Pension floor drops from 4% to 2.5% -- Time to bail?

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bnes
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Pension floor drops from 4% to 2.5% -- Time to bail?

Post by bnes »

This is a large company corporate pension, current value $20,000, fully vested. The pension has had a 4% floor for many years. I treated this as a "nearly risk free" rate, counted it as a bond for AA, and was happy. Is this change enough that I should roll it over to a 401(k)?

The floor is now 2.5% with a cap of 15%. Compounding is yearly, but credited quarterly. The benchmark is the ten year treasury measured in August. Details are here https://cache.hacontent.com/ybr/R516/08 ... Glance.pdf.

It is a legacy plan, no longer eligible for contributions.

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The change of course matches the decline in the ten year bond. The last few years the pension has clearly given a premium over the ten year note:
Image
Last edited by bnes on Tue Aug 12, 2014 3:15 am, edited 1 time in total.
bpp
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Re: Pension floor drops from 4% to 2.5% -- Time to bail?

Post by bpp »

As a bond, it still looks like a reasonably good deal to me. If you bailed, what would you replace it with?
ubermax
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Re: Pension floor drops from 4% to 2.5% -- Time to bail?

Post by ubermax »

It's an employer paid defined benefit plan - you pay zip - what's the problem ?? - and BTW unless I'm missing something "bailing" would necessitate you terminating your employment .
LongerPrimer
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Re: Pension floor drops from 4% to 2.5% -- Time to bail?

Post by LongerPrimer »

Don't expect to get much from this pension on retirement.
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Lancelot
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Re: Pension floor drops from 4% to 2.5% -- Time to bail?

Post by Lancelot »

ubermax wrote:It's an employer paid defined benefit plan - you pay zip - what's the problem ?? - and BTW unless I'm missing something "bailing" would necessitate you terminating your employment .
Yep, my thoughts as well. Don't look gift horses in the mouth :)
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bnes
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Re: Pension floor drops from 4% to 2.5% -- Time to bail?

Post by bnes »

Lancelot wrote:
ubermax wrote:It's an employer paid defined benefit plan - you pay zip - what's the problem ?? - and BTW unless I'm missing something "bailing" would necessitate you terminating your employment .
Yep, my thoughts as well. Don't look gift horses in the mouth :)
It's a legacy plan, no longer eligible for contribution, there is no additional employer contribution.
The cash value can be rolled over, drawn down, or it can be left to ride on the conditions outlined above.
Drawdown is age based, unrelated to employment status.
ubermax
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Re: Pension floor drops from 4% to 2.5% -- Time to bail?

Post by ubermax »

Bnes , from a little research it looks like the company had a cash balance plan ( a DB plan) and did a "soft-freeze" in 2009 , i.e. closed it to new employees and now it is terminating that plan and giving employees choices on how they receive their benefit - do I have it right ?

Legacy plan means nothing to me - other than the fact that "a legacy" relates to something from the past , i.e. a past active pension plan .

If I'm right with the above thinking then your question makes sense but it helps to give folks a little background .

I'll leave it to others to provide advise - I'm not good at predicting future interest rates and so I'd tell you to lump sum it and run :happy
ubermax
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Re: Pension floor drops from 4% to 2.5% -- Time to bail?

Post by ubermax »

Bnes , I have to retract a little - read your link again - it's a frozen plan and you get a benefit when you terminate employment or retire - correct ?? and so when you say "bail" you mean terminate employment , right ?

But from the link it looks like you still get a pay credit and interest credit - but that link was current as of 1/1/2014 - have things changed since then , i.e. dropping the pay credit ?
cherijoh
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Re: Pension floor drops from 4% to 2.5% -- Time to bail?

Post by cherijoh »

bnes wrote:This is a large company corporate pension, current value $20,000, fully vested. The pension has had a 4% floor for many years. I treated this as a "nearly risk free" rate, counted it as a bond for AA, and was happy. Is this change enough that I should roll it over to a 401(k)?

The floor is now 2.5% with a cap of 15%. Compounding is yearly, but credited quarterly. The benchmark is the ten year treasury measured in August. Details are here https://cache.hacontent.com/ybr/R516/08 ... Glance.pdf.

It is a legacy plan, no longer eligible for contributions.
bnes -are you still employed by this company? What is your age? Your post says "roll it over to a 401(k)" - is that even permitted in your plan? Or did you mean to say IRA instead of 401k?

I am a participant in a frozen cash balance pension plan and there is absolutely nothing I can do with my pension benefits until I terminate my employment. My 401k plan allows in-service rollovers at age 59.5, but not the pension plan. After terminating my employment, I could transfer funds from my 401k to my pension and then annuitize, but there is no mechanism to move money from the pension to the 401k.
Bill M
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Re: Pension floor drops from 4% to 2.5% -- Time to bail?

Post by Bill M »

From looking at the "At a Glance" document, there is no provision for a rollover of the cash balance to a 401k. Also the balance is still earning "pay credits" of at least 4% of pay (possibly more right now but reducing eventually to 4%).

Assuming a 401k rollover option was added, I see two key considerations: (1) is the company match for the 401k plan significantly higher if you are not a participant in the legacy pension plan, and (2) what is the pension plan's formula for converting the account balance into an annuity.

For (1), you're getting at least 4% of pay credited to the pension plan; with a 401k contribution limit of $15.5K you would need a significant bump in the company matching percentage to come out even (e.g., for salary of $100K, additional match would need to be roughly 25%!!). I seriously doubt the company match in the 401k will match the legacy pension plan contribution.

For (2), if the annuity calculation is based on "actuarial equivalence" to the lump sum payment, then you could buy a SPIA through Vanguard's link with Hueler for roughly the same price. But if the calculation are based on conversion factors contained in the pension plan, they may be significantly better (mine, e.g. had a hardwired factor of 1/114.96, which is roughly equivalent to a 6% risk-free environment). Actuarial equivalence is likely, but you need to check.
dickenjb
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Re: Pension floor drops from 4% to 2.5% -- Time to bail?

Post by dickenjb »

You would actually consider leaving your company in hopes of earning another 50 basis points on $20K? What is that, $100 a year?

Or have you already left and neglected to tell us?
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bnes
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Re: Pension floor drops from 4% to 2.5% -- Time to bail?

Post by bnes »

ubermax wrote:Bnes , from a little research it looks like the company had a cash balance plan ( a DB plan) and did a "soft-freeze" in 2009 , i.e. closed it to new employees and now it is terminating that plan and giving employees choices on how they receive their benefit - do I have it right ?
@ubermax, you've got the basics correct. And sorry for the confusion everyone: due to a gap in service, the relevant employment has ended. All future company match is going to a separate 401(k). There was no choice in the switchover, it was mandated by the company's rules.

The question now comes down to an individual choice. What's better:
  • Roll the pension cash value, and invest in regular market in an IRA (presumably at Vanguard).
  • Leave the cash value in the defined benefit plan (at ten year treasury rate, compounded annually, floor 2.5% and cap 15%).
I currently count the pension cash value as a "bond" for asset allocation purposes, and I loved it when the floor was 4%.
My AA is is now 40/40/20 stock/bond/play money.
Last edited by bnes on Tue Aug 12, 2014 2:43 pm, edited 1 time in total.
ubermax
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Re: Pension floor drops from 4% to 2.5% -- Time to bail?

Post by ubermax »

bnes wrote:due to a gap in service, the relevant employment has ended.
what does this mean ? have you terminated employment or not ?

All future company atch is going to a separate 401(k). There was no choice in the switchover, it was mandated by the company's rules.

The question now comes down to an individual choice. What's better:
  • Roll the pension, and invest in regular market in an IRA (presumably at Vanguard).
  • Leave the cash value in the defined benefit plan (at ten year treasury rate, compounded annually, floor 2.5% and cap 15%).
I currently count the pension cash value as a "bond" for asset allocation purposes, and I loved it when the floor was 4%.
My AA is is now 40/40/20 stock/bond/play money

Again I don't think you can roll if you're not terminated or retired - under "Benefit Payment Options" first sentence of that link you posted - I'll assume you're 1 of those 2 - still can't forecast rates and so I'd lump sum and roll .

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bnes
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Re: Pension floor drops from 4% to 2.5% -- Time to bail?

Post by bnes »

ubermax wrote:
bnes wrote:due to a gap in service, the relevant employment has ended.
what does this mean ? have you terminated employment or not ?
There was a voluntary end to employment (after a child was born), and a later return to the same corporation.
The pension administrator says the account is eligible for a lump sum rollover.

If the pension cash value is held, there will be an annuity option later (exact terms are unclear, if it's a good annuity or a poor one).
Last edited by bnes on Tue Aug 12, 2014 7:35 pm, edited 2 times in total.
Calm Man
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Re: Pension floor drops from 4% to 2.5% -- Time to bail?

Post by Calm Man »

Bnes it's a long thread so I just scanned. Are your questions involving a drop of 1.5% in the guaranteed lowest rate on a sum of 20K? If so that is $300 a year if things stay at the floor which they might not. I would not have that take up much energy. Whether to use the stable value or an intermediate type or total market bond fund is really probably a wash and again not worth your energy !!!!!
ubermax
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Re: Pension floor drops from 4% to 2.5% -- Time to bail?

Post by ubermax »

There was a voluntary end to employment (after a child was born), and a later return to the same corporation.
The pension administrator says the account is eligible for a lump sum rollover.

If the pension cash valueis held, there will be an annuity option. The terms of that annuity are murky (unclear if it's a better deal or a worse deal than a market purchased annuity). - you have to find out if you can get an immediate or deferred annuity for the optional forms noted on that link you had , the plan administrator should be able to provide amounts under each , then you can take that lump sum amount and ask Vanguard how much annuity it will buy comparable to the amounts they provide you - not sure what's murky about it , could you explain what has you confused ?
manwithnoname
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Re: Pension floor drops from 4% to 2.5% -- Time to bail?

Post by manwithnoname »

Calm Man wrote:Bnes it's a long thread so I just scanned. Are your questions involving a drop of 1.5% in the guaranteed lowest rate on a sum of 20K? If so that is $300 a year if things stay at the floor which they might not. I would not have that take up much energy. Whether to use the stable value or an intermediate type or total market bond fund is really probably a wash and again not worth your energy !!!!!
If it went down to 2.5% this year expect further reductions in interest rate in the future if fed rate declines. Current fed rate for 10 year is 2.5% Why not roll over to a balanced fund for the long term or if you are risk adverse see if you can get a better fixed rate, say 3% CD. Of course 3% rate may require that you invest for 10 years. If you have long investment horizon of 25-30+ years don't waste your retirement funds in fixed income\ because you need long term growth.
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bnes
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Re: Pension floor drops from 4% to 2.5% -- Time to bail?

Post by bnes »

manwithnoname wrote:If it went down to 2.5% this year expect further reductions in interest rate in the future if fed rate declines. Current fed rate for 10 year is 2.5% Why not roll over to a balanced fund for the long term or if you are risk adverse see if you can get a better fixed rate, say 3% CD. Of course 3% rate may require that you invest for 10 years. If you have long investment horizon of 25-30+ years don't waste your retirement funds in fixed income because you need long term growth.
@manwithnoname Yes, I expect the floor could drop more, which is part of the point behind the thread.
But keep in mind it's a floor not a fixed rate. A floor is actually better than a fixed rate, because the actual rate paid can float higher.
The pension is basically a Floating 10 Year T-Bill, something I can't buy on the retail market.

@ubermax: I'm not interested in an annuity at this time. Thanks for the suggestion: I could shop to see who has a better deal now Vanguard or the pension admin.
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