What happens to DB pension if you quit before retirement age?

Factual Questions
1

Here’s the story. MrSin has worked for Big Ole Corp of America (BOCOA) for 35 years. He has been feeling unappreciated by BOCOA for the past several years. This feeling has grown as his raises have gone from ok, to tiny to zero last year even though he has been rated as being in the top 5% of contributers. In addition, BOCOA is currently in the process of drastically changing their health insurance plan with out of pocket costs to employees increasing dramatically (1000’s of $'s) for significantly less coverage. He is 2.5 years away from being able to retire from BOCOA early at reduced benefits.

Recently he was recruited by Another Big Company (ABC) at a significantly higher pay rate (about 50% more). In addition, ABC’s health insurance plan covers more and costs a fraction of BOCOA’s. The only downside benefit-wise is that he would go from 6 weeks to 4 weeks vacation per year.

Being so close to retirement age we are worried that his quitting BOCOA and going to ABC now could have a major detrimental effect on his retirement benefits.

He is vested in a defined benefit plan that he’s contributed to for the entire 35 years of his tenure at BOCOA. He also has a 401k plan. To further complicate matters BOCOA has a health insurance component to their retirement plan that fills in for Medi-care until you reach SS age if you retire early.

Sorry this is so long. Bottom line what happens to his pension plan if he jumps ship? And how do we find out before he pulls the trigger?

2

What the person should do is contact the HR/pensions dept. at Corp. #1 and ask for an estimate of the pension benefits that will be due upon retirement should he a) quit and change jobs now or b) stay at corp. #1 until retirement.

The details of the pension are specific to the terms of Corp. #1’s plans. The only authorative source for answers re. the pension will be the company’s HR/pensions dept.

Or conversely, you can calculator the changes yourself…all you need are the terms of the plan (available from the plan’s documents) and personal salary info.

3

What **strqwert44 **says is true - there is no “one size fits all” answer for the DB questions. I would recommend first looking through the plan documents yourself. Only contact the HR department as a last resort, as asking “what happens to my pension if I quit tomorrow?” is a tip-off regarding your husband’s intentions. Unfortunately, many pension plans are so arcane that you will have no alternative but to do this.

Regarding the 401(k), that is his. Typically the company will allow him to (1) keep it in the company plan, (2) roll it into an IRA, or (3) take a cash disbursement (bad, as it will be highly taxed and be removed from a tax-sheltered vehicle). If the company has also made contributions, some of those may be subject to a vesting period and may be lost. This information should be quite easy to figure out, as 401(k) plan documents are usually far easier to interpret than DB plan documents.

Best of luck to your husband (and you), regardless of his decision.

4

I can tell you how it would work at my current employer, also a BOCOA, but only for people hitting standard retirement age. I haven’t read the early retirement part of the disclosure.
It approximates:
(Avg of final 4 yr salary) / 30 * (Years of Service or 30, whichever is highest) * 2 /3

So, if I worked 30 years and made $100K per year in my last 4 years of service, it would be 66600 per year.
If I worked 28 years and made $100K per year, then my annual pension would be 61600 per year.

YMMV, and the previous BOCOA I worked for had a much, much more complicated pension plan.
Once you have your DB plan’s details handy, you may wish to consult a financial planner and/or accountant to run the numbers for you, or refer you to someone who can.
Perhaps the full benefits details from ABC might help an accountant or financial planner help you weigh the differences.

5

If in US after 35 years he should be fully vested. If he walks away from his present company he is not repeat not walking away from his retirement. He will have 2.5 years less service that if he stays for the 2.5 years. Also if there are any improvements (not likely) he will not recieve them.

Also look at the new conpany’s retirement plan and how long to vest.

6

I agree with the others who have said that it depends on the rules of the individual plan. Check with the plan administrators and find out.

7

Thanks for the replies. His company plan is rather complicated, but we’ll try to wade thru it or go to a consultant as suggested. One last question. I read on the inter-webs that he might be offered a lump-sum payment instead of a pension. Is that a good or bad thing?

8

Speaking just to lump sum vs payout over time.

There are two factors to consider. One is risk.

If you take the lump sum, you get to invest it. Invest smartly, do well, live well. Invest badly, lose a bunch of it, eat cat food.

Conversely, if you leave it at BOCOA, there are two possibilities for how they handle your share of the money after you retire.

One is they buy an annuity from a life ins co and the ins co pays you your stipend each month. Until the ins co encounters a financial crisis & can’t pay anyone any more. Then you get nothing.

The other is they leave your money in BOCOAs account, along with all the other employees’ & retirees’ money. And BOCOA hits hard times & can’t afford to keep the plan going, so it beomes underfunded. Then a crisis hits & the Federal PBGC takes over. Then everyone’s pension is limited to the legal max, regardless of how much they may have been promised. The Federal max is about $35K / year.

Many of us in (or formerly in) the airline business have seen our DB pensions destroyed by the risks I described.
The other decision factor with the lump sum is interest rates when you retire/quit versus the plan expectations & historical norms.

When interest rates are unusually high, the lump sum you receive is extra small since a small lump will pay the same monthy stipend as the plan requires. When interest rates are unusually low, the lump sum you receive is extra big since it takes a bigger lump to pay the same monthy stipend as the plan requires.

The danger is that this method *assumes *you can get that exact same interest rate every day for the rest of your lives. Given the interest rate gyrations we’ve seen in the last 20 years, it’s fair to say that is an unrealistic expectation.
What I’ve said above is generic to any DB plan in the US. But as other have said, you need detailed exact answers based on detailed exact knowledge of the specific plan documents, the latest law, etc. Every decision you make in this area will be irrevocable. So get smart, like paying for experts smart, before doing anything.
Someone upthread said that you would be vested in your DB plan if you quit before the early retirement age. That is NOT necessarily true. I am in a DB plan now where prior to the early retirement age, you lose 100% of the DB benefit. The day after my early retirement date I can quit/retire & receive the reduced early bennie. The day before, zero.

The biggest thing to think about overall is that at BOCOA, you were used to the idea that priomises about the future meant something, and that next year would be much like this year. So you could map out where you’d be in 5, 10, or 20 years & compare the packages at BOCOA and ABC like for like.

Sadly, those days are largely gone.

Whatever either BOCOA or ABC tell you today about the 2010 medical plan, there can be no assurance the 2011 medical plan won’t be utterly different. Promised retiree medical benenfits can disappear overnight, even if the company is profitable. ABC’s lower employee contributions in 2010 can turn into double that in 2011.

They can’t change everything; there are some regulations limiting their ability to remove promised DB benefits. But they certainly can make them less attractive over time. One other point to ponder … If the DB pension plan is underfunded, or becomes underfunded, beyond a certain point then the lump sum option is withdrawn by law. Losing that option may make retiring earlier rather than later the safer option.

9

one more thing…if you’re willing to give the internets a shot, you can try crowd-sourcing the benefit impact if you don’t mind sharing the plans details.

you wouldn’t need to share your personal pay/tenure info. the most important things are…

  1. the pension reduction factors (eg the penalty for leaving the company early/bonus for staying until 55/65.)

  2. the pension calculation formula (generally, years of service times pay times some fraction)

  3. any temporary pension incentives to get people out the door.

  4. i’m probably forgetting something but you get the gist.

again all of this information is in the summary plan document. you get electronic or paper versions of the plan documents annually and they should be readily available at the HR dept. or on your company’s intranet.

and with the lump sum v. annuity…it all depends on your comfort level. would you rather have say $1,000,000 in your own bank account and manage it yourself or have a regular check arrive in direct deposit until you both pass on?

Just make sure that Big Corp. wouldn’t turn into the next GM and go bankrupt. Lots of GM/airlines/steelworkers/etc. pensioners lost a big chunk of their pension during their company’s bankruptcy.

Your pension is guaranteed (kinda like FDIC) for up to something like $30k per year. Beyond that if your company goes bankrupt, you join the line with the other creditors.

good luck.

10

I agree that you should check the details with the plan administrator. However, it is a very rare plan that requires one retire from the company to be eligible for the pension. The normal requirement to draw a pension is that one have worked for the company for X years (often ten to vest for partial pension, 20 or 25 to draw full pension) and have attained the age of Y years. This is true even if one leaves one job for another. Often such plans are transferable – “portable” – if you worked for ABC for 20 years, took a job with DEF for ten, and then retired, your 20 year credit with ABC can follow you to DEF’s pension plan and be consolidated with what you work there. But this is by no means always the case.

The complexities lie in the varying standards for eligibility: retiring at one age may require more years of eligibility than retiring at a later age, for actuarial reasons that should be obvious: you need to have paid in enough to compensate for what you’re taking out, allowing for interest earned. So you might be able to retire at 55 with 30 years eligibility, at 60 with 25 years, or at 65 with 20 years. The idea, of course, is that you will die at about the same age in any case. and they will have paid out more if you retire at the younger age, so you need more years of paying in to compensate for that.

Another complexity that shows up is in the potential options you can take. I chose to draw $33 less than the maximum I could have drawn per month in order to be in a plan that will give my wife half my (maximum-amount) pension for the remainder of her life if she outlives me, but if she dies, I’ll move from the $33-less figure to the maximum. There were a good dozen other variations available; with us both eligible for relatively small pensions, we felt that was our best choice. Had I gone for the maximum, the pension would terminate with my death, with nothing but a small lump-sum death benefit to her.

11

Thank you all for your responses. I dug out the Big Book of Benefits and the pension section alone was well over 100 pages long. The amount of options, many with expiration dates that occur prior to when Mrsin is eligible to retire, is staggering.:eek: Then there are pages of formulas for calculating the pension credit itself by year/range of years going back to 33 BC I think, then more pages of formulas for calculating adjustments to the pension credit by year/range of years.:smack::smack::smack: There is also a possibility of a pension supplement for early retirement that may or may not still be available in 2012.

I now have a much better idea of how BOCOA’s pension plan works (spreadsheets are good:) and what Mrsin’s monthly payout will be if he quits prior to retirement age*.

*and no bad things happen to BOCOA’s pension funding between times. What a crap shoot.

12

This could be good, or it could be bad. The bad would be if he takes it as cash-in-hand as the tax would be severe. The good would be if he rolls it into and IRA and follows a tax-advantaged withdrawal strategy. Some potential benefits of the IRA are: (1) he controls how the money is invested, and (2) the lump sum may be more than the present value of the pension payments (depending on the implied interest rate), and (3) potentially more money for his heirs in the event of an earlier-than-expected demise.

You sound like you are financially savvy, so a little internet searching and a couple spreadsheets should give you a rough idea if the lump sum is a good idea. One tip - see if you can get a price quote(s) on an annuity that would give the same cashflows as the pension. If the purchase price of the annuity is higher than the lump sum offered then the lump sum is not a good option (i.e., you could not replace the pension payments with the bag of cash they are offering you). You are unlikely to find an annuity that exactly matches the pension cashflows, but you should be able to make a reasonable comparison.

13

If BOCOA is as big as all that, there may well be pension counselors / consultants who deal extensively with just this company’s plans. If they exist, they’re likely to be located in the same city as HQ or cities with major plants / facilities, etc.

Finding one of those would be much more valuable than some random “financial planner” in your local town.

If your husband’s job is unionized, the union has a wealth of practical info and help available. They’re also more likley to know about & mention the little tricks which pay extra in special cases which the company reps might forget to mention.

Even if he’s not union … If the company has a substantial union workforce, you might try calling them for advice. They won’t opine on plans other than the ones they administer, but they might have some good pointers to outside counselors / consultants.

14

You could wangle around it by saying something like, “What would happend if I got laid off.” Then you get the answer, and the you can says something like “So it’s the same if I get fired?” “Is it the same if I quit?” You just go about it in a round about way.

With today’s joblessness rate so high, it’s perfectly reasonable to be concerned about being laid off and that will give you the segway into quitting

15

Everyone at Mrsin’s age and level in the company knows what happens if they get laid off. They pray to get laid off.:slight_smile: This is part of his frustration. The company’s attitude seems to be: “You’re too good to be laid off but we ain’t giving you a raise either because you’re so close to retirement age it would be foolish of you to leave.” And after looking at the benefits lost by leaving just short of retirement age they may be right. That is the underlying cause of his grrrrrness.

16

If he’s truly under a defined-benefit plan (lucky him!) then most likely the pension amount is, as Mr. Slant said, based on some combination of average high salary times number of years of service times a multiplier (e.g. 2% per year of service so if you’ve worked 30 years, you’d get 60% of your average high salary). The details should be spelled out in the pension document.

As he’s earned that pension, if he moves on now the main difference would be the actual pension amount, when he starts to take the pension, would be a bit smaller. He should be able to start taking it at the appropriate age whether or not he is with the company at that point.

As far as the health insurance gap coverage, that may not be “postponable” - i.e. he may have to hit a specific age, while employed there, to have it as an option (my company has something similar; I have to be employed here on my 55th birthday to have it as an option).

Re lump sum retirement: The downside of that is that I’d guess it’s a taxable distribution. I could take such a lump sum from my former employer’s defined benefits plan and that’s how it would be treated; it wouldn’t be assessed a penalty however. In your case, it’s probably a much larger amount (mine would be less than 10,000 dollars, I think) so you’d face a much bigger tax hit. Interestingly, I could opt to start collecting a monthly annuity even now… last time I looked it’d bring me about 60 bucks a month :). Personally, I’d only take it if you felt that a) you could invest the money yourselves and do reasonably well with it, and/or b) you had reason to believe the company’s pension obligations are underfunded - i.e., get yours while the getting is good.

17

Someone mentioned the options concerning the 401(k) but neglected to point out that if his new employer has a 401(k), they may allow him to rollover the balance of his old plan into the new. There are advantages and disadvantages to doing that.

Also some pension plans are what are called “cash balance” plans and are treated similarly to 401(k)s in terms of payouts. But it sounds like you may be dealing with a good old fashioned final-average-pay DB plan (which are increasingly rare).