Thoughts on a B-Fund only retirement (defined contribution)

[Vref+10]

Take a pilot who has a typical B-Fund retirement, approx 10 - 12%. That pilot works for 30 years.

Now take another pilot who works at the same airline with an A-Fund retirement and works 30 years, then gets approx. 65% of Final Average Earnings (FAE).

Who do you think will do better?

It seems the A-Fund is really based on the total years of service, and the earnings of the last 5 years (usually). So with an A-Fund retirement, you could be lazy your whole career, and then just work your butt off and fly the biggest equipment the last few years, and make just as much as the same pilot with the same seniority who worked much harder his entire career.

Now compare those same two pilots with a B-Fund. The pilot who worked harder his whole career might have $2 million in B-Fund, and the pilot who worked less might have $1.5 million.

So the B-Fund type of retirement promotes a more "free market" type effect on how much your retirement is. You work harder your entire career, then you have more in the end. But not quite so with the A-fund (defined contribution).

 

[Jim Smyth]

Unfortunately the A and B funds are going the way of endangered species. A good 401K is the way to go IMO. You have to get the company you work for to do a good matching on the monies you save. I worked for a company (Midway Airlines until Chapter 7 in 1991) that had a 401K and went out of business 6 years after I was hired on. By law I was refunded all of my 401K money within 60 days and had to reinvest it in a retirement vehicle or pay penalties of ten percent plus its added to your income that year so you also had to pay tax on top of the ten percent. But at least its your money and the company cant get there incompetent hands on it! If you have a good matching contribution from your company (SWA currently is 7.3 percent) and you max it out for a 30 year career you will be a millionaire and not have to worry about the company defaulting on your A & B funds when your time is near, like what is going on now in the industry. I think 401K's are the wave of the future (and should have been for a long time) and its a shame it wasnt in place since the mid 80's when they came into existance so guys that are retireing now can count on the funds being there and not having to live on a percentage of the PBGC fund.

 

[Flash]

I thought the 'B' fund, once you're vested (ex 5 yrs.) , will always be yours and can't be taken out of your account. That makes it safer than an A fund that as we've all seen can be sent to the PBGC for some fraction of it's original worth. The B is also better than matching 401k as you don't have to contribute if you don't want to.

 

[flynlow]

I thought the 'B' fund, once you're vested (ex 5 yrs.) , will always be yours and can't be taken out of your account. That makes it safer than an A fund that as we've all seen can be sent to the PBGC for some fraction of it's original worth. The B is also better than matching 401k as you don't have to contribute if you don't want to.

You are correct sir.

 

[skykid]

I thought the 'B' fund, once you're vested (ex 5 yrs.) , will always be yours and can't be taken out of your account. That makes it safer than an A fund that as we've all seen can be sent to the PBGC for some fraction of it's original worth. The B is also better than matching 401k as you don't have to contribute if you don't want to.

Roger, if your "B" fund can be taken from you it is worthless. The difference I see between a "B" fund and 401K is the company puts a set amount into the B fund regardless of what you do. It would have been ideal if we could have built on pilots having an A and B fund in this industry, however that is not the way of the future in ANY industry. A funds are going away, regardless of how many years companies can convince Congress to spread the payments. Delta owes, according to an AP article, $450Mil to their pension funds in 2005. Think they can compete with Airtran, even if it was only $45 million? I'm not blaming Airtran either, if I was starting a company today I wouldn't be setting up traditional pensions. Look for B funds to look more like 401Ks as well.

 

[mach none]

At Alaska, the B fund goes into our 401K.

 

[Singlecoil]

According to my analysis, if you have more than 25 years of service to offer, get at least a 12% employer contribution, and get at least an 8% rate of return, you will be money ahead with a straight 401K. Anything less than those three factors, and you would have been better off under a traditional A plan.

Also, under the A plan, the company assumes all the risk. Under the B plan, you assume all the risk.

 

[FreightNazi]

UPS has both A and B plans. The A plan right now is a measly 1% which should be increased in the new contract. The B fund is 11%. UPS' pension is very secure with no threat of it going away.

 

[CitationLover]

the A fund will not be as "valuable" as a B fund until the early retirement subsidies kick in. the crossover on a normal (age 65) pension is around age 60, so with unreduced at 60 the A fund is worth a lot more.

does UPS only have a 1% defined benefit plan?!?! or is it 1% of final average earnings times years of service?

 

[Green]

Many of the 401k calculators assume an annual return of 8%. Call me pessimistic but I think that is somewhat unrealistic. The A funds were pretty sweet while they lasted. Take someone who had a FAE of 300k and they are looking at a 180k+ pension. Obviously they are fast dissapearing but with a well funded A plan (ie UPS/fed ex) you don't have to worry about the market going into a protracted downswing right as you entre retirement age.

With a traditional 401k you can withdraw 4% per year without exhausting your principle. That is 40k per million. Of course with the A fund you don't have the capital in your bank account and if you die shortly after retirment it won't do you much good, although most of those individuals also have a B fund. The good old days of a six figure pension and a million dollar plus B fund are probably fast drawing to a close but it sure must have been nice for those who got in while the getting was good.