next »

[mythbuster]

TT University is state run and offers a choice in retirement benefits. One is a pension plan that vests one year after the tenure decision year, given my departments schedule for that. It also offers investment plans that vest earlier but have the usual caveats of "market risk". The investment plans also have a higher rate of defined contribution by the institution than the pension plan. Given that pensions are hard to find nowadays, I'm having a hard time deciding which to do. Both are based off of employer contribution, I can't add extra to them, although I can set up a external 403b. Should I be jumping for a pension given how rare they are? Does the percentage of salary contribution really matter for the pension? What else should I be thinking of that I'm not right now?

[wegie]

What percentage of people in your department/college fail to get tenure? If you fail to get tenure, what happens to the money already paid into the pension?

If you opt for the pension, can you take it with you if you get recruited for that amazing job at R1WonderUni after you've been at TT place for 15 years? Or is the pension effectively a big golden pair of shackles?

What are the restrictions on working after taking the pension?

Are they still paying into SS for you?

[charlesr]

I faced a similar decision recently.

In addition to the possibility of not getting tenure you need to consider the possibility that you may take another job and leave the system. Defined benefits plans, what you call a pension plan, usually have the benefits back end loaded, meaning that years 20-25 are much more important than years 5-10.  For example, if you were to put in 15 years in your plan, and then leave for another state system and put in an additional 15 years in a different but identical plan, you would typically have a much smalled pension than if you had stayed with the original plan for all 30 years.

Also, the benefits formulas often can be (legally) changed with no advance warning.  I am not saying this will happen but it could.  Almost all states are facing hugely underfunded pension plans.  They have two choices: raise taxes or lower benefits.

I think you are trading one form of risk for another.  For what it's worth, I chose the defined contribution  (market based) plan.  Partly because it vested faster and partly because I do not think I will stay in my job for the next 20 years.

[madhatter]

If any pensions are still around 20 years from now, I'll be very surprised.

[embitteredhistorian]

If any pensions are still around 20 years from now, I'll be very surprised.

You obviously have no idea how pensions work.

[madhatter]

If any pensions are still around 20 years from now, I'll be very surprised.

You obviously have no idea how pensions work.

On the contrary. I've been part of two pension plans that were subsequently eliminated.

[embitteredhistorian]

If any pensions are still around 20 years from now, I'll be very surprised.

You obviously have no idea how pensions work.

On the contrary. I've been part of two pension plans that were subsequently eliminated.

Not every pension plan is the same.

[aristotelian]

If any pensions are still around 20 years from now, I'll be very surprised.

You obviously have no idea how pensions work.

On the contrary. I've been part of two pension plans that were subsequently eliminated.

Not every pension plan is the same.

That is precisely madhatter's point!

If the 403b gives you a higher contribution and more flexibility, I don't know why you would choose the pension.  You can always invest your 403b in funds that have a guaranteed rate of return.

[onion]

If any pensions are still around 20 years from now, I'll be very surprised.

You obviously have no idea how pensions work.

On the contrary. I've been part of two pension plans that were subsequently eliminated.

Not every pension plan is the same.

That is precisely madhatter's point!

If the 403b gives you a higher contribution and more flexibility, I don't know why you would choose the pension.  You can always invest your 403b in funds that have a guaranteed rate of return.

I recently faced this decision and took the 403b instead of the state pension, largely because I'm in a state where, if you move before you're vested in the plan, you lose everything.  It's not portable.

In addition, the state I'm living in has been raiding the state pension funds.  New York, California, Illinois, and a few other states have been thinking about raiding funds or are facing serious budget shortfalls that will affect the pension funds.  As much as I would like to take a state pension, I don't have confidence in them.  I don't have a lot of confidence in the market, either, but the 403b is mine, and I can take it with me when my state defunds all public universities and I lose my job (which I'm convinced is going to happen within the decade).

[mythbuster]

Thanks for all the input. Prior to vesting at year 6, if you leave you loose everything put into the Pension plan. The market based plans (they have 2 choices) vest at a year or earlier. You have confirmed my gut feeling to not go with the pension unless I feel I can commit to 20+ years in the State system. In this day, that's pretty unlikely. But I wanted to check the group to make sure that I wasn't missing something by being offered a Pension since they are so rare. Now to just decide between the variety of market based plans!!

[spork]

lose

[aandsdean]

Thanks for all the input. Prior to vesting at year 6, if you leave you loose everything put into the Pension plan. The market based plans (they have 2 choices) vest at a year or earlier. You have confirmed my gut feeling to not go with the pension unless I feel I can commit to 20+ years in the State system. In this day, that's pretty unlikely. But I wanted to check the group to make sure that I wasn't missing something by being offered a Pension since they are so rare. Now to just decide between the variety of market based plans!!

The one really good thing about a state pension (presuming they last for the next 20 years or so) is that if you stay around to meet the "rule of 80" or whatever event qualifies you to retire, you can retire, move to a private school, and double-dip for the rest of your life.  I know a couple of people who've done this--retired from a state system, collect the retirement, work at the new place, contribute to TIAA (or whatever other annuity company), etc.  One of these is now a chancellor (president) in a different state system, and is the most ethical and honorable person I know.  There's nothing wrong with this practice, and in fact5t it's pretty smart.  

But to do it, several things, not all of which are under your control, have to fall into place just right.

(And I should talk:  I've been a prof for 20 years and have worked at four institutions.)

[pedanterast]

Prior to making this decision I would look at the State of Illinois' situation and extrapolate the extent to which you could run into the same thing.  They are looking at just whacking 20% off of everyone's monthly check.

Tenure is a gamble and although it's probably more a game of skill than a game of luck, you can't please everyone.  And if you were to be unreasonably denied tenure (or even if you were reasonably denied!), that risk seems too huge to me.  To a certain extent your age would be a factor because the younger you are the more you could overcome this.

I am not a particularly risk-averse investor and I would not personally take the risk of the defined benefit here.  It is important to realize that you can create your own defined benefit through the use of annuities, zero coupon Treasuries, and so forth, so I can't really see the upside here.

[clean]

Another issue, depending on your discipline, is your future marketability.  In good years we may get 'state raises' that are essentially cost of living adjustments.  When times are hard there are not only no raises but furloughs.  Imagine (or just look around and see the inequity or inversion at your current place and see) what you will be making in 30 years if you only get state raises.  My last job was full of people working at the 10th percentile because they were trapped.  "In 5 more years," many would say, "I can retire from this job and go on the market, get my retirement, and earn a good living".

Some say that tenure provides 'golden handcuffs'.  I think that the defined benefit plan is the real culprit, or at least a coconspirator!

Finally, let's say that the formula is 2% times your years of service times your last year's salary.  Then after 25 years, you could retire on 50% of your salary.  In other words, you are now only working for 50 cents on the dollar as you could make the other 50 cents by staying home!  How much crap would you want to put up with once you realized that you are only working for 50 cents on the dollar?

The down side, going back to the first paragraph, is that because you were tied to the job by the pension, you were so underpaid, that now you can not live on the 50%.

For what it is worth, I m in the defined contribution plan. When I leave, the money is mine.  WHEN I DIE, THEM MONEY IS MY HEIRS. IN THE DB PLAN, WHEN YOU DIE, THE STATE  STOPS Paying AND KEEPS ANYTHING LEFT.

[clean]

Here is a post I made a while ago:


Many schools have 2 retirement plans, the defined benefit and the defined contribution. The defined benefit pays a certain percentage of the average of your last five years wage times the number of years of credit you get. The defined contribution is where the employer pays you a percentage of your salary into the account, and then you decide where to allocate the assets.


I have given some thought about the pros and cons of these programs. It is a critical decision since it is almost always binding.

Here are my thoughts on these, and I would appreciate any other feedback on this. I am not a new employee, but the OP is, and new people should have the benefits of the wisdom/mistakes of those they follow.

Defined Benefit:
Pro
The risk of investment performance is on the state.

You dont have to worry about 'what to invest in'.


Con
You are less able to move because you may lose retirement benefits (one 30 year job usually is better than 3 ten year jobs).

Salary compression. If you can not move, you may not be able to get salary adjustments. (A coworker with 30 years service makes a full 1/3 less than I make and I am a newly tenured- associate professor).

When you die, the payments stop (or you take a lower payment for the longer of the employee or the spouse's life)

Takes a long time to Vest (for you to qualify for the benefits). If you leave or are denied tenure before the vesting period, then you dont get the state's share of the retirement. They will return the portion you paid in, usually.

There is sometimes a max benefit... after 30 years or so, the only increase you get is from the increase in your wage.... if you put in 50 years, and the plan was 2% of salary, they still wont pay 100% of salary. SO after a while you find that you are working for only 40 cents on the dollar. you could have made 60% or close by retiring. Want to work for 40% extra?


Defined Benefit
Pros.
Mobility. You get the amount you put in plus the state's match (vesting is usually only 1 year, no more than 5).

Since you are mobile, you can move to keep up with the salary level in your field.

Since you vest before the tenure decision, even if you are denied, you take the assets with you.

You can experience superior returns relative to the state's formula.

You retire on the assets that you have accumulated. When you die, the remainder of your wealth goes to your heirs.

Every year you work, you increase the assets in the plan. The longer you work, the more there is to live on or leave to your heirs later.

Cons
the risk of plan performance (or non-performance) lies with you. 



Other issues
In either plan, you still have the ability to save in a Roth IRA.  You also likely have access to a 457 defferred compensation plan.  That allows you to contribute an additional 15000. 

Personally, I have the 403.  I will switch to the Roth 403 when the next school year starts.  I never liked the idea that i went up for tenure before the vesting period was up.  I did not want to be in a position that they could fire me and I d lose the benefits of the contribution.


Here is a similar link:

http://chronicle.com/forums/index.php/topic,35342.0.html