Defined benefit (pension) or defined contribution?

[youdontkillmoney]

I work for a local government and have a pension account (defined benefit) for retirement, and also max. a 401k, IRA, and have a couple of annuity accounts. I am 41. So I am pretty diversified in terms of retirement accounts from pensions to 401k type etc. All in all I have about $250K total in retirement accounts.

My question relates to my wife: She has a (1) defined contribution account (employer pays into only), (2) a IRA she maxes, and a (3) 401k type account she maxes and after we buy a home next year, I will open up a variable annuity for her to sock way more cash for retirement. She is 38. All in all she also has about $250K in all retirement accounts.

I am wondering if I should diversify her retirement accounts by replacing the defined contribution with a defined benefit (pension with guaranteed income stream). Her employer is a large hospital, 9 years ago I chose the defined contribution for her (and not the defined benefit) since it is portable and we control the investments. There is about $50,000 in it after ten years and is all employer contributions with market returns. The employer contributes 5% of pay for the first ten years of service, then it goes up to 8% for the next 5 years and then 11% for thereafter.  

The benefit of defined contribution is it is portable if she leaves the employer, with defined benefit it is not, so it stays there when she leaves but available when she turns retirement age. There is no indication after ten years of service she will be leaving this employer.

Given pensions (defined benefit) is fast becoming extinct, and not many employers offer it (government and large companies, but not all), should I switch the defined contribution to a defined benefit (pension) for her? I like the diveristy/mix of accounts in her retirement portfolio if I do, she'll have a 401k type still and IRA to invest in the stock market via mutual funds, but will also have the guarantee of a pension, like I do in my job.....thoughts?

[youdontkillmoney]

We decided to convert her employer paid defined contribution to a defined benefit (pension) since pensions are hard to come by nowdaways except established large companies (and even they are doing away with them) and government employers. My research online indicates a defined benefit beats returns of a defined contribution over a long time span, by about 5-10 percentage points.

Plus, when doing this one time conversion, the existing defined contribution will still exist with the $50K balance and fluctuate with the market, but the new defined benefit will start to take on employer contributions instead for the next 20 or so years until the wife retires; so in essence she will get the best of both worlds, a defined controbution and a defined benefit. Not to mention all the other retirement accounts she has privately outside of her employer.

[bada_bing]

Defined benefit plans vary a lot in their terms. The important feature that makes a DB plan attractive is

inflation proofing. If the plan doesn't have inflation adjustment of benefits, I would judge it as inferior

to a DC plan with portability and vested ownership of the balance.

As an example, I have a DB plan from a previous employer that has no inflation adjustment. It will be

20 years since I worked for that employer when I hopefully retire in 5 years. The plan also has no provision

to lump sum out. I sweat the inflation rate because of this pension, but there is nothing I can do. I would have

lump summed out of it at any time if the option was available.

You can always convert cash into a annuity, insurance salespeople will line up for your business. The 

reverse isn't necessarily true, you can't always get the value out of an annuity.

[youdontkillmoney]

Thanks, good insights, will look into inflation protection feature

[Thomas_Thumb]

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@bada_bing wrote:

Defined benefit plans vary a lot in their terms. The important feature that makes a DB plan attractive is

inflation proofing. If the plan doesn't have inflation adjustment of benefits, I would judge it as inferior

to a DC plan with portability and vested ownership of the balance.

As an example, I have a DB plan from a previous employer that has no inflation adjustment. It will be

20 years since I worked for that employer when I hopefully retire in 5 years. The plan also has no provision

to lump sum out. I sweat the inflation rate because of this pension, but there is nothing I can do. I would have

lump summed out of it at any time if the option was available.

You can always convert cash into a annuity, insurance salespeople will line up for your business. The 

reverse isn't necessarily true, you can't always get the value out of an annuity.

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Very well said.

I too have a defined benefits pension plan with a previous employer that lacks inflation adjustment. Unlike you, I was offered a lump sum a couple years ago but neglected to take it. I have a lot in 401Ks and wanted to maintain some alternate retirement "fixed income" streams.

Looking back - keeping the pension without having inflation protection was probably a mistake even though inflation has been rerlatively low the last 10 years. By comparison my wife (we both left the same employer in 2004) rolled over her lump sum  into a 401k. Her rollover has appreciated quite nicely. Live and learn.

A defined benefits plan without inflation adjustment may not be an ideal option.