401k vs Defined Benefit for 25-yr-old

[GarciaGM]

The company where I work offers both a 401k plan and a Defined
Benefits pension plan. However, due to company contribution caps and
poor stock choices within the DB plan, the company could not
participate in 401k for CY2003. All company contributions had to go
to the DB plan to "catch up" on its value. Can anyone give me a
rundown of what ramifications this has for me? I am 25 years old and
am 80% vested with both plans. It would seem to me that the 401k
contributions would be more valuable to me as a younger employee than
the DB contributions. My employer touts these two retirement plans as
"extremely competitive" and generous employment benefits rather than
providing higher salaries. I want to know if this could be used as a
salary negotiation point when the time comes for my annual raise. Any
input would be greatly appreciated.

MGarcia

 

[John A. Weeks III]

The company where I work offers both a 401k plan and a Defined
Benefits pension plan. However, due to company contribution caps and
poor stock choices within the DB plan, the company could not
participate in 401k for CY2003. All company contributions had to go
to the DB plan to "catch up" on its value. Can anyone give me a
rundown of what ramifications this has for me? I am 25 years old and
am 80% vested with both plans. It would seem to me that the 401k
contributions would be more valuable to me as a younger employee than
the DB contributions. My employer touts these two retirement plans as
"extremely competitive" and generous employment benefits rather than
providing higher salaries. I want to know if this could be used as a
salary negotiation point when the time comes for my annual raise. Any
input would be greatly appreciated.

A pension plan may have been good years ago when:

1) people stayed at jobs for many, many years
2) companies stayed in business for many, many years
3) management types were not outright theives

Today, people move between jobs so often, it is hard to get
vested into any signficant pension benefit. Companies merge,
reorganize, and go bankrupt so often that it is hard to keep
up. And management has been known to dip into pensions, steal
from pensions, and run companies through bankruptcy to avoid
having to pay benefits. Just ask the steel workers about
pensions.

As a result, I like to see people be in control of thier money.
That is the nice thing about 401K programs, and IRAs in general.
The money leaves your company, which means that as long as they
pay it like they are supposed to, you will own that money, and
they cannot steal it back. (As a caveat, that is if you invest
in funds from 3rd parties, and not company stock.) If you leave
the company, you roll your money into a roll-over IRA, and you now
have 100% control over the money and the investments.

In your case, crooked CEO's and greedy financial people will have
40 years to figure out how to screw you out of your pension. And
the Republicans will likely have run social security broke by then,
too. You will need your 401K (which will be an IRA by then) money
to retire on.

-john-

 

[Brent D. Gardner, ChFC]

The company where I work offers both a 401k plan and a Defined
Benefits pension plan. However, due to company contribution caps and
poor stock choices within the DB plan, the company could not
participate in 401k for CY2003. All company contributions had to go
to the DB plan to "catch up" on its value. Can anyone give me a
rundown of what ramifications this has for me? I am 25 years old and
am 80% vested with both plans. It would seem to me that the 401k
contributions would be more valuable to me as a younger employee than
the DB contributions. My employer touts these two retirement plans as
"extremely competitive" and generous employment benefits rather than
providing higher salaries. I want to know if this could be used as a
salary negotiation point when the time comes for my annual raise. Any
input would be greatly appreciated.

Most DB plans are currently underfunded, so those companies that have one
are going to be adding money over the next few years to get back on target.
Consider yourself fortunate that you work for an employer that actually as a
DB plan. Generally, the DB is funded with employer dollars, although one can
argue that those monies could be paid in salary -- I believe its better if
it isn't.

The concept of shifting the risk/responsibility to the employee, via Defined
Contribution plans, is one that has been taken too far. The upside is that
many companies are adding a DB plan back to the mix. This is an EXCELLENT
move, because some people, no matter how good the advice they get, are going
to retire broke, if someone doesn't salt away money for them -- money they
can't touch, and money they can't cash in -- to provide a guaranteed income
they cannot outlive.

In the old days, nobody had a 401(k), so a DB plan was the only benefit.
Companies competed for employees by how rich their plan was. My own father
was lured away by the promise of a large company that paid 100% of the
highest five year average at age 65. That carrot proved to be elusive, since
one has to make it to 65 to get that massive benefit. Retire before age 60
and the benefit is reduced to 50%, so one has to consider their position in
the company (management vs. rank and file, key vs. replaceable).

If I were you, I'd take full advantage of the 401(k). Combined with the DB
plan, you can be in excellent shape down the road.

Brent D. Gardner, ChFC
Chartered Financial Consultant
http://members.cox.net/brentdgardner1378/

"Be ever questioning. Ignorance is not bliss. It is oblivion. You don't go
to heaven if you die dumb. Become better informed. Learn from other's
mistakes. You could not live long enough to make them all yourself." - Hyman
George Rickover (1900-86), Admiral, US Navy, advocated development of
nuclear subs & ships

The Chartered Life Underwriter (CLU) and Chartered Financial Consultant
(ChFC), designations owned and exclusively offered by The American College,
signify the highest standards of academic study and professional excellence
in the financial services industry.