking at a train wreck as more companies' funds start having problems due to a long history of underfunding.

PBGC only replaces part of your pension, which is obviously better than nothing.

At least with defined *contribution* plans, you do know what you've got in the bank. The downside of those is, depending on the type, you may have to control the investments yourself, and if you screw up, well, it's Alpo for dinner.

As a minor hijack: my company was sold to a larger one a few years ago. As a result, I could theoretically start taking my defined-benefit pension *right now*. 20 years before normal retirement. Yeah, it'd be 60 bucks a month. Well, less than that, as I'd need to take the spouse-support reduction so Papa Zappa would have 20ish bucks a month if I croaked :D I think I'll hold off and take the 250 bucks (less spouse reduction) at retirement time!

[Debaser]

It's hard to imagine anybody willingly choosing a pension over a 401(k). Pension plans give the worker no control over their choices. The money is "promised" to them, but can be looted, lost or stolen.

With a 401(k) or IRA plan the money belongs to the worker. It cannot be stolen by anyone. It cannot be looted or mis-managed by corporate interests beyond the workers control. The fund can follow a worker from one company to the next. The money gets distributed as the worker chooses upon his or her death. The worker, not the corporation has control of investment choices. The worker can be assured that all interest and dividends generated are being compounded for his benefit.

There really is no aspect where a pension is better. The choice is very simple. Hopefully some day soon we won't have old fashioned pensions anymore at all.

[UncleBeer]

With a 401(k) or IRA plan the money belongs to the worker. It cannot be stolen by anyone. It cannot be looted or mis-managed by corporate interests beyond the workers control.
Except by, ya know, the fund manager and his company.

[Tamerlane]

It's hard to imagine anybody willingly choosing a pension over a 401(k).



Thankfully I don't have to as I have both, as should we all :).

- Tamerlane

[Debaser]

Except by, ya know, the fund manager and his company.

Can you give an example of this ever occurring?

[Happy Scrappy Hero Pup]

Debaser, the crux of the Enron scandal was that the employees had no control over where there 401(k) money was invested, and large portions of it were locked into Enron stock, which was driven into the toilet by the mismanagement and criminal activity of the executive officers of that company, who also (and, by dint of being Enron execs) had control over every aspect of where the employees' money went and how much of a return it earned.


There is no way under the sun that I can conceive of anyone submitting his retirement options to the whim of the market and the dubious trust of an executive who has no fiduciary duty to the employee.

[Happy Scrappy Hero Pup]

And that's "their" money.


Sweet God, it's been a long day.

[Ass For A Hat]

With a 401(k) or IRA plan the money belongs to the worker. It cannot be stolen by anyone.
Sadly, this has happened often enough that the Dep't o' Labor has felt the need to put this (http://www.dol.gov/ebsa/publications/10warningsigns.html) together to help plan participants be vigilant. The most common danger in 401(k) arragements is that contributions deducted from employee paychecks, destined for the plan, are pocketed by the employer.

As far as whether I'd choose to fund my own retirement account or have my employer do it, I'd pick the DB plan every time.

[Icarus]

There really is no aspect where a pension is better. The choice is very simple.

As I detailed in another thread long since lost to the sands of time.....

The unfortunate aspect I have witnessed is that the trend over time has been to eliminate pensions in favor of 401(k)s with no compensation to the employee for doing so. In the old days, you got your salary + company pension contributions. Then 401(k) came along and you got your salary + company matching 401(k) contributions. Now what I see is, you got your salary + .........(hello? hello? is anybody there?) NO COMPANY MATCHING! To me the whole thing is a trojan-horse/slight-of-hand to "reduce the cost of labor" (steal money from the workers). They will successfully convince people that having control over "their own money" is a good thing, all the while reducing what those people are getting.

[JohnT]

Debaser, the crux of the Enron scandal was that the employees had no control over where there 401(k) money was invested, and large portions of it were locked into Enron stock

That's not at all true, at least according to Kurt Eichenwalds latest book, Conspiracy of Fools : A True Story (http://www.amazon.com/exec/obidos/tg/detail/-/0767911784/qid=1115926026/sr=8-1/ref=pd_csp_1/103-7856723-5077421?v=glance&s=books&n=507846). In it, he goes into the controversy and makes the following points:

1. Enron employees were locked out of their 401(k)s for 10 days only, in November/December 2001.
2. In that time, the stock sank from $6.50 to $3.50.
3. Before that, the stock sank from $50 to $6.50. By the time the $6.50 level was reached, the 24-day period that Smith and Enshwiller detailed in their book (http://www.amazon.com/exec/obidos/tg/detail/-/0060520736/qid=1115926220/sr=1-1/ref=sr_1_1/103-7856723-5077421?v=glance&s=books) had already passed (starting on October 16th 2001 when Enron filed the 8-K that really started the snowball effect.) So they had plenty of time before the freezing to dump their stock, and they were (well, should have been) well informed as to what was going on. It wasn't as if wasn't front page news or anything.
4. When the accounts were unfrozen, Enron employees as a whole bought more Enron stock than they sold.

Quite frankly, reading Eichenwalds account makes one wonder if people are really qualified to run their own retirement accounts.

[JohnT]

Also, the employees overinvested in Enron in the first place, so it's not as if they're blameless here.

And, it was a 10-Q that they released, not an 8-K. The 8-K filing marked the end of the 24 day period mentioned above. Enron employees were locked out of their 401(k) plans after this period.

[Debaser]

As I detailed in another thread long since lost to the sands of time.....


I don't think that this is the case. Employers are always at competition with eachother for employees. The natural supply and demand of workers ensures that people make as much or as little as they are worth.

If a worker costs more due to some hidden cost other than what's in his paycheck, then this is taken into account. An example of this is the hidden matching tax that employers pay for Social Security. This is really just a tax on the workers. Since this cost is taken into account by employers, it is ultimately being passed on to them in the form of lower wages.

Pensions would be just another example of this. As pensions become less common, workers make more money in their actual paycheck to make up for it.

[Debaser]

Thanks, John. I knew that claim was bunk, but wasn't looking forward to researching it!

[Debaser]

Sadly, this has happened often enough that the Dep't o' Labor has felt the need to put this (http://www.dol.gov/ebsa/publications/10warningsigns.html) together to help plan participants be vigilant. The most common danger in 401(k) arragements is that contributions deducted from employee paychecks, destined for the plan, are pocketed by the employer.


Well, pensions collapse often enough that the feds had to put this (http://www.pbgc.gov/about/default.htm) together to bail all the poor souls out who have had thier pensions vanish outright.

PBGC pays monthly retirement benefits, up to a guaranteed maximum, to about 518,000 retirees in 3,479 pension plans that ended. Including those who have not yet retired and participants in multiemployer plans receiving financial assistance, PBGC is responsible for the current and future pensions of about 1,061,000 people.


1,061,000 people are the victims of pensions that have gone the way of the Dodo. That's enough for me not to be interested, to say the least.



As far as whether I'd choose to fund my own retirement account or have my employer do it, I'd pick the DB plan every time.

Well, that's your choice to make. But, I can't see why anyone would willingly choose to be in a DB plan. They are inferior in every meaningful way with other plans such as 401k's and IRA's.

[Debaser]

Oh, and this...

The most common danger in 401(k) arragements is that contributions deducted from employee paychecks, destined for the plan, are pocketed by the employer.


This is outright theft, and is illegal. Taking money from someone's 401(k) contribution or account is no different than stealing it from their paycheck or bank account.

Can you give cites of this happening on a large scale?

If a company wants to get out of paying my pension it can. They can declare bankruptcy and walk away without paying me a cent and without breaking the law. If a company wants my 401(k), then they cannot have it. There's no way for them to get it besides somehow stealing it from me, which would be a criminal act. Nor can they have their funds that have been matched. They now belong to me, and are in an account in my name.

[Ass For A Hat]

I can't see why anyone would willingly choose to be in a DB plan. They are inferior in every meaningful way with other plans such as 401k's and IRA's.
Which meaningful ways are you referring to? All that you've demonstrated is that there are companies who have defaulted on their pension obligations and that the PBGC has assumed those obligations. This says more about the companies that default than it does about the differences between DB and DC plans.

One thing I wanted to add about the Enron situation that JohnT didn't mention. Enron made it's entire company matching contribution in stock, and emloyees weren't free to move that money into other investements. That's not to dispute the other points he made though.

[Icarus]

I don't think that this is the case. Employers are always at competition with eachother for employees. The natural supply and demand of workers ensures that people make as much or as little as they are worth.

....snip....

As pensions become less common, workers make more money in their actual paycheck to make up for it.

With all due respect to rosy Econ 101 views of the world, um, yeah right. :rolleyes:

[Debaser]

Which meaningful ways are you referring to?


Defined Benefit plans (pensions).

-Workers have no control over investment choices.
-Workers have no choice in the amount to contribute to the plan.
-Payments from pensions are set at a limited amount that is not variable by the worker.
-Pensions don't transfer from one company to another.
-Workers depend on a promise to pay from the company. This promise can be broken.
-The employer can decide not to pay the pension.
-Death and survivor bennies from pensions are decided by the company, not the worker.

Defined Contribution plans (401ks):

-Workers get to make investment choices best for them.
-Workers can contribute an amount of their choosing.
-The workers can choose the amount they wish to withdraw and at what times on retiring.
-401(k)'s can be transferred with the employee as they change jobs.
-Workers have their money in an account they control and own.
-Money in the workers' account cannot be taken away except by illegal theft.
-Upon death the funds from the plan go to whomever the worker has specified.



All that you've demonstrated is that there are companies who have defaulted on their pension obligations and that the PBGC has assumed those obligations. This says more about the companies that default than it does about the differences between DB and DC plans.


We're debating which is better. I've shown you that there are over a million people who've had their pensions completely vanish. Nobody has shown me a single cite yet for a single person who's 401(k) has been taken away in a similar fashion.

The PBGC doesn't pay the full amount of the pensions. They only try and take up some of the slack. Besides, if pensions weren't risky and often worthless in the first place then why do we even need a huge government entity to bail all of them out. No such thing exists for 401(k)'s because it's not needed.

[Ass For A Hat]

Sorry, but I don't agree that many of the things you have copied and pasted below are true advantages/disadvantages.

Defined Benefit Plans
-Workers have no control over investment choices.
This is because an investment professional is responsible for determining how the plan is going to meet it's predetermined obligations. Do you really need a cite that demonstrates that professionals make better investment decisions than laymen?
-Workers have no choice in the amount to contribute to the plan.
-Payments from pensions are set at a limited amount that is not variable by the worker.
Good job. You've hit on the nature of DB plans. The company promises a certain benefit at retirement and is responsible for figuring out how to meet that obligation. Why is this better or worse than a DC plan?


Defined Contribution plans (401ks):

-Workers get to make investment choices best for them.
-Workers can contribute an amount of their choosing.
These both assume that the emplyoees are sufficiently educated to plan for an amount needed at retirement and to know how to properly invest to achieve that goal. I am not convinced that this knowledge is widespread.

-The workers can choose the amount they wish to withdraw and at what times on retiring.
Totally dependent on plan language. This type of flexibility is very uncommon.

-401(k)'s can be transferred with the employee as they change jobs.
Woo hoo. You can have this one.

-Workers have their money in an account they control and own.Many, not all, DC plans allow participants to direct the investement of their account balance. This is in no way required. As far as control and own...not really. Certainly all participants recieve a statement that has their name on it. That's about it though. Almost all pension accounts are pooled investments. At the asset level, Participant A and Participant B's shares are held in the same trust account. Many insurance company products group multiple plans into the same investment pool. Participants only have a right to receive their money when they meet one of the plan's requirements for distributable events. It's much different than money that sits in your checking account.

I've shown you that there are over a million people who've had their pensions completely vanish.
No, you've shown that there are a million people who have their penion benefits assumed by the PBGC. Those people are not getting nothing. Did you read your cites?

Besides, if pensions weren't risky and often worthless in the first place then why do we even need a huge government entity to bail all of them out. No such thing exists for 401(k)'s because it's not needed.
What kind of logic is this, exactly?

[Debaser]

Sorry, but I don't agree that many of the things you have copied and pasted below are true advantages/disadvantages.


I have never plagarized myself on this board or anywhere else. Backup this accusation with some evidence or retract it at once.

[Ass For A Hat]

I have never plagarized myself on this board or anywhere else. Backup this accusation with some evidence or retract it at once.
Yeah, you're right. I got carried away there. Sorry.

The bulk of your list is still without merit however.

[Cunctator]

There really is no aspect where a pension is better.A pension provides insurance against longevity risk that is simply not available when a retiree is paid a lump sum benefit from a defined contribution plan.

Defined Benefit plans (pensions).

-Workers depend on a promise to pay from the company. This promise can be broken.
-The employer can decide not to pay the pension.How are pension plans structured in the USA? Here the pension plan is an entirely separate entity from the employer's business, with its own assets administered by trustees in line with the plan's trust deed. If the plan is properly funded (and I accept that that can sometimes be a big if), the employees are not reliant on the employer paying their pensions.

[Shalmanese]

Sorry, but I don't agree that many of the things you have copied and pasted below are true advantages/disadvantages.

Defined Benefit Plans

This is because an investment professional is responsible for determining how the plan is going to meet it's predetermined obligations. Do you really need a cite that demonstrates that professionals make better investment decisions than laymen?



And most laymen won't be making their own investment decisions. Instead, they'll be investing in mutual funds or other schemes which use the exact same investment professionals. The difference is, employees now have a choice about where they want to invest. Younger people might prefer high risk stocks whereas people closer to retirement might want bonds for security. Some people may prefer to invest in ethically or enviromentally sound companies.



Good job. You've hit on the nature of DB plans. The company promises a certain benefit at retirement and is responsible for figuring out how to meet that obligation. Why is this better or worse than a DC plan?


Because, often those promises aren't kept. This isn't so much a flaw of DB as it is the current regulatory enviroment but it makes it incredibly attractive to do so. If your suffering a cash crisis and you have a fully stocked pension, you can choose to either a) declare bankruptcy and give everyone the full value of their pensions or b) play some accounting tricks to give you some extra spending money and not be able to fulfil the pensions if you do go bankrupt.


These both assume that the emplyoees are sufficiently educated to plan for an amount needed at retirement and to know how to properly invest to achieve that goal. I am not convinced that this knowledge is widespread.


The way it works in Australia is that there are only a certain subset of of investment plans that qualify for DB which is government regulated. This means, while it's certainly possible to do badly under a DB plan, it's unlikely that you'll do catastrophically.


Totally dependent on plan language. This type of flexibility is very uncommon.

Many, not all, DC plans allow participants to direct the investement of their account balance. This is in no way required. As far as control and own...not really. Certainly all participants recieve a statement that has their name on it. That's about it though. Almost all pension accounts are pooled investments. At the asset level, Participant A and Participant B's shares are held in the same trust account. Many insurance company products group multiple plans into the same investment pool. Participants only have a right to receive their money when they meet one of the plan's requirements for distributable events. It's much different than money that sits in your checking account.


Again, thats an implementation issue, not a inherent flaw. In Australia, the company isn't allowed to touch the plan.


No, you've shown that there are a million people who have their penion benefits assumed by the PBGC. Those people are not getting nothing. Did you read your cites?


Because these pensions are being payed by the taxpayer so amount in the end to everyone getting nothing since the extra benifits are offset by higher taxes for everyone else.

[Ass For A Hat]

Because these pensions are being payed by the taxpayer so amount in the end to everyone getting nothing since the extra benifits are offset by higher taxes for everyone else.
From the PBGC (http://www.pbgc.gov/about/default.htm) web site.

PBGC is not funded by general tax revenues. PBGC collects insurance premiums from employers that sponsor insured pension plans, earns money from investments and receives funds from pension plans it takes over.
And most laymen won't be making their own investment decisions. Instead, they'll be investing in mutual funds or other schemes which use the exact same investment professionals.
Sure, most people in DC plans invest in mutual funds. Planning for retirement is more than just turning your money over to a mutual fund manager though. A DC plan participant needs to be able to figure out how much they need to put in over a lifetime in oder to meet their retirement income needs. In addition to deciding how much to contribute, they also need to decide where to put that money.

Obviously, since DC plans have only been popular in the U.S. for about 20 years, there isn't a vast amount of evidence as to how well the average participant will do over a lifetime of investing on their own. There is certainly some evidence though that many do not do a good job. Enron is just one example. Sure, those people didn't deserve to be defrauded, but what were retirement age employees doing with their entire portfolio in one stock?

DB plans take the onus of investment risk off of the participant and put it on the plan sponsor. The funding of the plan is also born by the employer. This still leaves the individual free to save their own money for retirement if they wish. Lastly, in the event of collapse, the DB plan is insured by the government. If an unforturnate DC plan participant does a bad job of planning for retirement, they aren't going to have much luck asking the government to bail them out.

[UncleBeer]

Can you give an example of this ever occurring?
Uh, just so we're on the same page here, are you asking me for an example of mismanagement of a mutual fund and/or fraud committed by the fund's manager or parent company? Examples of this are legion. In fact, quite recently, a major investigation was undertaken by the SEC into the illegal practice of "market timing," (the too quick buying and selling of shares) and "late purchases" )stock buys after the market has closed for the day). Officers at Janus (and several other mutual fund providers) have since been indicted anc convicted with some severe fines levied.
http://money.cnn.com/2005/04/21/news/midcaps/janus.reut/index.htm
http://mutualfunds.about.com/od/mutualfundfraud/
http://mutualfunds.about.com/b/a/023397.htm
http://www.sec.gov/news/press/2005-39.htm
http://www.sec.gov/news/press/2005-40.htm

If you're asking if a 401(k) retirement account (a more narrow category) has ever been mismanaged, looted, or has otherwise been the target of nefarious dealings by the fund manager then I would wonder why you're making that distinction. Monies contributed to a 401(k) by an employee aren't handled by the fund manager any differently than monies invested by individuals. The fund manager sees only a pool of cash with which he's tasked to invest.

[Shalmanese]

From the PBGC (http://www.pbgc.gov/about/default.htm) web site.

PBGC is not funded by general tax revenues. PBGC collects insurance premiums from employers that sponsor insured pension plans, earns money from investments and receives funds from pension plans it takes over.


My mistake.


Sure, most people in DC plans invest in mutual funds. Planning for retirement is more than just turning your money over to a mutual fund manager though. A DC plan participant needs to be able to figure out how much they need to put in over a lifetime in oder to meet their retirement income needs. In addition to deciding how much to contribute, they also need to decide where to put that money.

Obviously, since DC plans have only been popular in the U.S. for about 20 years, there isn't a vast amount of evidence as to how well the average participant will do over a lifetime of investing on their own. There is certainly some evidence though that many do not do a good job. Enron is just one example. Sure, those people didn't deserve to be defrauded, but what were retirement age employees doing with their entire portfolio in one stock?

DB plans take the onus of investment risk off of the participant and put it on the plan sponsor. The funding of the plan is also born by the employer. This still leaves the individual free to save their own money for retirement if they wish. Lastly, in the event of collapse, the DB plan is insured by the government. If an unforturnate DC plan participant does a bad job of planning for retirement, they aren't going to have much luck asking the government to bail them out.

Well, the easiest way around that is to make a legislated minimum percentage of income a person has to invest. A sane minimum with generally safe investment strategies means that even in a reasonable downturn, people will still end up with enough to live in if not in the lap of comfort.

Unclebeer: Are you implying that DB schemes are immune from corrupt mutual fund managers? It was my understanding that no matter where you invest, it still went into the same managers and, thus, choosing DB over DC wouldn't solve the problem of inadequate mutual fund regulation.

[JohnT]

choosing DB over DC wouldn't solve the problem of inadequate mutual fund regulation.

Nor does it solve the problem that over 98% of all managed funds underperform their target markets indices over the life of the fund. Cite (http://www.amazon.com/exec/obidos/tg/detail/-/0071385290/qid=1116007788/sr=8-1/ref=pd_csp_1/104-0521128-3222316?v=glance&s=books&n=507846)

But that's really another thread. Carry on! ;)

[Debaser]

[QUOTE=UncleBeer]Uh, just so we're on the same page here, are you asking me for an example of mismanagement of a mutual fund and/or fraud committed by the fund's manager or parent company?

No. I had posted:

"With a 401(k) or IRA plan the money belongs to the worker. It cannot be stolen by anyone. It cannot be looted or mis-managed by corporate interests beyond the workers control."

To which you responded "Except by, ya know, the fund manager and his company."

This seems to imply to me that you beleive a fund manager or his company could steal or loot it. Or mis-manage it without the workers control.

What's that have to do with mis-management of mutual funds? Your examples of market timing and late purchases have nothing at all to do with the subject at hand.

I've shown evidence in this thread that over a million people have been defrauded by pensions. They paid in over their working lives and the money isn't there for them. (Yes, the government does pay them something, but it's not as much as they would have gotten in the first place, and the government wouldn't need to bail people out if those plans weren't drying up in the first place.)

I'm simply pointing out that this is not possible with a 401(k) or IRA fund. The money belongs to the worker and cannot be stolen. If you think that a fund manager can just take money out of a 401(k), then provide a cite of this happening! Nobody can show me a single example of this ever happening to a single person.

[Debaser]

Unclebeer: Are you implying that DB schemes are immune from corrupt mutual fund managers? It was my understanding that no matter where you invest, it still went into the same managers and, thus, choosing DB over DC wouldn't solve the problem of inadequate mutual fund regulation.

Exactly. Mutual fund managers are going to be a part of the equation no matter which way you invest. (Pension or 401k).

I also agree that the best way to avoid all of this nonsense altogether is simply to invest in index funds. The fees are lower (or nonexistant) and the performance is better. It's a win, win.

[UncleBeer]

Unclebeer: Are you implying that DB schemes are immune from corrupt mutual fund managers?

Heh. Noooo way. My buddy manhattan would have my balls on his key chain if postulated something that transparently absurd. I knew after I'd posted, I should have probably have made my position clear. I believe contribution-type plans (such as the 401(k)) are far more preferable than the classic (and disappearing) pension (or distribution) plans. They are certainly less susceptible to being raided for fradulent personal (or corporate) gain if only because the monies pass through the hands of fewer people (although there are other reasons such as those given by Debaser, too). I was only taking exception to Debaser's claim:
With a 401(k) or IRA plan the money belongs to the worker. It cannot be stolen by anyone. It cannot be looted or mis-managed by corporate interests beyond the workers control.

It was my understanding that no matter where you invest, it still went into the same managers and, thus, choosing DB over DC wouldn't solve the problem of inadequate mutual fund regulation.
Right. I agree with this statement. A corrupt mutual fund manager/company doesn't care (or necessarily know) where the money he's tasked with investing comes from. And if fact, I'm not even sure that matters anyway. If he's unprincipled enough to commit fraud, he's gonna steal it all. Plus, the fund manager operating fradulently is probably manipulating the other end of the game—the buying & selling of specific market issues—anyway; he's not generally siphoning off incoming capital.

[Debaser]

I was only taking exception to Debaser's claim:

OK. I now see what you meant. I still disagree with it, though.

I think that what you are saying is very indirect. I'm saying money can't be stolen or mismanaged from a 401k or IRA. This is true. However, money in these types of accounts can be invested in a mutual fund, and these funds can be mis-managed. This is your point.

Well, you do have a point, but it is a bit of a stretch. Also did say that it can't be mis-managed "by forces beyond the workers control". The worker chooses to put his money into a fund. That's his choice, and it's up to him to put the money into a good reputable fund that won't be looted from. If a worker doesn't want to expose himself to that risk, he can buy an index fund or a bond fund or a t-bill fund, etc. But all of this is within the control of the worker, as I originally stated.

With a pension, nothing is in the workers control. If the people running the pension want to invest it all in a shady mutual fund with a corrupt, thieving manager then they can. The worker can't choose what to do. It's not in thier control.

[UncleBeer]

What's that have to do with mis-management of mutual funds? Your examples of market timing and late purchases have nothing at all to do with the subject at hand.
The point I was hoping to make clear (and at which I'm apparently failing), is that contributors to a 401(k), and hence share owners in mutual funds, are just as susceptible to fradulent activities by the fund managers as private individual investors in any given fund. If a fund manager is running his fund in a way that maximizes his personal wealth through fradulent means as opposed to maximizing the overall fund value for his investors, then our hypothetical worker is the victim of theft. I submitted several citations indicating that some mutual fund providers, from time-to-time, use the assets in their trust in a manner which is more likley to maximize their own corporate benefit, at the expense of the investors. And surely the investor has no (short-term) control over the fund provider. And in some cases no long-term control either. (The 401(k) plan at my company right now offers funds from several mutual fund providers. Prior to Jan '05, though, all the funds in our plan came from a single fund provider. Kinda tough to just move your money elsewhere to avoid being defrauded in that situation.)

[UncleBeer]

Heh. We're kinda posting past each other here. Sorry about that.

I think that what you are saying is very indirect. I'm saying money can't be stolen or mismanaged from a 401k or IRA. This is true. However, money in these types of accounts can be invested in a mutual fund, and these funds can be mis-managed. This is your point.
Right. Exactly.

And yes, the raiding of a mutual fund, by whatever means, is a step removed from that which typically takes place in a designated benefit pension. But it still takes place. And there are circumstances (see my post just above) which prevent the worker from exercising complete control over the choices of where to put his retirement money.

I'd also like to state again, that I am very largely in agreement with you. A contribution-type plan is far more preferable than a distribution-type plan.

[Ass For A Hat]

I've shown evidence in this thread that over a million people have been defrauded by pensions.
Again...you have not shown this at all. You've quoted a statistic that says the PBGC has current or future obligations to over a million people.
They paid in over their working lives and the money isn't there for them.
First off, these plans are paid for by the employers, not the employees. Secondly, money is there. The link to the PBGC cite is earlier in the thread, but here's some more about how they do what they do.

An employer can voluntarily ask to close its single employer pension plan in either a standard or distress termination. In a standard termination, the plan must have enough money to pay all benefits, whether vested or not, before the plan can end. After workers receive promised benefits, in the form of a lump sum payment or an insurance company annuity, PBGC' guarantee ends. In a distress termination, where the plan does not have enough money to pay all benefits, the employer must prove severe financial distress - for instance the likelihood that continuing the plan would force the company to shut down. PBGC will pay guaranteed benefits, usually covering a large part of total earned benefits, and make strong efforts to recover funds from the employer.

You somehow seem convinced that these million people have all been cheated by corrupt employers and they are left with nothing for their retirement. You have presented absolutely nothing to support this idea.

[Ass For A Hat]

Well, the easiest way around that is to make a legislated minimum percentage of income a person has to invest. A sane minimum with generally safe investment strategies means that even in a reasonable downturn, people will still end up with enough to live in if not in the lap of comfort.
I think we'd better steer clear of that question in this thread. That notion veers in the direction of the current debate about Social Security in the U.S. That's a whole other kettle of fish, and there are other threads on the SDMD devoted to it.

[Debaser]

You somehow seem convinced that these million people have all been cheated by corrupt employers and they are left with nothing for their retirement. You have presented absolutely nothing to support this idea.

I have not said or implied that they have been left with nothing. Please stop with this straw man.

[Shalmanese]

From the PBGC (http://www.pbgc.gov/about/default.htm) web site.

PBGC is not funded by general tax revenues. PBGC collects insurance premiums from employers that sponsor insured pension plans, earns money from investments and receives funds from pension plans it takes over.


From this week's economist (http://www.economist.com/printedition/displaystory.cfm?story_id=3966462)


The PBGC could ill afford more big corporate failures. The agency, which had a $9.7 billion surplus in 2000, faced a $23.3 billion deficit last year (including the expected effect of a default by United). But worse seems bound to follow: the PBGC puts corporate America's total pension deficit at $450 billion.


I think an article a few weeks ago also described the PBGC as too big to fail which means that in the end, the taxpayer will have to pay out the shortfall if PBGC doesn't meet their obligations.

[Ass For A Hat]

I have not said or implied that they have been left with nothing.
I disagree.

I've shown you that there are over a million people who've had their pensions completely vanish.
Well, pensions collapse often enough that the feds had to put this together to bail all the poor souls out who have had thier pensions vanish outright.
On top of this, you've repeatedly made unsupported accusations of fraud on the part of plan sponsors.

[Ass For A Hat]

I think an article a few weeks ago also described the PBGC as too big to fail which means that in the end, the taxpayer will have to pay out the shortfall if PBGC doesn't meet their obligations.
You may be right about the PBGC's future. I hope not, but certainly it is under more pressure now than ever. What I can't let stand however, are Debaser's wild, unsupported, claims about what has already occurred.

[Debaser]

"pensions vanish" <> "left with nothing"

I'm obviously aware that those whos pensions do go away are paid by the PBGC. I've made reference to this a number of times.