Andy Lang
02-02-2002, 07:48 PM
So why did employee contributory DB pension plans die off nearly totally (except for s some big government plans)?
Answer: two reasons:
1. Because the employee contribution is after-tax, as opposed to pre-tax--like 401(k)s are, and
2. Because the accumulation of employee contributions is like a bank account, level as a % of pay, and accumulated at some stated rate of interest, while the present value of the normal retirement benefit and the early retirement benefit is so tiny--due to the serious flaws that caused the trillion dollar scandal I keep talkin about--and when you subtract the 'employee-provided benefit' from the total benefit to get the 'employer-provided benefit', availible if you terminate after vesting (termination is voluntary or involuntary) you get a negative number for as many as 15-20 years and even after that it ain't too hot.
The lack of deductibility of employee-contributions from employee's pay means that such DB pension plans are severely disadvantaged as compared to 401(k)s and also that most employees can't afford it, especially those who dont make a lot of money.
The negative number in 2 means you get zero for the employer-provided benefit and it also means you helped fund the plan for your employer--you lucky dog you.
Kinda hurts a bit to know you worked for someone for say 20 years or more and not only got zero from the DB pension plan, but also contributed to your employer quite a bit so his contribitions could be less.
Especially hurts if
a. you have been terminated in a mass termination, through say bad management, and
b. The company has been communicating to you for all these years about the great retirement benefit you are going to get, and even in many cases told you the company (plan sponor, government?) had contributed on your behalf maybe 4% of your pay each year, while you were contributing another 4%.
So these plans are nearly extinct.
Except that our federal plans covering many millions of federal workers have contributory DB pension plans.
So good luck if you leave government.
The way to fix all this is to make the employee contributions tax deductible from pay, pay interest on the accumualtion which reflects the long term rate expected on plan assets (much higher than provided in any such plan) and of course, fix the d*mn PVABP--which is done by simply making the actuarial cost reserve, aka, the past service liability, equal to the present value of the accrued benefit, and simply annuitizing the amount--all using identical actuarial assumptions used by the actuary for the long term--which are supposed to be individually realistic and best guess.
Internal consistency of assumptions and methodology is important you know--like the actuarial books say--ansd say--so do the accounting books--at least they used to.
Of course the best actuarial cost method to use is as I have I have said many times,The Entry Age Normal Actuarial Cost Method--one far and away the most popular method in use--once upon a time.
Answer: two reasons:
1. Because the employee contribution is after-tax, as opposed to pre-tax--like 401(k)s are, and
2. Because the accumulation of employee contributions is like a bank account, level as a % of pay, and accumulated at some stated rate of interest, while the present value of the normal retirement benefit and the early retirement benefit is so tiny--due to the serious flaws that caused the trillion dollar scandal I keep talkin about--and when you subtract the 'employee-provided benefit' from the total benefit to get the 'employer-provided benefit', availible if you terminate after vesting (termination is voluntary or involuntary) you get a negative number for as many as 15-20 years and even after that it ain't too hot.
The lack of deductibility of employee-contributions from employee's pay means that such DB pension plans are severely disadvantaged as compared to 401(k)s and also that most employees can't afford it, especially those who dont make a lot of money.
The negative number in 2 means you get zero for the employer-provided benefit and it also means you helped fund the plan for your employer--you lucky dog you.
Kinda hurts a bit to know you worked for someone for say 20 years or more and not only got zero from the DB pension plan, but also contributed to your employer quite a bit so his contribitions could be less.
Especially hurts if
a. you have been terminated in a mass termination, through say bad management, and
b. The company has been communicating to you for all these years about the great retirement benefit you are going to get, and even in many cases told you the company (plan sponor, government?) had contributed on your behalf maybe 4% of your pay each year, while you were contributing another 4%.
So these plans are nearly extinct.
Except that our federal plans covering many millions of federal workers have contributory DB pension plans.
So good luck if you leave government.
The way to fix all this is to make the employee contributions tax deductible from pay, pay interest on the accumualtion which reflects the long term rate expected on plan assets (much higher than provided in any such plan) and of course, fix the d*mn PVABP--which is done by simply making the actuarial cost reserve, aka, the past service liability, equal to the present value of the accrued benefit, and simply annuitizing the amount--all using identical actuarial assumptions used by the actuary for the long term--which are supposed to be individually realistic and best guess.
Internal consistency of assumptions and methodology is important you know--like the actuarial books say--ansd say--so do the accounting books--at least they used to.
Of course the best actuarial cost method to use is as I have I have said many times,The Entry Age Normal Actuarial Cost Method--one far and away the most popular method in use--once upon a time.