Our firm has always had a traditional defined benefit pension program–i.e., calculated using years of service, most recent salary history, and a number of other complex actuarial formulae. Pretty common attributes, for anyone familiar with these types of plans, and the program definitely favors long-term employees.
We are currently faced with having to choose between staying with the traditional plan and a cash balance plan, a choice many people have been forced to make over the past few years. Cash Balance plans are less costly to administer, and many, many companies have migrated toward them. This particular one uses a present value formula mapped to the 30-year T-Bill rate to determine the initial “drop in” amount. It uses this same rate (determined annually on a set date) calculate annual growth.
Given my current status–almost 20 years with the firm, in my early forties, steady salary growth–and based on everything I’ve read, I assumed that the details in our “pick one” package would have shown that it is much more beneficial for me to just stay with the traditional plan. That’s not the case, however. It is not at all clear which is the wisest choice, especially since projecting my ultimate age at termination of employment is (in this day and age) a real crapshoot.
I realize that to address my particular situation someone would need a great deal of detail, but can anyone provide any general advice as to how to analyze this situation?
Has anyone who has gone through this figured out a way to calculate outcomes (we have access to a modeling program that lets you “assume” salary growth and interest rates) and triangulate down to the proper choice?
I know this can never be reduced to a simple algebraic exercise, but any advice is welcome.
This is agonizing…(and I’m sure I’ll be struggling with this right up to the deadline)…
My employer did the same thing last year. Very few people opted for the traditional retirement.
The big selling point to me, though, was portability. If I get surplussed or canned, I can take my money with me, and roll it over into some other retirement plan. The projections were not relevant to me, as I’m not much into crystal balls.
I can’t really help you but I do wish to point out:
In my experience, when companies ‘change’ a benefit, its been to make it less. When was the last time your company changed health plans and it was better? No, they do it to cut costs. Be suspicious and don’t switch unless you are very sure.
I would think that if you have 20 years in, you should stay put but I really don’t know for sure.
Both great points. The portability factor is an even bigger issue when I consider the fact that they’re using a T-Bill rate to peg growth–meaning, if I get canned and take the money, it would be tough NOT to beat that.
BlinkingDuck, that thought has occurred to me on more than one occasion and it may, by itself, prove to be the tie-breaker.
I think you’ll find that most of the time, people with greater than average years of service get screwed, while those with only a few years come out ahead. There was a rash of stories on this last year, as a number of large corporations moved in this direction, and several were sued by older workers. I can’t think of who it was off the top of my head (though one was one of the biggest companies in the country, I think)–I should think a search of the WSJ should come up with some useful information.
Both Johnson and labdude agree with what I have been reading in the WSJ for several years.
New people come out better in the cash balance. People with seniority see large amounts of money allocated for their pension disappear.
However, they did sweeten the deal. You were “grandfathered” if your age + years of => 60 OR if you had been employed at least 20 years. They gave a good big bit of extra money to people who met those categories. However, those who fell in just under the wire did not make out so well (with a cash balance) and were better off under the old plan.