How do I know if my pension is valuable?
That seems like a weird title, doesn’t it. Aren’t all pensions valuable? After all, we’re past the golden age of the defined benefit plan, and most employers are all-in on just a defined contribution plan. Wasn’t it that pensions by definition are so valuable, that’s why they had to go away?
Not necessarily. Not if the pension is so small as to be mostly financially worthless. A pension that exists just so the employer can claim to be a unicorn in the modern age of no defined benefit plans. “Look, we have a pension! Come work for us!” But in this case the pension is actually worse than financially worthless in that if you don’t realize how low the value of it actually will be, you might get lulled into believing that your employer is actually saving for your future. And then you don’t actively save for your future yourself. Ouch.
What about an employer offering both a 401k/403b plus a pension? Isn’t that even better, the financial panacea of the employee world?
I’m sorry to say, likely not. There is no free lunch in physics or in employee-land. Time for some math.
The most common match, for a 401k/403b contribution, when I looked today on Investopedia, was $0.50/dollar up to 6%. But if you work for a higher tier employer, it might be dollar for dollar up to 5%.
So one way to compare, is to take a look at your compensation documentation from your employer. What do they quantify the value of their pension contribution on your behalf to be? How does that compare to the gap percentage in 401k/403b match that they aren’t offering?
Let’s say you make $100,000, because that makes for nice round math. A better 401k/403b match of 5% (assuming you put in your 5% to be matched) would therefore be $5,000. Your employer claims the contribution value of your pension for the year to be $1000. If your employer matches $0.50 on the dollar for the first 4%, and you put in your full 4%, you would contribute $4000 and your employer would contribute $2000. The total employer contribution in this scenario is only $1000+$2000=$3000, significantly less than the $5,000 that the more generous match would have provided, despite the “unicorn” of the pension.
What would make it work out about equally? Well, either your employer would need to give a higher pension contribution, or a higher match. If we’re going to stick with the $1000 pension contribution, the match would need to have a $4000 value, something like a 1:1 match on the first 4%, or a $0.50/$1 match on the first 8%. If we’re going to stick with a $0.50/$1 match on the first 4% for $2,000, we need a total of $3,000 in pension contributions.
So how did it work out for you, is your pension valuable? Or are you finding out your pension is misleading?
This of course leaves aside whether you’d rather have 401k/403b dollars, vs pension dollars. That’s a pros and cons discussion for another day.