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I am looking at a possible employment opportunity with a state-affiliated institution in the United States. They offer a couple of options for retirement plans, and one of them is a pension plan. Of course, pensions have become quite rare in the U.S., so it is exciting to me that this might be an option for me. But I am concerned that this institution might eventually follow the lead of almost all the other businesses in the United States and do away with their pension plan. What are the risks to me in such a circumstance if the pension plan is discontinued:

  • Before my pension is fully vested
  • After my pension is fully vested, but while I am still contributing to it
  • After I leave the company with a fully-vested pension, but before I reach retirement
  • After I have begun collecting my pension
  • I had a (fully funded!) pension plan at one point, and IIRC when the company did away with it they converted it to a 401(k). – RonJohn Aug 21 '18 at 13:40
  • By "state-affiliated institution", do you mean a University? – RonJohn Aug 21 '18 at 13:41
  • @RonJohn It is a research institute affiliated with a public university. – Daniel Aug 21 '18 at 13:41
  • I'd research your state's rules on the need for Universities to fully fund their pensions. Note that even if they must now fully fund their pension plan, there's no guarantee that the rules won't change in the future. Personally, I'd go with the 403b/401k (or whatever the user-directed plan is called). Matches must be made at least yearly, so you'll know that the money is actually there when you retire. – RonJohn Aug 21 '18 at 13:48
  • You may also want to look into the actuarial present value (APV) of the pension benefits so you can compare it to other employer benefits such as a 401k match if applicable. First calculator for APV from google: pensionbenefits.com/calculators/cal_main.jsp?sub_item=aecal – Kora Aug 21 '18 at 20:00
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A lot depends on how long you will remain in your position and whether you want to have a retirement fund that you can take with you when you change jobs. Many academics end up with one employer for their entire career. We get the security of tenure in exchange for salaries that are low compared to what we could earn in industry. Once a faculty member has tenure they aren’t likely to move to another institution. Defined benefit pensions payoff wonderfully for long term employees. Thus defined benefit pension plans are attractive to faculty. However, if you are in a tenure track position and you don’t get tenure, your preference for staying with that employer won’t matter and the pension plan will be almost worthless to you.

At my institution, new assistant professors mostly choose the defined contribution plan over the traditional pension, largely because they don’t know whether they’ll be long term employees or not. That’s how I decided on the defined contribution plan when I started as an assistant professor. Fast forward 10 years and I was a tenured full professor with a secure position wishing I’d opted for the defined benefit pension plan.

A decade ago, my state offered us tenured faculty a one time chance to switch to the defined benefit plan from the defined contribution plan. After discussing this with my financial planner, and considering that I will most likely finish my career with this institution, I opted to switch to the defined benefit plan. I’ll end up with a fairly good pension after 25 years of service (from the day that I switched- no credit for time in the DC plan), plus the accumulated investments in my defined contribution account, which has come back reasonably well from the Great Recession.

Under the new rules, faculty all get a one time chance to make this switch when they are awarded tenure at seven years of service. It is a very nice option to have.

Of course, none of this says anything about the risk that your pension plan will default. In the US, there have been many situations where private companies underfunded their pension plans and subsequently went out of business, leaving their pensioners without promised benefits. There is the Pension Benefit Guaranty Corporation (PBGC) that backs up failed pension plans, but if the PBGC takes over your pension you can expect substantially reduced benefits.

There is somewhat less of a risk of this happening with a pension plan funded by a state or local government simply because that government is likely to continue to exist and generate tax revenue for a very long time. Defaulting on pension obligations would be a significant crisis for any government, so steps are typically taken to prevent collapse before it occurs. Since pension contributions and liabilities unfold over decades, there is plenty of time to address any issues. Over the decades, a small increase in the employer or employee contribution rate or a small decrease in benefits can make a pension plan sound again.

In comparison, if you have a defined contribution plan, then the funds contributed by yourself and your employer are in an account that is under your control. Those funds can't be taken away from you, but you have to invest them, and the return on those investments could vary dramatically depending on factors that are really outside of your control. If your investments do poorly (consider the Great Recession of the late 2000's) in the years just before you retire, you could end up in a very difficult situation. If your investments do well, then you could become quite wealthy and be able to retire early.

  • Let me add that for friends and former college classmates who work in industry, the concept of staying with one employer for more than two or three years (let alone the 26 years I've spent with my current employer) is laughable. I think they're better off with defined contribution plans. – Brian Borchers Apr 20 at 3:08
  • For what it's worth, I did have a traditional defined benefit plan with my large corporate (think bat wings) employer in the 1980's. Since I left before vesting I had nothing to show for it but my employee contributions... – Brian Borchers Apr 20 at 3:11
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Government affiliated employment tends to be kinder to their workforce than public employment. If a government funded pension tends to go away, current participants are typically grandfathered in (if they wish). Sometimes with a change of system participants are given the ability to opt out for a 401K instead.

I know several people that worked for government organizations, who no longer offer pensions but were grandfathered into the old system. If a new employee came aboard they would not be offered the pension system.

FedEx drastically changed their pension system a few years back. No grandfather option was offered.

So there is no telling that if the system will change or how it will if it does. Some much prefer a 401k plan so you don't run into the hassles of state employees of Kentucky.

For some the 401K option works out horrible. I know a couple of people, that were given the option to opt out of a pension fund, put it in a 401K in risky investments and was soon down to almost zero after the dot.com bust.

If you have the discipline to regularly invest, understand asset allocation, will not be tempted to withdraw the money when it gets "big", and can avoid chasing the "next big thing", then you can expect a 401K plan to work out much better in the long run.

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    I doubt that any DC (defined contribution) pension will beat a DB (defined benefit ) suggesting opting for a DC over a DB is dangerous – Neuromancer Oct 20 '18 at 20:53
  • Where do you think Pete is suggesting Defined Contribution over Defined Benefit? – quid Dec 20 '18 at 9:00
  • @quid: In the last sentence, the answer claims that if you have discipline, a 401(k) is better than a defined benefit plan. – Ben Voigt Dec 20 '18 at 20:08
  • No it doesn't. 'Much better in the long run' Doesn't necessarily say 'much better than a defined benefit pension in the long run.' In fact Pete doesn't ever distinguish in his answer a position specific to defined contribution to defined benefit. This answer is really just that relying on an employer pension has risks related to the solvency of the organization sponsoring/administering the pension, which is materially different than a 401k that is invested in something other than a promise from the plan sponsor. – quid Dec 20 '18 at 20:20
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    @quid: "Better" is a conparison. What do you think Pete is comparing to, if not a defined-benefit plan? There is no possible meaning other than "much better than a defined benefit pension in the long run" given the context. – Ben Voigt Apr 19 at 6:20
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During Detroit's woes, it was a federal court that handled the pension , as it was "guaranteed" by the Michigan state's constitution. It was a long involved fight.

Detroit pension AARP

Public pensions are golden. Golden Pensions, Taxes

Anecdotally, private pensions, when they encounter trouble, get bailed out by PBGC, for pennies on the dollar.

  • I think the last line should be improved. If a company goes bankrupt, your pension payments can be cut dramatically. Some companies have used generous pension offers over pay increases, which increases their long-term liabilities. This can end up lead to bankruptcy. The key here is that taking a pension may seem like the safer bet but it's important to remember the money isn't guaranteed. At least with a 401K you get the money now. The same logic applies to investing too much in the company you work for. – JimmyJames Sep 20 '18 at 18:46
  • Note that public university pensions may be different from the state's retirement pension and may not have the same protections because the institution is not a direct part of the state government. For example, California is split, a number of colleges use the state's PERS, but University of California has its own fund (which, unlike the state's, was actually overfunded for a while). – user71659 Nov 19 '18 at 19:58

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