D1984 wrote:
VERY few defined benefit plans outside of the governmental sector permit employee contributions. Where such contributions are permitted they are always 100% vested.
Why do so few non-governmental plans allow this? Is it typically just corporate policy or is it some sort of ERISA or Pension Protection Act regulation?
Typically, employers also offer a 401(k) plan, which allows employees to contribute their own money if they want to.
There are traditions in the public sector around retirement plans that go back decades and the sense is that some nominal level of employee contributions will help dampen public criticism of the richness of public sector retirement benefits.
Also, in one of the rare cases that employee contributions ARE allowed, are they tax deductible? Are they subject to the same annual benefit limit (enough to buy a $200K--although IIRC it will be $205K next year--benefit given a participant's age and the assumed interest rate) as employer contributions to pensions or are they subject to the (usually) much lower limits under 415(d) that defined contribution plans like 401K's are subject to?
I don't want to get too technical here, but under 415 there are separate limits applicable to DB and DC plans. The availability of employee contributions to a DB plan doesn't have much bearing on these limitations.
Some plans that permit employee contributions do so on a pre-tax basis and some do it on an after-tax basis.
Before we get too bogged down in this particular topic, though, the short answer to the question about employee contributions to a private sector DB plan in general is that these plans are so rare that most of these questions are largely theoretical. The more interesting questions arise in the setting of so-called "hybrid" plans such as cash balance plans, and, less frequently after 2001, money purchase pension plans.
Again, there are very few of these plans out there outside of the public sector, but you would always receive the greater of the value of your contributions and the discounted present value of the normal retirement age benefit (assuming the plan provided for pre-retirement distributions).
Do you mind putting some hard numbers on this? Say a 30-year old male employee (i.e. 30 years old when he quit to work at a different job) had been working for an employer three years and had put in $17,000 of his own money per year. I know that the "value of his contributions" amount would be $51,000 but what would the discounted present value of his normal retirement benefit be in $ if taken in a lump sum?
Is the discounting done via interest rates (i.e. the 30-year Applicable Federal rates) or some other kind of formula?
Plan sponsors have some discretion in the interest rate and mortality assumptions they use in calculating these benefits, but yes the discounting is done through an interest rate and mortality assumption outlined in the plan document.
I don't know what the discounted present value of the benefit would be in your example because you didn't specify what the accrued benefit at normal retirement age would be after three years under the plan's formula. As a practical matter, most plans like this have five year cliff vesting, so you would usually just get your contributions back.
Also, when/if the lump sum is taken, can the money be rolled over to a 401K or a profit sharing plan, or can it only be rolled over to another pension plan or 412 plan?
It can be rolled over to any tax qualified retirement plan that will accept it (different plans have different rules regarding rollovers) or an IRA.
It depends on the plan. Most plans provide a joint and survivor annuity option that would allow you to designate someone to receive survivor benefits upon your death. Many plans also provide a lump sum option.
The words "if it didn't" and "many plans" imply that at least SOME plans
could (depending on how the employer chose to set it when they set up the plan) and inf fact
do only provide the joint and survivor option (or only provide a choice of single life option and a joint and survivor option with no choice of lump sum which in this case is just as bad). What if you have no heirs, your parents are both dead (or you are estranged from them for whatever reason), you were an only child, and you aren't married and don't have a significant other of any kind? A joint and survivor option is useless to you...you need the money in a lump sum now (and no, you can't sell it as a structured settlement or viatical because who will pay much of anything for a benefit that will only continue six months since you have no one to put on the "survivor" option). Is there no law that REQUIRES employers to at least offer a lump sum option upon departing one's job?
Sponsors of defined benefit plans are not required to offer a lump sum or any other form of benefit other than a single life annuity for single participants and a joint and survivor annuity for married participants. As a practical matter, virtually all plans do provide several optional benefit forms, but they aren't required to.
I agree that it isn't fair in all situations, but that's the way it works.
There's nothing wrong with 401(k) plans providing loans, except that providing loans is not the purpose of a retirement plan. There's also nothing wrong with taking money out of your kids' college savings to pay off your credit cards, but that's not why you set that money aside in the first place.
If you paid the money back (at your credit card interest rate) to the plan instead of to the credit card company then it seems your kids might actually be better off because very few if any safe investments in a 529 are going to net a guaranteed double-digit yield with rates where they are today.
Maybe so, but if I am the employer who has set up a plan to provide a mechanism to transition employees out of my employee population before they die, I would be focused on the plan achieving this objective more than helping my employees meet their other financial objectives while they are still working.