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Old 10-10-2019, 08:01 PM
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What's the Dope's view on the superiority debate re: traditional defined benefit pensions vs. 401ks?


This thread is inspired by the news that GE just became the most recent company to freeze its pension benefits. Given that, and in light of the fact that traditional defined benefit pensions are mostly extinct in the private sector, where do you fall on the trope oft-discussed that such pensions really *are* superior to the now-ubiquitous 401k systems that most workers tend to be invested in today?

I can kind of see both sides to the equation: having a decently sized pension ensures that no retiree will ever run out of money, while the pension itself is reliant on its parent company continuing to exist in the first place and making sound investment decisions with the pension funds. On the flipside, 401ks place the onus of retirement saving entirely onto the backs of individual workers, who could potentially lose a ton of their money if they do not invest judiciously enough, whether in terms of picking the right investments or simply stashing away enough of their paycheck for a long enough period of time. *But,* 401ks are portable and could prove invaluable to a worker who switches jobs multiple times throughout his or her working life.

FWIW, as somebody who actually *is* vested in a traditional pension thanks to union membership, I am mostly a big proponent of them even if I think that all workers nowadays should supplement any pension benefits with copious retirement investing (which I also do). I am sad to see them basically be eliminated from the private sector, and hopefully at some point they will make a resurgence.
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Old 10-10-2019, 08:50 PM
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Do you not have the intermediate stage of a defined contribution plan, but the assets are invested by an investment board made up of representatives from the employer and the employees?

It's an approach taken in Canada. The pension money vests in each employee's account with each pay period, and the employer can't claw it back. So the pension funds are'n't affected if the company goes under. But the investment board provides professional investment decisions, rather than leaving it to each employer, and has the clout of a pension fund in making investments at good rates.
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Old 10-10-2019, 08:56 PM
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My employer offered employees a chance to take cash according to their years of service and income to switch to a 401k type plan back in 1997. I knew some guys who took them up on it and got in some cases $250K to switch. Then the bust of 2000 came and some of them took a real beating. I stood pat as they only offered me something like $45K to switch. Best move I ever made. I think if you've got a pension plan, stick with it and go ahead and put a 401k on top of it.
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Old 10-10-2019, 10:10 PM
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Rule of Thumb: if you've got a long-term financial asset of some sort, and someone with an army of accountants and actuaries on call offers to buy it from you for a hefty price, turn them down!

If they want it that badly, they've assessed the long-term value and it's s worth more in the long run than whatever the immediate cash value they're offering now.
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Old 10-10-2019, 10:59 PM
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I am sad to see them basically be eliminated from the private sector, and hopefully at some point they will make a resurgence.
Not be rude, but - not a chance. They were an experiment that was tried for a few decades, but the conclusion was that they were not sustainable. In the history of the world, a mere blip.
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Old 10-10-2019, 11:19 PM
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They both have their problems. Pensions have the problem that companies underfund them, especially if their value grows during a boom, and so when the bust comes they never catch up. Plus, the way they were done in the US was not portable. When I was in grad school computer scientists who switched jobs often often complained about never staying in one place long enough for pensions to vest for very long. They loved 401Ks.

The problem with 401Ks is that people can't afford to put money into them, and so don't get the match, and that people mismanage them, selling low and buying high.

I had both. My AT&T pension lasted several changes of companies, and when I got offered a buyout it was a lot bigger than I expected it to be. (I took the buyout to be able to manage it directly.)
But I was making enough to invest in 401Ks and didn't panic during crashes. The median 401K value for those 50 - 59 is $60,900, which is not going to go very far. So it can be said that 401Ks have failed also. Look at all the people whose retirement plan is to work until they die.

I can see two solutions. One is a pension that goes with the person, not the company, and is managed outside the company. Companies are forced to contribute. Since the manager's bottom line is not helped by reducing contributions in up years, a lot of the issues would be removed.
Another would be mandatory company contributions to 401Ks before matching. My daughter, who works for a university, gets 10% without contributing anything.

On the plus side, when I hit 80 I might be able to handle yunguns (age 65) to be my servants, because a lot will be broke.
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Old 10-10-2019, 11:21 PM
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Not be rude, but - not a chance. They were an experiment that was tried for a few decades, but the conclusion was that they were not sustainable. In the history of the world, a mere blip.
In the history of the world, having a lot of people surviving until retirement is a mere blip. So I think we either need to do something or have some ice floes ready.
And in the US most of us do have a government pension, without which things would be really bad.
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Old 10-10-2019, 11:31 PM
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I know a family that had saved up 401K of about 1 million dollars, when they retired in 1999.

By 2012 or 2013, it was all gone, as they had stayed in the stock market through the crash, and had mis-managed it. Now, they live strictly on social security and their company pensions (they both worked at companies that had defined benefit pensions).
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Old 10-11-2019, 12:05 AM
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The reason defined benefit plans are going away is because they are generally not sustainable in the current environment. They subject companies and municipalities to unpredictable swings due to changes in interest rates and mortality tables, and are a huge resource drain.

I see no way that defined benefit plans can make a resurgence. Even in the government sector many municipalities are tiering their plans to reduce the cost of new entrants.
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Old 10-11-2019, 12:17 AM
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Why is it that companies only do matching to 401k contributions rather than standalone contributions? Are they not allowed to? They used to have to put money away for a pension. It seems they could put that money in a 401k just as easily.

I wish there was an annuity-based fund for a 401k that was sort of like a pension. It could be like adding extra to SS or something. Many people are very bad with investment decisions and will either fritter or lose all their money. If instead they could contribute and then get some fixed benefit later on, that would be a great choice for many people who aren't savvy about investments or disciplined enough to leave the money alone.
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Old 10-11-2019, 05:02 AM
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In the history of the world, having a lot of people surviving until retirement is a mere blip. So I think we either need to do something or have some ice floes ready.
Damn that global warming, we're all out of ice floes!

I have an old-fashioned defined-benefit pension coming at age 65. I also now have a 401(k) on top of it (or beside it, or something....) And social security. And planning to work until 70 if I can, and maybe beyond part time.

Suffice to say a lot of people my age and younger have little trust in any one method of funding old age. I want to keep multiple strategies going as long as I can. Unless you're simply filthy rich no method is without risk and uncertainty.
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Old 10-11-2019, 07:43 AM
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Even in the government sector many municipalities are tiering their plans to reduce the cost of new entrants.
They are indeed tiering their plans, but it doesn't always have to do with interest rates and mortality tables. Sometimes it's for more basic, obvious reasons. For example, when I joined my pension system, I expected to make contributions until I retired. After about 14 years, a law was passed that ended contributions for people with more than 10 years' service - I got a 3% raise, but that's also why their are two tiers after mine ( which both currently must contribute until they collect - until the politicians give them a gift). The tiering is also affected by mortality tables, although perhaps not only in the way you mean - people before me could retire at 55 with a full pension, I can retire at 55 with a full pension if I have 30 years of service and people after me have to wait until at least 62. Which means 1) most of the people in those tiers will wait until 62 to retire and 2) even if they don't, the 40-50% reduction for early retirement will reduce payments.
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Old 10-11-2019, 08:04 AM
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Even in the government sector many municipalities are tiering their plans to reduce the cost of new entrants.
They are indeed tiering their plans ,* but it doesn't always have to do with interest rates and mortality tables. Sometimes it's for more basic, obvious reasons. For example, when I joined my pension system, I expected to make contributions until I retired. After about 14 years, a law was passed that ended contributions for people with more than 10 years' service - I got a 3% raise, but that's also why their are two tiers after mine ( which both currently must contribute until they collect - until the politicians give them a gift). The tiering is also affected by mortality tables, although perhaps not only in the way you mean - people before me could retire at 55 with a full pension, I can retire at 55 with a full pension if I have 30 years of service and people after me have to wait until at least 62. Which means 1) most of the people in those tiers will wait until 62 to retire and 2) even if they don't, the 40-50% reduction for early retirement will reduce payments.


* and it's been going on a long time- I joined Tier 4 in 1988

Last edited by doreen; 10-11-2019 at 08:07 AM.
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Old 10-11-2019, 08:13 AM
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Why is it that companies only do matching to 401k contributions rather than standalone contributions? Are they not allowed to? They used to have to put money away for a pension. It seems they could put that money in a 401k just as easily.
Some do.
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Old 10-11-2019, 08:38 AM
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The reason defined benefit plans are going away is because they are generally not sustainable in the current environment. They subject companies and municipalities to unpredictable swings due to changes in interest rates and mortality tables, and are a huge resource drain.

I see no way that defined benefit plans can make a resurgence. Even in the government sector many municipalities are tiering their plans to reduce the cost of new entrants.
Right, but it's not like individuals don't have the same problems (unpredictable swings in the market and in interest rates, and really unknowable mortality with an actuarial pool of 1 person). And, individuals are much worse at managing money than professionals. And, it's much harder for an individual to predict his own mortality than it is for a pension fund of hundreds or thousands being able to predict the mortality of their actuarial pool.

The main problem with pensions was that they were given very favorable accounting treatment and were allowed to assume very high rates of return, allowing companies to underfund them. Companies made a promise to pay these pensions and purposely underfunded them because the accounting rules said the could assume 8% returns forever in a 2% fixed rate environment. That's obviously not sustainable.

Pensions were a great idea that were handled poorly so companies could raid them and then default on their obligations. It's funny you mention GE, OP, because one of the reasons why they bought RCA was because of RCA's overfunded pension (well, properly funded, probably, but overfunded from an accounting perspective) that they subsequently raided.

People are not good at saving and not good at investing and have no good way to hedge their own mortality. Pensions were forced savings, invested professionally, and had an actuarial pool of retirees with much more predictable mortality than an individual has. Annuities could help out individuals (if they saved enough), but they have so many fees and other issues, that it's not that efficient.
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Old 10-11-2019, 08:45 AM
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I loves me my pending government pension. After 20 years of service, it will provide lovely monthly payments until both the Mrs. and I are deceased, and will also pay off to our kids if we both die before 15 years of payments have passed (but only to the 15 year mark for them). Unused sick time will be matched by my employer (the state) to pay for continued private health care insurance.

That'll be supplemented by the 401Ks and other investments put into play during my 15+ years in the private sector and since. They were managed conservatively and did okay during the collapse of 2008.

We'll postpone SS as long as possible, hopefully until age 70.

My view is that if you have a guaranteed pension, hang on to it because some of them just can't be beat. But check out the details of it, and supplement it however you can with other retirement plans. Gotta be realistic.
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Old 10-11-2019, 10:11 AM
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Why is it that companies only do matching to 401k contributions rather than standalone contributions? Are they not allowed to? They used to have to put money away for a pension. It seems they could put that money in a 401k just as easily.
They didn't have to put money away for a pension. Some of them chose to, but they didn't have to and plenty didn't.
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Old 10-11-2019, 12:44 PM
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I wish there was an annuity-based fund for a 401k that was sort of like a pension. It could be like adding extra to SS or something. Many people are very bad with investment decisions and will either fritter or lose all their money. If instead they could contribute and then get some fixed benefit later on, that would be a great choice for many people who aren't savvy about investments or disciplined enough to leave the money alone.
This is already available. When people retire they can convert their savings to an annuity that pays them a defined benefit until they die. Economist have been puzzled by the fact that so few people use them. It turns out that most people value the option of having a reserve for emergencies over the security of a steady income stream.
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Old 10-11-2019, 01:07 PM
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This is already available. When people retire they can convert their savings to an annuity that pays them a defined benefit until they die. Economist have been puzzled by the fact that so few people use them. It turns out that most people value the option of having a reserve for emergencies over the security of a steady income stream.
Provided they can have the money grow and leave it untouched until they retire, that would be an option. But the people for whom an annuity is the right choice may not be savvy enough to make good investment decisions during their working life to buy a good annuity. It's my feeling that if you can invest well enough to buy a good annuity, you don't really need the annuity. Whatever you did to save up that money, you can keep doing that on your own and keep control of the money. The people who need the annuity would be the ones who wouldn't save a lot, would pull the money out for vacations and such, would invest in funds with high fees or poor returns, etc.

I think it would be useful to have something where you could put 10% of your salary into a retirement annuity which worked much like SS. You couldn't access the money until you were of a certain age, if you died earlier the estate wouldn't get the money, etc. It would not be a good choice for a savvy investor, but it would be a beneficial option for people who want a "set and forget" retirement option.
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Old 10-11-2019, 01:52 PM
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In the history of the world, having a lot of people surviving until retirement is a mere blip. So I think we either need to do something or have some ice floes ready.
With global warming, ice floes may also become a "blip". Good news is a lot of people won't need to worry about long term retirement!
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Old 10-11-2019, 01:57 PM
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This is already available. When people retire they can convert their savings to an annuity that pays them a defined benefit until they die. Economist have been puzzled by the fact that so few people use them. It turns out that most people value the option of having a reserve for emergencies over the security of a steady income stream.
I'm sure that's part of it - but I have recently started looking into the possibility of converting most of my deferred compensation into an annuity - and I really can't find any general info. Not even whether withdrawing a large amount from my 457K to buy an annuity will be subject to state income tax in the year I do it. Sure, there are websites looking to sell me an annuity that might give me info if I create an account - but I don't like to get information only from someone trying to sell me something.
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Old 10-11-2019, 02:50 PM
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I'm sure that's part of it - but I have recently started looking into the possibility of converting most of my deferred compensation into an annuity - and I really can't find any general info. Not even whether withdrawing a large amount from my 457K to buy an annuity will be subject to state income tax in the year I do it. Sure, there are websites looking to sell me an annuity that might give me info if I create an account - but I don't like to get information only from someone trying to sell me something.
I'm not any kind of tax adviser, but make sure you talk to one before you withdraw money from a tax deferred account like a 401k. You may be able to invest in an annuity right in the account, deferring the taxes until the money is paid out -- I remember seeing products like that when I worked adjacent to some insurance people. I think that an annuity will automatically qualify for your minimum withdrawals that 401k's and the like have when you reach certain ages.

The problem with annuities is that they are hard sells so commissions are large so fees are high. And, they come with all kinds of bells and whistles that will add cost, when all you're looking for is a personal pension.
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Old 10-11-2019, 03:28 PM
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The problem with annuities is that they are hard sells so commissions are large so fees are high. And, they come with all kinds of bells and whistles that will add cost, when all you're looking for is a personal pension.
There is one type of annuity that avoids those issues - a SPIA, Single Payment Immediate Annuity. Seldom mentioned by advisors since there usually is just a small or no commission.

Easy to find online calculators for the curious.
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Old 10-11-2019, 09:51 PM
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With global warming, ice floes may also become a "blip". Good news is a lot of people won't need to worry about long term retirement!
Yeah, the floes are supposed to melt after the oldsters get on them, not before.
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Old 10-11-2019, 10:22 PM
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I loves me my pending government pension. After 20 years of service, it will provide lovely monthly payments until both the Mrs. and I are deceased, and will also pay off to our kids if we both die before 15 years of payments have passed (but only to the 15 year mark for them). Unused sick time will be matched by my employer (the state) to pay for continued private health care insurance.

That'll be supplemented by the 401Ks and other investments put into play during my 15+ years in the private sector and since. They were managed conservatively and did okay during the collapse of 2008.

We'll postpone SS as long as possible, hopefully until age 70.

My view is that if you have a guaranteed pension, hang on to it because some of them just can't be beat. But check out the details of it, and supplement it however you can with other retirement plans. Gotta be realistic.
Got to get that government job to get that pension. But, municipalities and states are in danger. The federal not so much because of being in control of the dollar.

The danger with 401k is self discipline and potentially the government pillaging them. I like 401ks but I can see the allure of a federal pension.
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Old 10-12-2019, 01:47 AM
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Rule of Thumb: if you've got a long-term financial asset of some sort, and someone with an army of accountants and actuaries on call offers to buy it from you for a hefty price, turn them down!

If they want it that badly, they've assessed the long-term value and it's s worth more in the long run than whatever the immediate cash value they're offering now.
Sure, but they might be someone, or a company, that happens to be in a better position to exploit that financial asset for its long-term worth than you could anyway. You might be someone with only 10-30 years left to live, and would be better off with big cash now, while that company could last for many decades after you die.
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Old 10-12-2019, 01:49 AM
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The danger with 401k is self discipline and potentially the government pillaging them.
What...? (Do you mean the taxation of 401k benefits upon withdrawal?)
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Old 10-12-2019, 06:38 AM
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What...? (Do you mean the taxation of 401k benefits upon withdrawal?)
That's built into the system. What I worry about is a future administration deciding that retirement assets exceeding a certain amount of dollars disqualifying the owner from receiving social security benefits. I realize that that's not likely to happen, because that would be bad for old people with money, and old people with money run the government, but there was a time when I was younger that that worried me.
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Old 10-12-2019, 06:54 PM
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Our staff association (not actually a union) wrested control of the pension fund and set up a defined contribution plan to the Canadian equivalent of 401k. Since I retired just before the mini-recession in 2000, I did very well. It was turned into an annuity at a very favorable rate (which, given very low interest rates they must be taking a bath on) but I have been getting about 5/6ths of my 1999 salary for very nearly 20 years and counting. And when I am pushing up daisies, my wife will still be getting 60% of it (so half of my final salary). This is all in addition to Quebec Pension (similar to soc. sec.) and a something called old age security (an additional payment not supported by payments to the Quebec Pension Plan). On the other hand, 1980 type inflation will kill me. But it hasn't happened.
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Old 10-12-2019, 08:31 PM
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I can see two solutions. One is a pension that goes with the person, not the company, and is managed outside the company. Companies are forced to contribute. Since the manager's bottom line is not helped by reducing contributions in up years, a lot of the issues would be removed.
But how is this different than social security?

Personally I'd be happy with higher social security taxes and higher social security benefits, combined with some kind of government tax credit that is used to match personal savings. Of course a personal tax credit will get expensive. If the first 2k in personal income tax is a tax credit to match the first 2k in savings, that will be about 300 billion a year.
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Old 10-12-2019, 11:36 PM
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But how is this different than social security?

Personally I'd be happy with higher social security taxes and higher social security benefits, combined with some kind of government tax credit that is used to match personal savings. Of course a personal tax credit will get expensive. If the first 2k in personal income tax is a tax credit to match the first 2k in savings, that will be about 300 billion a year.
Social Security works. Not all companies will offer pensions, but those who do, and have employees who expect to retire on them, would be forced to fund them honestly.

Social Security, btw, is redistributive, with a number of features which cause people on the bottom of the income curve to get relatively more than a flat system. Which is fine with me. Private pension plans would probably not have this feature.

I think it would be hard to increase the SS tax for all, but not that hard to increase the cap for the better off. That would at least fund the system and maybe even allow us to increase payments at the bottom.
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Old 10-13-2019, 09:37 AM
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1. Right, but it's not like individuals don't have the same problems (unpredictable swings in the market and in interest rates, and really unknowable mortality with an actuarial pool of 1 person). And, individuals are much worse at managing money than professionals. And, it's much harder for an individual to predict his own mortality than it is for a pension fund of hundreds or thousands being able to predict the mortality of their actuarial pool.

2. The main problem with pensions...

3. People are not good at saving and not good at investing and have no good way to hedge their own mortality. Pensions were forced savings, invested professionally, and had an actuarial pool of retirees with much more predictable mortality than an individual has. Annuities could help out individuals (if they saved enough), but they have so many fees and other issues, that it's not that efficient.
1. True, the risk of unknown future market returns is always there, it's just a question of who bears it.

2. I think the main problem, though you gave a couple of examples of symptoms of it, is that company managers work for company shareholders (ideally, but always partly for themselves personally in practice...just like everybody else) not company employees, despite any recent popular rhetoric among woke CEO's about working for 'stakeholders'. So there have to be guardrails that make them do certain minimum things for groups like employees, especially *ex* employees whose morale and attitudes don't directly affect the current productivity and thus profitability of the company. The basic argument for individually managed savings is just to put control of retirement savings in the hands of those who have the most direct self interest in making it work: the future retirees.

3. But right, the basic offsetting problem is that ordinary people aren't necessarily that rational, besides unskilled, in financial stuff.

But 'annuities have high fees' is mainly valid for products like variable annuities which are vehicles for savings as well as paying out in retirement. As other posters have pointed out, SPIA's, which just cover the back end, you pay $X upfront and get $Y per month per life are quite competitively priced and can be had for very low fees. Of course like anything you *can* get yourself ripped off on an SPIA, you can pay list price for a car where other people are getting 10%+ off, too. But you can get SPIA's competitively priced with low fees. They aren't a panacea, the market in US pretty much lacks true inflation adjusted ones for example (because customers don't want them, back to lack of rationality plus financial illiteracy, they pay out less because it's real dollars, and most people just see that as 'less'). And you have credit risk to the insurer, so should diversify that with at least a couple or three but that's more complicated.

Recent proposed reforms have included making it more streamlined to annuitize the payout of 401k/IRA's and that's a good small caliber idea. But the only really plausible big caliber idea to make taxation higher and public pensions more generous. Company pensions don't really make a lot of sense IMO besides 'that's what we've always done', kind of like company provided health insurance doesn't either.
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Old 10-13-2019, 07:32 PM
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I agree that SPIAs can be useful, but let's go back to the OP's question -- what's our opinion on 401k's vs. pensions -- I think pensions were very useful because they were forced saving for the employees, managed by professionals, with (effectively) low fee SPIAs at the end. 401k plans require employees to have the discipline to save the money and manage it well.

Regarding the risks, pension funds could have matched their assets and liabilities with bonds instead of rolling the dice with stocks. When the market crashed, they had to keep paying out, so they were selling at the lows, increasing the pain. Insurance companies that provide immediate annuities aren't allowed to do that -- why were pension funds allowed to? My point is, well-managed and well-funded pension funds don't have to take those kinds market risks -- highly rated corporate and government bonds could be used to match their actuarial liabilities very well.

Anyway, I agree that, for retirees that have had the discipline to save for retirement through their 401k and did a good job managing it, an SPIA can be a great way to create an individual pension (also agreed that the bad products tend to be deferred variable annuities).
  #34  
Old 10-13-2019, 10:26 PM
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Originally Posted by RitterSport View Post

Regarding the risks, pension funds could have matched their assets and liabilities with bonds instead of rolling the dice with stocks. When the market crashed, they had to keep paying out, so they were selling at the lows, increasing the pain. Insurance companies that provide immediate annuities aren't allowed to do that -- why were pension funds allowed to? My point is, well-managed and well-funded pension funds don't have to take those kinds market risks -- highly rated corporate and government bonds could be used to match their actuarial liabilities very well.
I'd maintain the key point that market risk/return relationships exist no matter who is put in charge of pensions. You could have regulations that said corporate pension money had to be invested in low return govt bonds...you could have regulations saying the IRA/401k money had to go into high grade bond funds. Same same basically. Now nobody is bearing equity risk...but expected return is lower. Thus more has to come out of wages now to pay a given payout in the future.

Not saying that's wrong or right, just largely IMO beside the point of who should be responsible for pension management. Unless one labors under the illusion that ordering companies to put more aside for defined benefit pensions wouldn't just lower wages commensurately. Just like higher 401k/IRA contributions required to reach a given target with govt bonds only would. There's not much reason to believe that a mandate for super conservative pension investing by companies would come out of the shareholders' end of things. It would tend to come from the workers' end of things.

It's true insurance companies tend to operate under stricter investment guidelines that tend to result in more conservative investments than private or that matter state/local public pension plans (corp pension plans are actually usually run more conservatively than public employee ones). But as we've discussed, people don't/shouldn't generally rely on insurance co's to build up assets in working years from 20-something to 60-something. SPIA's from ins co's are for the shorter 60-something to 70/80-something back end.

I don't see on a first order basis how forcing private investment to lower return safer assets really answers the question of who should control pensions, co's or individuals. Maybe on a second order basis the fact that the lower returns of 'riskless' assets and their effect on future benefits and current wages would be better hidden from workers in arcane pension rules for co's, v telling people they were not allowed to invest in equities in their 401k's, which would probably be bitterly resisted. But it's really the same thing either way.

Again I think the first principals conflict is that companies are run for shareholders (in the best case, for management's personal gain in the worst case) not workers. All the regulation in the world doesn't change that. Workers have a directly aligned interest in optimally managing their own pensions which companies never will. OTOH workers are typically financially illiterate and sometime irrational on the topic. That's the tension, but I personally believe pushing responsibility for the pension system back toward corps is a mistake. Better to try to improve on the flaws in the personally managed system.
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Old 10-16-2019, 01:31 PM
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Defined benefit plans (pensions) and defined contribution plans (401k) are employee benefits that are offered at the discretion of employers, they are not rights, or mandated. Employers use such plans to distinguish themselves in the market place as good employers. In some cases employers user richer (above market) benefits to entice employees to join them and/or stay working with them. This is very dependent upon the labor market that the employer is facing.

Defined benefit plans have generally gone by the wayside to never return, because of the significant risks that employers face when funding them: interest rate risk, mortality risks, market performance risks, etc. After the financial crisis of 2008, the average defined benefit plan in the US found itself with 40% - 60% funding deficits, that the company's were faced with making up the shortfall. As the participant's began living longer and as interest rates declined, deficits also continue to grow. These are risks that are difficult for companies to manage effectively.

So as most companies froze or discontinued their defined benefit plans, others followed suit as the market had changed what was an acceptable employee benefit. Most companies that provide defined contribution plans, also provide help through outside advisors on how to invest your money that is contributed.

Quote:
Originally Posted by Voyager
The problem with 401Ks is that people can't afford to put money into them, and so don't get the match, and that people mismanage them, selling low and buying high.
People need to take responsibility for their own lives. It is not the responsibility of your employer to ensure that you have saved enough money to retire. But many employers do provide the tools and the mechanisms to make it easier for employees to do that. Most also make matching contributions.

If you are told that for every dollar you contribute that your employer will match up to 6% of your pay, my question is why? If a friend came to you and said hey I've got this great investment opportunity for you. Invest $200 a month and each month you will earn $200 on top of that investment, a 100% return guaranteed, would you turn it down? I'd make changes to my personal spending habits to make sure I got that investment return.
  #36  
Old 10-16-2019, 06:49 PM
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People need to take responsibility for their own lives. It is not the responsibility of your employer to ensure that you have saved enough money to retire. But many employers do provide the tools and the mechanisms to make it easier for employees to do that. Most also make matching contributions.

If you are told that for every dollar you contribute that your employer will match up to 6% of your pay, my question is why? If a friend came to you and said hey I've got this great investment opportunity for you. Invest $200 a month and each month you will earn $200 on top of that investment, a 100% return guaranteed, would you turn it down? I'd make changes to my personal spending habits to make sure I got that investment return.
Theoretically true. Practically speaking, not so true due to well understood psychological reasons.
When retirees run out of money (at least they have Social Security, a defined benefit plan) what do you propose to do? Let them starve? Tell them they should have been better investors?

Lots of shortfalls in retirement plans come not from excessive spending but from trying to keep things together during layoffs. Income stagnation means that there is less opportunity to save. Getting that return is great - but not so great if it means not having money for both food and a mortgage. Telling people to adjust their personal spending habits is fine for those of us in the upper middle class, not so good for those just holding on. It's very much a "let them eat cake" attitude.
We know for instance that when 401K contributions were not the default, the signup rates were much lower than they were once Thaler and Sunstein (working for Obama) made them the default. And Thaler noted that when they made the contribution rate 2% as the default (to not take money people would need by default) the amount of contributions dropped.
Now I did fine in saving for retirement. But it would be arrogant of me to say that what worked for me would work for someone making 1/3 of what I did and who isn't all that good with numbers.
The main factor, I think, in my retirement success is that I have never been laid off and so have never had to dip into savings to live. Not everyone is so lucky.
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Old 10-17-2019, 10:25 AM
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This has been a fascinating read, in large part because (I'm in the UK) so much of what happens in the US has a close parallel here. I have a defined benefit plan from a a job I had some years ago (a company pension, available to pay out from age 65 for life; but you could take it earlier at a reduced income); a defined contribution plan (roughly analogous to a 401k) which is paying out now; and a state pension (roughly analogous to SS; worth about $10K in income per year) from age 66 for life.

If people don't mind the slight hijack, I have a question re SS. I see comments like this

Quote:
Originally Posted by Qadgop the Mercotan View Post
We'll postpone SS as long as possible, hopefully until age 70.
- which make me think, actually, this isn't the same as a UK state pension. The UKSP is something you pay for via an additional tax (loosely speaking - National Insurance) through your working life. When I hit 66 I get that index linked $10K/yr until I die. You can't take it early and there is no point in putting off taking it - it wouldn't pay out at a higher rate as a result, you would just lose the income over the years you deferred (I'm not even sure it's possible to "defer"). So it appears to be different in some ways to US Social Security. Could someone be kind enough to wise me up regarding SS?

Thanks

j
  #38  
Old 10-17-2019, 10:34 AM
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Those of you with private sector pensions: How many years do you need to work in order to qualify, and at what age can you start receiving the benefits? The US Military recently changed from a pension plan to a 401K/TSP style plan. Those of us with enough time in service were able to be grandfathered into the old system. Luckily for us! The old pension system is far superior for retirees than this new one. The new blended retirement system only benefits the government, and the people who serve, but leave before retirement.
Nothing beats getting 50% of your base salary for life starting at age 38...
  #39  
Old 10-17-2019, 12:23 PM
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This has been a fascinating read, in large part because (I'm in the UK) so much of what happens in the US has a close parallel here. I have a defined benefit plan from a a job I had some years ago (a company pension, available to pay out from age 65 for life; but you could take it earlier at a reduced income); a defined contribution plan (roughly analogous to a 401k) which is paying out now; and a state pension (roughly analogous to SS; worth about $10K in income per year) from age 66 for life.

If people don't mind the slight hijack, I have a question re SS. I see comments like this



- which make me think, actually, this isn't the same as a UK state pension. The UKSP is something you pay for via an additional tax (loosely speaking - National Insurance) through your working life. When I hit 66 I get that index linked $10K/yr until I die. You can't take it early and there is no point in putting off taking it - it wouldn't pay out at a higher rate as a result, you would just lose the income over the years you deferred (I'm not even sure it's possible to "defer"). So it appears to be different in some ways to US Social Security. Could someone be kind enough to wise me up regarding SS?
First, there's the concept of "full retirement age" which is different depending on your year of birth. It used to be 65 and has been going up two months at a time until it reaches 67 for those born in 1962. The benefit at full retirement age is sort of a baseline- if I start collecting at 62, I will receive less per month , and if I delay collecting until after 67, my benefit will increase until it reaches some maximum. If I am under a certain age ( 70, I think) and still working, my earnings will decrease my monthly benefit if I earn more than a certain amount. I recently estimated my benefits, and I will get about $24K at 62, $34K at 67 and $43K at 70. The differences are of course because I will be collecting that $42K for 8 fewer years than the $24K. Although it's not technically speaking an individual account, this is one of the ways it almost works like one - if I want to spend $X on an annuity that pays out for my lifetime, the further in the future ( and the older I am) that payments start, the larger the payment will be
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Old 10-17-2019, 12:31 PM
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First, there's the concept of "full retirement age" which is different depending on your year of birth. It used to be 65 and has been going up two months at a time until it reaches 67 for those born in 1962. The benefit at full retirement age is sort of a baseline- if I start collecting at 62, I will receive less per month , and if I delay collecting until after 67, my benefit will increase until it reaches some maximum. If I am under a certain age ( 70, I think) and still working, my earnings will decrease my monthly benefit if I earn more than a certain amount. I recently estimated my benefits, and I will get about $24K at 62, $34K at 67 and $43K at 70. The differences are of course because I will be collecting that $42K for 8 fewer years than the $24K. Although it's not technically speaking an individual account, this is one of the ways it almost works like one - if I want to spend $X on an annuity that pays out for my lifetime, the further in the future ( and the older I am) that payments start, the larger the payment will be
Thanks doreen, that's great. One last clarification - once you take SS the payments continue for the rest of your life, right?

(BTW - we also have the full retirement age thing as well, except that the increments are by a year. It starts at 65 and extends out to a max (currently) of 68).

j
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Old 10-17-2019, 12:41 PM
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Thanks doreen, that's great. One last clarification - once you take SS the payments continue for the rest of your life, right?
It does
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Old 10-17-2019, 01:09 PM
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One additional thing to add is if you have a defined benefit plan, check to see if you have a lump sum distribution option. If you do, most likely it may be beneficial to elect the lump sum distribution instead of taking the annuity. It's a matter of math. Your annuity is a function of the expected long term return on investments (usually the expected corporate bond yield over your expected life span), along with your mortality (expected life span). Today's expected return, depending upon your plan could range between 3 and 4%. I believe that taking the lump sum, I can invest in a stock index fund and earn greater than 4%.

My DB plan offers the me the ability at age 55 to take a lump sum and roll it into my 401k or IRA account, and continue investing tax deferred. At some point after I reach 65, I will have mandatory minimum distributions that the government will require me to take. This also makes these assets available to my spouse and children, if I were to die prematurely.
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Old 10-17-2019, 01:42 PM
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One additional thing to add is if you have a defined benefit plan, check to see if you have a lump sum distribution option. If you do, most likely it may be beneficial to elect the lump sum distribution instead of taking the annuity. It's a matter of math. Your annuity is a function of the expected long term return on investments (usually the expected corporate bond yield over your expected life span), along with your mortality (expected life span). Today's expected return, depending upon your plan could range between 3 and 4%. I believe that taking the lump sum, I can invest in a stock index fund and earn greater than 4%.

....
I did this exact calculation with an insurance broker I trust -- I asked if I were to take the lump sum for a pension that I had vested in a few years prior and roll it into a deferred annuity with the plan of annuitizing as if it were a pension, could he match the promised payment. He said he couldn't come close to the DB plan and told me to keep it in the pension. So, the lesson is, I guess, be careful with these permanent decisions.
  #44  
Old 10-17-2019, 02:12 PM
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I did this exact calculation with an insurance broker I trust -- I asked if I were to take the lump sum for a pension that I had vested in a few years prior and roll it into a deferred annuity with the plan of annuitizing as if it were a pension, could he match the promised payment. He said he couldn't come close to the DB plan and told me to keep it in the pension. So, the lesson is, I guess, be careful with these permanent decisions.
As I said, it's a math equation. It appears that you have a very rich pension.
  #45  
Old 10-17-2019, 03:28 PM
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Thanks doreen, that's great. One last clarification - once you take SS the payments continue for the rest of your life, right?

(BTW - we also have the full retirement age thing as well, except that the increments are by a year. It starts at 65 and extends out to a max (currently) of 68).

j
To expand on what doreen said, the idea is that assuming that you die at the average age, the amount you get from the time you start SS to the time you die is roughly constant. So you get less if you start getting benefits early, and get more if you take them later.
The increased benefit per year is roughly 8%, which is a good return, so it makes sense to delay if you can afford to and don't expect to die early.
Given the poor state of American retirement savings, lots of people take SS early, which costs them if they live longer than the average.
  #46  
Old 10-17-2019, 03:34 PM
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My DB plan offers the me the ability at age 55 to take a lump sum and roll it into my 401k or IRA account, and continue investing tax deferred. At some point after I reach 65, I will have mandatory minimum distributions that the government will require me to take. This also makes these assets available to my spouse and children, if I were to die prematurely.
65? Isn't it 70 1/2? I cashed out my pension and put it into an annuity with some survivor benefits, and I haven't touched it yet at 67, with no problems.
My pension would pay my wife half the benefit if she survives me at the cost of a reduced benefit to me. That didn't seem like a good deal. Her getting the balance is more useful.
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