# What to do with DB pension funds after leaving company in late 20's?

I'm trying to understand if I can roll my defined benefit pension plan into my IRA and invest it that way. I assume I can let it sit in the pension account and earn the interest credits between 2-10%. At this point in my life, I feel it would be best to put it in my IRA but want to make sure I'm not overlooking anything. What factors should I consider?

• What kind of plan are the pension funds in: Defined Benefit, 401(k), 403(b), or something else? There are multiple kinds of entities companies could create and thus it is part of something to disclose here in trying to answer the question. – JB King Oct 14 '13 at 22:44
• It is a defined benefit plan, thank you for the comment. – Matthew Larson Oct 14 '13 at 22:59
• At the risk of asking the obvious - Is a rollover to an IRA permitted? Not all defined benefit plans allow an early transfer or any at all. – JoeTaxpayer Oct 15 '13 at 0:12

All things being equal, a defined benefit pension is far better than an IRA or a 401(k). Think about it this way - let's say you can have a guaranteed $100 a month*, or the chance at$100 a month. Which is better?

Now, obviously, your tolerance for risk is the difference - but this is the beauty of a defined benefit plan. Your employer is picking up the risk. Assuming that the pool of investments is about the same (which unless if their funds are tremendously under performing they are), the question is, who takes the risk - you or them?

Especially if you are moving into a new position, having a defined benefit plan is like having a risk-free asset in your portfolio. It increases your safety. The only reason to roll this over into a 401(k) or IRA is if your expected value (risk * payout) is better.

A worked example.

If half the time you would earn more than \$100 and half the time less, then you could imagine the two as being equally good. Only if you really love risk would you take that chance. In reality, only half the investments out there will "beat" the average, and as such, you actually have less than a 50/50 shot of beating a DB - unless if there are really low returns to it. More likely, I suspect you are over-estimating your ability to get a higher return.

• Your DB pension is risk-free only if you are 100% sure that the company will continue to pay into the pension fund enough money to ensure that it can pay out the defined benefits. If it's a government pension that's probably true. If it's not then over the next few decades it is possible that the company will fail to make payments. The pension fund will thus be underfunded and eventually declare bankruptcy. Believe me, I speak from experience. – DJClayworth Oct 15 '13 at 20:57

I agree that to take the money from the defined benefit plan you are saying that you can get a better return than the plan. You are taking all the risk if you take the lump sum. But there are two more risks that you are taking by keeping the money in the plan even though you are decades from retirement.

Funding risk: companies and state/city/county governments have underfunded their pension programs due to budget pressure. In some cases they have skipped payments when the market was good, because they felt they were ahead of their obligations. They also delayed or skipped contributions when they had a budget shortfall, and wanted to not end the government/company fiscal year in the red. The risk is that they can get so far behind that they change their promises to current and former employees. This was one of the issues with the city of Detroit this year.

Bankruptcy: even though their are guarantees regarding pension benefits, the Pension Benefit Guaranty Corporation does set a maximum benefit. If the company goes bankrupt or the plan is terminated you might not get all the money you were expecting. While the chances of taking a haircut generally impacts people who have a long career, because they are entitled to a large benefit, it can impact people who don't expect it.