Pension Question for those with them

[vtchaz]

I'm not firmiliar with how Defined Benefit Pensions and Defined Contribution plans are calculated. Can anyone who actually knows what he's talking about give me a quick run-down? I'm just trying to compare the retirement plans at various companies. Thanks for any help!

 

[Fox-Tree]

I'm not firmiliar with how Defined Benefit Pensions and Defined Contribution plans are calculated. Can anyone who actually knows what he's talking about give me a quick run-down? I'm just trying to compare the retirement plans at various companies. Thanks for any help!

Dude,
Plan your retirement based on the defined benefit plan not being there. Chances are it won't. So - I wouldn't' waste time worrying about which is better. If it is there at retirement, great - it will be gravy.
Worry about B-fund and 401K matching and contributions.

 

[SWAlifter]

Defined Benefit Plans- Companies provide a guaranteed (supposedly) pension in the form of monthly payments after retirement or, in some cases, a lump sum payment, based on years of service and salary (usually your last 3-5 years). The amount necessary to fund these payments must be determined annually by an actuary, and the company must annually provide the funds to meet the future obligations. For 2006 the maximum yearly pension is $175,000 (the max salary that can be used in the formula is $220,000). If the company files for voluntary distress or the PBGC determines to cancel the plan, the PBGC will cover the future benefits to a maximum of $3972/month.

Defined Contribution (401k, Profit Sharing, etc)- Companies must only make a "substantial and recurring" contributions, but are not legally required to make a fixed amount per year. The employee bears most of the risk of how the retirement account performs and there's usually a wide array of investment options. For 2006, the max an employee can contribute to a DC plan is $15,000/year (usually through pre-tax salary deferrals) and the total maximum amount that can be put annually into the plan is $44,000/year (including employee contributions and employer contribution/matching, profit sharing). The maximum employee salary that can be used in the formulas is $220,000.

For example at SWA we have a 401k (dollar for dollar matching to 7.3% salary) and Profit Sharing. Assume a guy makes $150,000. He can make a maximum salary deferral of $15,000 per year (usually payroll deducted monthly). The company will match $10,950 (15,000 x .073). This totals $25,950. If SWA also gives out 10% Profit Sharing that's another $15,000 for a total of $41,000. If you're a Capt making $180k you're going to go above the $44,000 max and the excess amount will be included in current income or an excess benefit plan.

The bottom line is Defined Contribution Plans usually favor younger employees and they are usually 100% vested within 5 years (the retirement account is totally your own). Defined Benefit Plans usually benefit older employees (unless of course you're at a bankrupt airline). But then what do I know, I'm just an airline pilot!

 

[vtchaz]

Thanks SWALifter...I appreciate you taking the time to give me the info I asked for. It's just what I wanted.

 

[skykid]

Everything you need to know about pensions is summarized wonderfully by Fox-Tree.

 

[warbirdfinder]

Quoted by SWAlifter (a very good description of the retirement plans):
If the company files for voluntary distress or the PBGC determines to cancel the plan, the PBGC will cover the future benefits to a maximum of $3972/month.

The only change would be to the maximum benefit paid age at 60 retirement, that would be $ 2581.53/month. But that is not guaranteed, if your had a large lump sum payout, your benefit could be zero, like mine.