FICU wrote:As has been mentioned here even though there is protection for a DB plan not all of the money is protected should something happen to the company down the road. My company has only ever had a DC pension plan so there is no other option for me. I have no problem with managing the money for my retirement and am secure in knowing that whatever the company has contributed to the plan remains mine and can't be touched. I'm sure AC will be around for a very long time but with the moves ACE has made in the recent past I wouldn't bet all my chips the company will look the same.
Hi FICU,
I note that you say that your employer has a DC plan and so there is no other option for you. I don’t want to come across as beating up on you or your DC plan so I ask that you take what I have to say below as an expression of my opinion on pensions in general and not a personal criticism of you and your DC plan. Hope that’s understood.
You say about your DC Plan that you are “secure in knowing that whatever the company has contributed to the plan remains mine and can’t be touched.” I would ask: not touched by whom? I would presume that the money in your DC plan is invested, and thus is exposed, “touched” if you will, by all the forces at play in the investment world. You can sum up all those forces with one word: risk. Risk doesn’t care if your money is in a DC Plan or a DB Plan, it will take its toll without discrimination. The difference between DC and DB is that you assume all the risk in your DC Plan and live with its consequences, whereas with DB the employer assumes all the risk and you can sleep soundly at night not having to worry about what tomorrow might bring. So in terms of money that “can’t be touched”, I would say that both plans are touched equally.
Perhaps you were thinking of the case where the company goes bankrupt, the DB Plan has to be terminated, and that whatever the company has contributed to the plan won’t remain yours and
can be touched. I’m also unsure what you consider constitutes ”all of the money”.
In our DB Plan, each month the employee makes a contribution and the employer makes a contribution and these two amounts are pooled together, held “in Trust” on your behalf and invested. Depending on investment performance, at any given time there will be less money, the same money, or more money than the total contributions deposited by employee and the employer. If the employer was to go bankrupt and the plan wound up, then, depending on the wind-up rules in the plan, you would get returned to you from the Trust less dollars, the same dollars or more dollars (also dependant on the investment performance of the plan) than that which you had personally contributed. In a wind-up situation, the plan would have to be seriously, seriously under-funded for you not to get returned to you at least all the dollars (all of the money) contributed by you and the employer. Because don’t forget, the solvency of a DB Plan is based upon what it promises to pay out on retirement, and not on the simple dollars contributed by you to the plan. There is no similar solvency test for a DC Plan because it doesn’t promise you anything.
On the other hand, if you consider what the DB plan promises to pay you on retirement as “all of the money”, then I would agree with you: “not all of the money is protected should something happen to the company”. That is so because the company promises to pay you a lifetime pension and no one knows how much constitutes “all of the money” that will be paid to you until after the day you die and the last retirement cheque has been paid out.
For example, and for the sake of simplicity, let’s say that on average throughout your career you contribute $500/month towards your pension and at the end of 30 years the plan promises to pay you $100,000/year. So over 30 years you would have contributed $180,000 into the plan and for sake of argument let’s say the employer paid in on your behalf an equal amount for a sum total of $360,000. In less than 2 years of retirement you will have been paid back the $180K that you originally put in and in a little more than 3 ½ years you will have received back all of the money that both you and the employer put in. For the remainder of your retirement days, if you live for another 30 years, the DB plan promises to keep paying you that $100K every year. Where does that money come from? It comes from the investment performance of the plan, the hundreds of millions of dollars invested and held for all the pilots. Who guarantees the investment performance of the plan? The employer.
Consider a DC plan. That $360,000 total amount that you and the employer contributed over 30 years will, roughly calculated, buy you and your wife a lifetime $21,000/year last survivor annuity. Now what about that $100K/year pension provided by the DB plan? Well, to get that amount of annual pension you’ll need roughly $1.8 Million so you have to hope that your investment savvy will turn that $360K into $1.8M. For the average guy, of which I consider myself to be one, I see that as a daunting task, and loaded with risk and uncertainty.
To complicate matters, or I would say, to make matters worse, there is no guarantee at all for your investment. The risk is all yours. Retire, as I did, during an economic downturn and you could get wiped out. What is in your DC plan on retirement day is what you have to retire on. Lose 30-40% in the year or two before retirement and all of a sudden your 1.8M (if you were smart enough and lucky enough to get that kind of return in the first place) is more like 1.1 or 1.2 and that $100K pension you were looking forward to is now 55-60K. Things might even be worse.
So let’s be clear. There is no magic here. A DB Plan, in terms of an investment vehicle for your retirement, provides you the best risk protection that you could ever wish for when it comes to providing retirement income. Yes, the employer is the guarantor and if the employer goes bankrupt, then the landscape changes. A DC Plan, in terms of an investment vehicle, provides no risk protection at all when it comes to providing retirement income. The employer guarantees you nothing, and if it goes bankrupt you may, or may not have the same amount of money in your DC Plan that would have been held in Trust and returned to you from the wind-up of the DB Plan. Most significantly, what disappears with the wind-up of a DB Plan is the promise to pay a specific level of retirement income – and you never, ever had that from the git-go with your DC Plan.
I am not a financial guru, I have no formal investment training; I speak solely from my life’s experiences, from my heart and from my gut feel. I see discussions such as these as learning experiences and often I learn more from these discussions than I contribute. I welcome constructive criticism and opposing viewpoints.
Cheers,
