IRC 415: qualified
DB plans must limit the dollar amount of the benefit paid from the plan under certain circumstances
Summary: in general, you are right, Felix, but it is a question of cost to the corporations funding
the DB plans.
Corporations initially added DC plans to
their DB plans, but as the 90s ended, and equity performance sank, many terminated
their DB plans.
The relative decline and aging of
DB plans has had, and will continue to have, two effects in the market.
Sponsors realized that they would have to spend a lot more on
DB plans in the future than they would otherwise want to.
Second,
DB plans have always had a long investment time horizon.
Inflows to
DB plans depend on funding levels and the financial health of the company sponsoring the plan.
As
DB plans become a smaller fraction of the investor base, markets will become more volatile due to the reduction in long - horizon capital in the market.
While the national OAS / CPP / GIS pension programs cover much of this risk for low income workers, that is generally not the case for middle - income workers without
DB plans.
In the current era of more short - lived employment relationships and with the average age of participants in
DB plans rising, these plans face several challenges:
DB plans were created back in the days when the relationships between employer and employed were more fixed than they are now.
DB plans were the ones selling equities in March 2000 and buying in October 2002; their rebalancing strategies insured that.
But Dēmos does not seem like the sort of outfit that would let the unpopularity of
DB plans amongst the workers they are to benefit slow them down.
Importantly, according to researchers, the increase in funded status experienced in the last year by U.S. corporate
DB plans resembles a similar increase seen in 2013.
All of which makes the ongoing decline of
DB plans seem more regrettable.
Thanks, IRS... many plans were not really overfunded, but you discouraged a healthy funding of
DB plans.
Federal employees and their unions want to keep their federal
DB plans as they are and will fight to do so.
DB plans don't have regulators that care about investment risks.
Uh, many of the same flaws apply to
DB plans, which are also under stress now.
Now corporations and states need to make contributions to
their DB plans when they can least afford it.
While
DB plans are still widespread for workers in the public sector (including the above pensions), they are much rarer in the private sector and becoming rarer as time goes on as major employers attempt to replace
DB plans with defined - contribution plans.
The weak standards were there to encourage the creation of
DB plans.
On the other side, there is a sort of leakage from
DB plans, as many of them allocate more to hedge funds and private equity.
Ontario benefits in particular, with $ 6 billion in tax generated from
DB plans and $ 27 billion in spending.
I was somewhat skeptical about the health of
their DB plans, partly because GM had contributed a big slug of its own common stock as an asset in the past.
Unfortunately the Defined Contribution (DC) plans that are displacing
DB plans «rob» retirees of both mortality credits and the benefits of risk pooling, Milevsky wrote.
He noted the global decline of DB pensions and the growing concern of policy makers that future retirees will no longer have access to the low - cost efficient longevity - pooling schemes that are the actuarial backbone of
DB plans.
The feds prefer to see
these DB plans slowly move to TBPs.
You need a strong profit stream in order to fund
DB plans.
Protection comes at a cost, though, and costs went higher for
DB plans.
Vettese says only 10 % of private - sector workers now have true DB pensions and this will continue to dwindle: 60 % of existing
DB plans are being closed to new members, so he expects the percentage to fall eventually to just 5 or 6 %.
With grey divorce on the rise and the demise of employer
DB plans, their only reliable income source is Social Security, or its Canadian equivalent of CPP / OAS.
It also found those in
DB plans are «far less reliant on the taxpayer - funded Guaranteed Income Supplement program,» meaning they are less of a drain on that portion of Ottawa's coffers.
No investing acumen required with
DB plans.
Then when their generous
DB plans kick in, which at times can be 70 % of their highest incomes, it is not enough.
Public sector
DB plans: Taxes may rise, spending cuts enacted, forced contributions to retiree plans negotiated, plans terminated for a 457 plan, partial plan termination, job cuts, funny accounting practices (worse than the private sphere), brinksmanship over debts, etc..
Alas there is no good answer, and with private
DB plans continuing to terminate because of underfunding, the answer is less than clear.
Many companies terminated
their DB plans, and replaced them with DC plans, cash balance plans, etc..
Given all the furor over investing in long duration bonds for pensions versus equities, it is funny that the PBGC rejected the growing conventional wisdom that
DB plans should invest in safe long bonds.
There would be no more tax deferral IRAs or 401 (k) s, and even pension earnings would get taxed inside
DB plans.
The great advantage of contributory
DB plans is that they divide responsibilities / advantages where they are best held:
«Likely the biggest differentiator from mutual funds and exchange - traded funds is that CITs can only be used in qualified retirement plans — i.e.,
DB plans, and increasingly, 401 (k) DC plans,» the research explains.
The first would allow current participants in defined benefit plans (for the small percentage of consumers that still have
DB plans) to take their retirement savings in the form of an annuity plus a lump sum.
DB plans like Social Security haven't worked out too well, In fact, -LSB-...]
«The average lump sum amount for those who took a lump sum from
their DB plans was approximately $ 192,357 ($ 232,507 for men compared to $ 144,793 for women),» MetLife finds.
«As an alternative to the monthly annuity benefit these plans are required to offer...
DB plans added lump sum distributions, often as a means of encouraging early retirement initiatives that became popular in the 1990s.
This is the sort of plan that would yield better results for most, given that
DB plans are out of favor, and participant - directed DC plans lead to high expense lousy results.
On the last point, annuities from insurance companies will almost always be inferior to those from
DB plans — the investment policy of the DB plan will likely yield more than the investments of the life insurance company.
I remember my first article in 1992, where I suggested that the graying of the Baby Boomers would lead to the termination of most
DB plans.
Not only do
DB plans provide better security, they have lower expenses.