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The year was 1988 and I was sitting across the table from my employer and his attorney, I was not a happy camper when they proposed to freeze the defined benefit (DB) pension. Instead, they would divert their contribution into a new 401k plan. I had been a pension trustee representing the union’s interest and had some awareness of some funding issues looming. Most employers are desperate to freeze those DB plans in order to escape the financial liability that can plague their bottom line.
At the end of the day the company got their way, but not before agreeing to a matching contribution (in addition to the fixed amount initially proposed) up to $2k per year. The new 401k did a couple things. First it transferred all the risk onto the employees, and second it created the potential to provide those workers with retirement income that far exceeded that of the old pension…. Or not. It all depended on choice.
36 years later I’m able to see the results and can report that they are mixed. The guys that chose to take advantage of the match are now enjoying comfortable retirements. The guys who didn’t plan and save adequately are either struggling or still working.
At the time the old pension was frozen, the maximum benefit was only $690 per month. I only had 10 vested credits, and had to split them with my x-wife, leaving me with a whopping $84 monthly check.
Fortunately for Chris and me, we choose to live within our means and took full advantage of every saving tool out there. Now fully retired we are more comfortable than we ever imagined possible. In a recent forum topic some commented that not having a lucrative DB pension was detrimental to automating ones finances. I contend that it doesn’t have to be that way. Bad luck aside, it depends on choices.
As a former CFO of several companies with DB and DC pension plans, I found that many plans gave great benefits for long term employees. What was missing was portability for those who did not retire from the company. A solid 15 year career would only yield a modest pension if the employee did not retire from that company. Less than 10 years of service may not yield anything. Back end loading the benefits detracted from recruiting new employees and encouraged older, burned out employees into staying beyond what their mental and physical condition warranted. They had to hit the “magic number” of age and service or they would be severely impacted.
I have had many employers in my over 45 years of working. I’ve also had significant stretches of self employment.Today, I have a very modest ($1000/month) pension from one employer, my wife has a similar size pension from a 15 year career as a teacher. Without the investments we made in 401K/403b plans (with and without matching) and in taxable savings, we would be struggling. You can cobble together a great retirement but it takes work. A little luck never hurt either.
DB plans were always designed for long-term employment and were born in industries with unions and that typical had such tenure – in the good old days. My pension is based on over 49 years in the plan and calculated on the five highest years of earnings in the last ten years of service. My five highest years of compensation were the last five years I worked and if I had retied before I did, the five year average would have been substantially less.
The 401k is a better fit for most people, but could and should be enhanced so that the plans have an employer contribution that is not dependent on the employee participation. In addition, adding profit sharing would be fair.
Some annuitization options would be nice as well.
Absolutely