Pension vs Enhanced 401k decision
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Pension vs Enhanced 401k decision
Up until recently my megacorp offered a pension in addition to a 401k with company match to new employees. New employees no longer have access to the pension, and they are now asking legacy employees to decide either to stay with the pension+401k with match vs move to a 401k only option with enhanced match along with an additional extra company contribution based on an algorithm.
If I elect to move I will still be eligible to receive accumulated pension benefits based in years of service through a certain date. Without crunching numbers it seems obvious not to give up a benefit a company is moving away from. After crunching numbers, the enhanced 401k option seems to align more with my families goals. Based on my calculations either situation (staying with pension or moving to enhanced 401k) nets out similarly, and the main difference is getting money later (pension) vs getting money now (enhanced 401k).
Have any of you had to deal with a similar situation? What things did you/would you take into consideration when making your decision?
If I elect to move I will still be eligible to receive accumulated pension benefits based in years of service through a certain date. Without crunching numbers it seems obvious not to give up a benefit a company is moving away from. After crunching numbers, the enhanced 401k option seems to align more with my families goals. Based on my calculations either situation (staying with pension or moving to enhanced 401k) nets out similarly, and the main difference is getting money later (pension) vs getting money now (enhanced 401k).
Have any of you had to deal with a similar situation? What things did you/would you take into consideration when making your decision?
Re: Pension vs Enhanced 401k decision
Have a search for a thread I created about is my pension guaranteed? That seems to be a big issue. No doubt the pension scheme is generous (which is why they are ruling it out for new employees. Then the issue is: will it be around when I need it!Coolguy8877 wrote: ↑Mon Aug 08, 2022 11:41 am Up until recently my megacorp offered a pension in addition to a 401k with company match to new employees. New employees no longer have access to the pension, and they are now asking legacy employees to decide either to stay with the pension+401k with match vs move to a 401k only option with enhanced match along with an additional extra company contribution based on an algorithm.
If I elect to move I will still be eligible to receive accumulated pension benefits based in years of service through a certain date. Without crunching numbers it seems obvious not to give up a benefit a company is moving away from. After crunching numbers, the enhanced 401k option seems to align more with my families goals. Based on my calculations either situation (staying with pension or moving to enhanced 401k) nets out similarly, and the main difference is getting money later (pension) vs getting money now (enhanced 401k).
Have any of you had to deal with a similar situation? What things did you/would you take into consideration when making your decision?
Good luck
Re: Pension vs Enhanced 401k decision
I have not been in this situation, but based on what you wrote here is what I would consider (along with some additional questions that came to mind as I was typing):
One key benefit of a pension is the longevity insurance. In most cases it is guaranteed to last until you die (is this the case for your pension?) and in some cases the survivor benefits will last until your beneficiary dies as well (you should verify the options for survivors). Also, is your pension COLA'd? Are you fully vested? Is the pension well-funded (i.e. is your company likely to claw back any of this promised benefit between now and when you retire)?
Another key benefit is the known dollar amount of the income from your pension. You won't have to worry as much about your investments tanking at inopportune times, and how this might impact your ability to meet expenses. A pension provides a reliable income floor.
Finally, I'm sure you know this, but you won't have access to the money in the 401k plan now. It will be under your control as far as investment options (do you have good options in your company plan, or do they all have high fees?), but you will have to wait until you are 59.5 years old or older to withdraw it without penalty (are you over 59.5 already?).
If the two options you are considering net out to be pretty similar, in what way(s) does the 401k align better with your family's needs?
One key benefit of a pension is the longevity insurance. In most cases it is guaranteed to last until you die (is this the case for your pension?) and in some cases the survivor benefits will last until your beneficiary dies as well (you should verify the options for survivors). Also, is your pension COLA'd? Are you fully vested? Is the pension well-funded (i.e. is your company likely to claw back any of this promised benefit between now and when you retire)?
Another key benefit is the known dollar amount of the income from your pension. You won't have to worry as much about your investments tanking at inopportune times, and how this might impact your ability to meet expenses. A pension provides a reliable income floor.
Finally, I'm sure you know this, but you won't have access to the money in the 401k plan now. It will be under your control as far as investment options (do you have good options in your company plan, or do they all have high fees?), but you will have to wait until you are 59.5 years old or older to withdraw it without penalty (are you over 59.5 already?).
If the two options you are considering net out to be pretty similar, in what way(s) does the 401k align better with your family's needs?
Tell me, what is it you plan to do with your one wild and precious life? |
~Mary Oliver
Re: Pension vs Enhanced 401k decision
I had this decision to make in the late 2000s timeframe. We were offered a 6% 401k dump-in each year or we could stay in the pension plan. I was able to see how much was contributed each year to the pension and this was around 11-13% or so. That alone told me that I should stick with the pension, but critical to this decision is whether you intend to stay with the company until retirement or not. If no, I’d lean toward the 401k option, otherwise, the pension might be better.
In my case, I had an option to take a reduced benefit starting at age 55 and a lump sum option. I recently took the lump sum option and retired, so I think I made the right decision for me. I would say in general that the people who stayed in the pension plan have been more in a position to retire early than those who did not.
In my case, I had an option to take a reduced benefit starting at age 55 and a lump sum option. I recently took the lump sum option and retired, so I think I made the right decision for me. I would say in general that the people who stayed in the pension plan have been more in a position to retire early than those who did not.
Re: Pension vs Enhanced 401k decision
My only word of caution is that it is easy to do away with those *enhancements*. How do I know? It happened to me. I chose an enhanced pretax retirement plan based on the excellent employer contribution. A couple of years after the GFC, in 2011, my employer felt justified to half this contribution. Of course, it never came back and never will.Coolguy8877 wrote: ↑Mon Aug 08, 2022 11:41 am Up until recently my megacorp offered a pension in addition to a 401k with company match to new employees. New employees no longer have access to the pension, and they are now asking legacy employees to decide either to stay with the pension+401k with match vs move to a 401k only option with enhanced match along with an additional extra company contribution based on an algorithm.
If I elect to move I will still be eligible to receive accumulated pension benefits based in years of service through a certain date. Without crunching numbers it seems obvious not to give up a benefit a company is moving away from. After crunching numbers, the enhanced 401k option seems to align more with my families goals. Based on my calculations either situation (staying with pension or moving to enhanced 401k) nets out similarly, and the main difference is getting money later (pension) vs getting money now (enhanced 401k).
Have any of you had to deal with a similar situation? What things did you/would you take into consideration when making your decision?
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Re: Pension vs Enhanced 401k decision
This is just anecdotal and may be more of an urban legend, but I have heard of people who switched to the enhanced 401k, just to have the company then cut back on the enhanced 401k match at a later date.
Re: Pension vs Enhanced 401k decision
Pensions, Annuities and Social Security provide income for life (assuming no default). Extra money in 401k may or may not. I like maximizing lifetime income. I'd continue on your current plan of having a pension and contributing to your 401k. This assumes your company is reasonably solvent.
Re: Pension vs Enhanced 401k decision
+1Dandy wrote: ↑Mon Aug 08, 2022 2:38 pm Pensions, Annuities and Social Security provide income for life (assuming no default). Extra money in 401k may or may not. I like maximizing lifetime income. I'd continue on your current plan of having a pension and contributing to your 401k. This assumes your company is reasonably solvent.
It is hard to overestimate the peace of mind that comes with monthly pension plus Social Security payments. Together with other pre- and post-tax savings and assets they comprise your own financial fortress that is likely to weather future storms.
Re: Pension vs Enhanced 401k decision
How far are you from being able to retire with an unreduced pension?
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
Re: Pension vs Enhanced 401k decision
+2Dandy wrote: ↑Mon Aug 08, 2022 2:38 pm Pensions, Annuities and Social Security provide income for life (assuming no default). Extra money in 401k may or may not. I like maximizing lifetime income. I'd continue on your current plan of having a pension and contributing to your 401k. This assumes your company is reasonably solvent.
My vote too.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
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Re: Pension vs Enhanced 401k decision
Another consideration you may want to keep in mind is that with my employer, who also offers a pension and a 401k with match, their pension account contributions are not a a part of the IRS 515(c) limit but the 401k match is.
That leaves me with more dollar room to make post-tax contributions to my retirement account and then fund a Roth IRA using a mega-backdoor strategy. If my employer were to replace the pension contribution with a higher 401k match, I would not just lose the predictability of the pension (fully funded) but also reduce the mega-backdoor contributions I can make today.
If your employer's retirement plan also permits after-tax contributions and mega-backdoor rollovers, this could be a significant trade off.
That leaves me with more dollar room to make post-tax contributions to my retirement account and then fund a Roth IRA using a mega-backdoor strategy. If my employer were to replace the pension contribution with a higher 401k match, I would not just lose the predictability of the pension (fully funded) but also reduce the mega-backdoor contributions I can make today.
If your employer's retirement plan also permits after-tax contributions and mega-backdoor rollovers, this could be a significant trade off.
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Re: Pension vs Enhanced 401k decision
Thanks! I aim to retire early but still have at least 15+ years until then. That said, while it is possible, it is unlikely that I will stay with my current until then. I will still be vested and be eligible to receive my accrued pension amount based on years of service, so I may need to compare anticipated pension payout vs 401k projections factoring the extra match/extra company contribution. This seems to favor the 401k in most instances, but this is obviously based on a number of personal assumptionsKenkat wrote: ↑Mon Aug 08, 2022 12:05 pm I had this decision to make in the late 2000s timeframe. We were offered a 6% 401k dump-in each year or we could stay in the pension plan. I was able to see how much was contributed each year to the pension and this was around 11-13% or so. That alone told me that I should stick with the pension, but critical to this decision is whether you intend to stay with the company until retirement or not. If no, I’d lean toward the 401k option, otherwise, the pension might be better.
In my case, I had an option to take a reduced benefit starting at age 55 and a lump sum option. I recently took the lump sum option and retired, so I think I made the right decision for me. I would say in general that the people who stayed in the pension plan have been more in a position to retire early than those who did not.
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Re: Pension vs Enhanced 401k decision
This is definitely a concern, and so is an early pension buyout. Probably impossible to predict which would result in a better scenario for me though.JS-Elcano wrote: ↑Mon Aug 08, 2022 12:10 pmMy only word of caution is that it is easy to do away with those *enhancements*. How do I know? It happened to me. I chose an enhanced pretax retirement plan based on the excellent employer contribution. A couple of years after the GFC, in 2011, my employer felt justified to half this contribution. Of course, it never came back and never will.Coolguy8877 wrote: ↑Mon Aug 08, 2022 11:41 am Up until recently my megacorp offered a pension in addition to a 401k with company match to new employees. New employees no longer have access to the pension, and they are now asking legacy employees to decide either to stay with the pension+401k with match vs move to a 401k only option with enhanced match along with an additional extra company contribution based on an algorithm.
If I elect to move I will still be eligible to receive accumulated pension benefits based in years of service through a certain date. Without crunching numbers it seems obvious not to give up a benefit a company is moving away from. After crunching numbers, the enhanced 401k option seems to align more with my families goals. Based on my calculations either situation (staying with pension or moving to enhanced 401k) nets out similarly, and the main difference is getting money later (pension) vs getting money now (enhanced 401k).
Have any of you had to deal with a similar situation? What things did you/would you take into consideration when making your decision?
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Re: Pension vs Enhanced 401k decision
~30 years. With the longer timeframe the assumptions come with more uncertainty. The likelihood I will stay with this employer until retirement is low, but I would still be eligible for my accrued benefits regardless of when I leave
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Re: Pension vs Enhanced 401k decision
I would define the company as you described, reasonably solvent . Just hard to say how long I will stay with the company, so I will factor the pension in as a form of diversification relative to my other savings when comparing projections for accrued pension benefit vs 401k estimates based on the enhanced contributions. Just hard to say how much weight to place on it. Point taken though nonetheless, especially given others have echoed the sentimentDandy wrote: ↑Mon Aug 08, 2022 2:38 pm Pensions, Annuities and Social Security provide income for life (assuming no default). Extra money in 401k may or may not. I like maximizing lifetime income. I'd continue on your current plan of having a pension and contributing to your 401k. This assumes your company is reasonably solvent.
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Re: Pension vs Enhanced 401k decision
This is definitely a factor. The enhanced 401k offering will enable me to contribute an additional several thousand dollars in my 401k on an after-tax basis which can be converted to Roth shortly thereafter. In the new plan, maxing my pre-tax and after-tax, plus the enhanced employer contribution will likely put me over the IRS 415 limit, but they claim to offer a way for employer contributions over the limit to be contributed a different route the following year so you don’t miss out on anything (still reading up on this).Progapanda wrote: ↑Mon Aug 08, 2022 4:31 pm Another consideration you may want to keep in mind is that with my employer, who also offers a pension and a 401k with match, their pension account contributions are not a a part of the IRS 515(c) limit but the 401k match is.
That leaves me with more dollar room to make post-tax contributions to my retirement account and then fund a Roth IRA using a mega-backdoor strategy. If my employer were to replace the pension contribution with a higher 401k match, I would not just lose the predictability of the pension (fully funded) but also reduce the mega-backdoor contributions I can make today.
If your employer's retirement plan also permits after-tax contributions and mega-backdoor rollovers, this could be a significant trade off.
If I don’t move I will still accrue pension benefits and contribute to my 401k pre-tax and after-tax plus the company contribution, but without the enhanced company contribution I will most likely not reach the 415 limit. I would likely still save that several thousand I wouldn’t be eligible to contribute after-tax in a taxable account.
With that extra after-tax contribution factored in with the enhanced 401k offering, my modeling has shown the enhanced 401k will come out slightly ahead vs the pension. Similar to what others have posted, it seems to boil down to how long I will stay at the company and accrue benefits, as well as how I value the degree of certainty the pension comes with vs the performance of the market as it relates to my 401k. Both are difficult, if not impossible to estimate, but I do like that the pension is another “basket” to draw from in retirement.
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Re: Pension vs Enhanced 401k decision
Decided to stick with the pension option after going back and forth for some time. Will be leaving some money on the table in terms of the extra match, but all things considered we anticipate maintaining a high savings rate regardless. In the end the pension was more appealing due to the guaranteed retirement income stream that is not reliant on market return. That is of course if 1. I am not offered a compelling buyout later and 2. if I live long enough to use it
Re: Pension vs Enhanced 401k decision
Generally speaking, companies don't make these sort of offers if they expect it to cost them more.Coolguy8877 wrote: ↑Fri Aug 26, 2022 11:01 am Decided to stick with the pension option after going back and forth for some time. Will be leaving some money on the table in terms of the extra match, but all things considered we anticipate maintaining a high savings rate regardless. In the end the pension was more appealing due to the guaranteed retirement income stream that is not reliant on market return. That is of course if 1. I am not offered a compelling buyout later and 2. if I live long enough to use it
Re: Pension vs Enhanced 401k decision
Exactly. And my point up stream is then the real question is: i) Will the pension be around in the future for your to collect it, see pension guarantee threads on this board and ii) Will you stay with the company long enough to collect it?exodusNH wrote: ↑Fri Aug 26, 2022 11:07 amGenerally speaking, companies don't make these sort of offers if they expect it to cost them more.Coolguy8877 wrote: ↑Fri Aug 26, 2022 11:01 am Decided to stick with the pension option after going back and forth for some time. Will be leaving some money on the table in terms of the extra match, but all things considered we anticipate maintaining a high savings rate regardless. In the end the pension was more appealing due to the guaranteed retirement income stream that is not reliant on market return. That is of course if 1. I am not offered a compelling buyout later and 2. if I live long enough to use it
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Re: Pension vs Enhanced 401k decision
When this came up at megacorp some years before I retired we didn't have a choice it was just pension frozen extra in the 401k whether you like it or not.