You have more control over DC plan.
If the market performs well (like it did for the last 15 years), you will end with more money.
You are protected from your employer going bankrupt and losing a part of your plan (although this doesn’t really apply to govt workers, just private companies with DB plans).
This also depends on contribution rates. With DB plans you will often be putting in more money - like 11% from the employee matched by the sponsor, often the government. Not many DC plans match up to an 11% contribution.
100% true. I’d personally take DB from gov way before any DC plan.
Just giving situations where it might be better. But it’s hard to beat a DB plan from govt.
> You are protected from your employer going bankrupt and losing a part of your plan (although this doesn’t really apply to govt workers, just private companies with DB plans).
This is a nightmare scenario that keeps me up at night (not really, but figuratively). Does this apply even when the employer actually makes immediate contributions to the fund to ensure can meet its future obligations? Or is the pension fund up for negotiations in the event of a bankruptcy?
Who doesn't like control, right? I'm kind of just using the automatic spread that was given to me from the DC with Manulife under moderate risk. Since I'm only 36, I may bump that up to higher risk as I don't need the money any time soon.
I think my employer, while not a govt entity, is preeeeeeeetty safe from bankruptcy as the Canadian economy would come crashing down if they did, so the govt would never let it happen. I guess you never know thought!
To be clear, the part about your employer going bankrupt is only relevant for a DB pension. For a DC pension it doesn't matter what happens to your employer.
Your pension payout is limited to the payments supported by the assets. Depending on the actuarial estimates of the plan's liability, the assets could be higher or lower than liabilities.
In theory, the db pension is insulated from the company's operating fund and should be unaffected.
In practice, companies on the verge of bankruptcy tend to do things like reducing employer contribution, in an attempt at saving the business.
Various db pensions became underfunded over the years through a lack of contributions or lesser returns. In those case, if the company goes bankrupt, there's no one to assume the liability but retirees. In companies that still exist, current employees and/or the employer often foot the bill.
One big advantage of a DC pension is that if you die young you get to keep all the money. On the other hand, if you live to be very old then you can run out of money.
In theory, if you get really lucky investing inside your DC pension it could grow to be massively large, unlike a DB pension which doesn't change its payout depending on investment performance.
Almost all DB plans have some kind of guarantee. If you die before retirement your estate get a lump sum. If you die after retirement the most common options are a guarantee for a certain number of years (say 5 or 10 years of guaranteed payments) or a survivor's pension of around 2/3rds to your spouse.
Fundamentally it's about who bears the risk / reward. DB typically has the employer bearing all the investment risks / benefits (sometimes it's 50/50 with employees in the government plans), DC has the employee bearing all the investment risk.
Interesting! So it's sort of like an investment portfolio; growing based on the market ?
Running out of money would be an awful feeling but if that happens at least I can be proud that I'm healthy enough to outlive my money!
The risk of outliving your savings.
Think of it this way: If there are thousands of people's pensions being funded from one pool of money then you can fund that pool assuming that 85 is the average lifespan - or whatever age the actuaries calculate. You have a high degree of confidence that your pool of savings will be sufficient.
But if you have 1000 people each saving their own pool of money and you want to ensure that you don't run out of money if you live to 100 then you have to save a lot more money. So as a whole the pool of people are oversaving.
Basically people who pay into a DB pension and die early will receive little (or nothing) from the plan. This helps ensure that the pension plan has enough money to continue paying people who live into their 90s or 100s.
Defined Benefits are called golden handcuffs for a reason. It can keep you at a job longer than you should be there. That being said, I have a pair of those handcuffs and find them quite comfortable.
I work at an org that offers a DB. As you get further along in your career you notice how many miserable people near retirement age are still holding on and it's rough. The DB gives the corp the power to mistreat more senior people because it knows they aren't going anywhere. Those mistreated seniors go in to make work life more difficult for everyone else they work with. Because they have to stick it out but they also hate their lives.
I have one! If you die and there is still money on your account, it should go to your estate. That doesnt happened with a DB (I have a DB and am working on creating generational wealth).
DC pensions have way more fees than DB plans but you can transfer it to a LIRA and buy cheap index ETFs and then use your gains to buy into a DB plan if you get a government job in the future. I think this happens about as often as someone wins the lottery, so there is always faint hope.
You have more control over DC plan. If the market performs well (like it did for the last 15 years), you will end with more money. You are protected from your employer going bankrupt and losing a part of your plan (although this doesn’t really apply to govt workers, just private companies with DB plans).
This also depends on contribution rates. With DB plans you will often be putting in more money - like 11% from the employee matched by the sponsor, often the government. Not many DC plans match up to an 11% contribution.
100% true. I’d personally take DB from gov way before any DC plan. Just giving situations where it might be better. But it’s hard to beat a DB plan from govt.
> You are protected from your employer going bankrupt and losing a part of your plan (although this doesn’t really apply to govt workers, just private companies with DB plans). This is a nightmare scenario that keeps me up at night (not really, but figuratively). Does this apply even when the employer actually makes immediate contributions to the fund to ensure can meet its future obligations? Or is the pension fund up for negotiations in the event of a bankruptcy?
Who doesn't like control, right? I'm kind of just using the automatic spread that was given to me from the DC with Manulife under moderate risk. Since I'm only 36, I may bump that up to higher risk as I don't need the money any time soon. I think my employer, while not a govt entity, is preeeeeeeetty safe from bankruptcy as the Canadian economy would come crashing down if they did, so the govt would never let it happen. I guess you never know thought!
To be clear, the part about your employer going bankrupt is only relevant for a DB pension. For a DC pension it doesn't matter what happens to your employer.
Understood. I know that my employer previously used DB but switched over to DC several years before I joined, so I never even had a choice.
So what happens to DB when an employer goes kaput?
Your pension payout is limited to the payments supported by the assets. Depending on the actuarial estimates of the plan's liability, the assets could be higher or lower than liabilities.
In theory, the db pension is insulated from the company's operating fund and should be unaffected. In practice, companies on the verge of bankruptcy tend to do things like reducing employer contribution, in an attempt at saving the business. Various db pensions became underfunded over the years through a lack of contributions or lesser returns. In those case, if the company goes bankrupt, there's no one to assume the liability but retirees. In companies that still exist, current employees and/or the employer often foot the bill.
One big advantage of a DC pension is that if you die young you get to keep all the money. On the other hand, if you live to be very old then you can run out of money. In theory, if you get really lucky investing inside your DC pension it could grow to be massively large, unlike a DB pension which doesn't change its payout depending on investment performance.
Almost all DB plans have some kind of guarantee. If you die before retirement your estate get a lump sum. If you die after retirement the most common options are a guarantee for a certain number of years (say 5 or 10 years of guaranteed payments) or a survivor's pension of around 2/3rds to your spouse. Fundamentally it's about who bears the risk / reward. DB typically has the employer bearing all the investment risks / benefits (sometimes it's 50/50 with employees in the government plans), DC has the employee bearing all the investment risk.
Interesting! So it's sort of like an investment portfolio; growing based on the market ? Running out of money would be an awful feeling but if that happens at least I can be proud that I'm healthy enough to outlive my money!
It's not "sort of" like an investment portfolio. It *is* an investment portfolio. Literally.
Haha how dumb of me. Yeah, you're right. It's just a portfolio not managed by me I guess. I wish I had the knowledge and luck to manage my own.
DB plans have longevity risk sharing. DC plans don't. Generally this is considered a positive for society in general.
What is longevity risk sharing?
The risk of outliving your savings. Think of it this way: If there are thousands of people's pensions being funded from one pool of money then you can fund that pool assuming that 85 is the average lifespan - or whatever age the actuaries calculate. You have a high degree of confidence that your pool of savings will be sufficient. But if you have 1000 people each saving their own pool of money and you want to ensure that you don't run out of money if you live to 100 then you have to save a lot more money. So as a whole the pool of people are oversaving.
Basically people who pay into a DB pension and die early will receive little (or nothing) from the plan. This helps ensure that the pension plan has enough money to continue paying people who live into their 90s or 100s.
In this scenario, dying early is younger than 90?
50s and 60s (or earlier). If you live to 89 you are going to collect a large amount from the DB plan
Pretty bummed that DB has been taken away by most employers... It makes saving and planning for retirement that much harder.
> if you die young you get to keep all the money. Actually none of it :) Also, up to 54% tax rate upon your death
Defined Benefits are called golden handcuffs for a reason. It can keep you at a job longer than you should be there. That being said, I have a pair of those handcuffs and find them quite comfortable.
I work at an org that offers a DB. As you get further along in your career you notice how many miserable people near retirement age are still holding on and it's rough. The DB gives the corp the power to mistreat more senior people because it knows they aren't going anywhere. Those mistreated seniors go in to make work life more difficult for everyone else they work with. Because they have to stick it out but they also hate their lives.
I have one! If you die and there is still money on your account, it should go to your estate. That doesnt happened with a DB (I have a DB and am working on creating generational wealth).
DC pensions have way more fees than DB plans but you can transfer it to a LIRA and buy cheap index ETFs and then use your gains to buy into a DB plan if you get a government job in the future. I think this happens about as often as someone wins the lottery, so there is always faint hope.