How to approach a defined benefit plan

[Silverdoc]

My wife just accepted an academic position, and is being offered the choice between a defined benefit plan (6% of salary annually, with 0.013 x annual salary x yrs of service as computation for annual pension, vesting in ten years) and an alternative retirement plan, with 6.5% salary offered with matching 6.5%. Investments are employee driven, vesting is immediate. Regardless of what plan is chosen, there is also available a 403b (no matching) and a governmental 457.
We plan to fully maximize the 403b and the 457. How should we approach the choice between the defined benefit vs alternative plan? What factors should we consider? Is there an automatically better option? Also, this is the only defined benefit plan offered to her; I do not have access to one in my job (and no access to a governmental 457 as well for me).
Thank you for your inputs!

[ENT Doc]

“6% of salary annually, with 0.013 x annual salary x yrs of service as computation for annual pension, vesting in ten years”

What is this? Some average? Done each year?

[Silverdoc]

“6% of salary annually, with 0.013 x annual salary x yrs of service as computation for annual pension, vesting in ten years”

What is this? Some average? Done each year?

They use average salary of 5 highest years throughout entire employment. Computation is finalized upon employment. Salaries relatively stable.

[GasFIRE]

How long does she plan to stay? Is this potentially a "forever" job? What type of job and retirement plan do you, Silverdoc, have? Both plans sound like SS alternatives where governmental employer doesn't contribute to SS. Basically choice is the DBP which is functionally an annuity vs. the alternative allowing employee selection from an investment menu (the immediate vesting could be very valuable if she doesn't stay for 10 years). Governmental pensions can offset certain SS benefits so read both plans carefully to see how they could affect future SS eligibility. For example, if OP contributes to SS for entire career and wife stays with new employer for an extended period when OP eventually claims SS, spousal benefits for wife will be reduced due to the DBP pension payout.

[OldSoul]

I'm an academic surgical subspecialist with a somewhat similar plan, and I generally veer toward the safety of the defined benefit plan, while also maximizing the 403b and 457 with additional employer contributions to my 401a. However, more details are required to make a more informed decision for your wife.

Is the 6% of salary annually separate from the defined benefit? My PERS divides their program into 2 components: one is a pre-tax contribution of around 15k from my salary, and it grows tax-deferred. Disbursement at retirement can be all at once or over 10 years. It used to be paid by my university, but they started requiring that we contribute to this plan about 4 years ago to keep the university solvent. The second is the formula similar to your wife's: 1.5% x # years of service x average of 3 highest annual salaries. The state capped the salary calculation for me at 288k. This cap has changed over the years. Older employees had no cap on their salary calculation. Newer employees have a salary calculation cap of around 190k, a significant reduction in total potential annual pension. My plan vested in 5 years.

Have you looked into these details? If her salary calculation cap is very high, and if she is confident she can last at least 10 years, then I would go for defined benefit. I like the idea of a 100-120k stable pension for the rest of my and my wife's lives.

[ENT Doc]

They use average salary of 5 highest years throughout entire employment. Computation is finalized upon employment. Salaries relatively stable.

How long does she anticipate working and what are the payout options?

[Silverdoc]

How long does she plan to stay? Is this potentially a "forever" job? What type of job and retirement plan do you, Silverdoc, have? Both plans sound like SS alternatives where governmental employer doesn't contribute to SS. Basically choice is the DBP which is functionally an annuity vs. the alternative allowing employee selection from an investment menu (the immediate vesting could be very valuable if she doesn't stay for 10 years). Governmental pensions can offset certain SS benefits so read both plans carefully to see how they could affect future SS eligibility. For example, if OP contributes to SS for entire career and wife stays with new employer for an extended period when OP eventually claims SS, spousal benefits for wife will be reduced due to the DBP pension payout.

Thank you GasFIRE, for your reply.
It is not yet clear if this will be her forever job. We are thinking of possibly part time work when the kids are in high school, just so she can be more available for them.
I have a job with another healthcare system, and I just have a 401k, that's it.
Yes, basically buying an annuity. Distribution options are 1) as a straight annuity, or 2) annuity with possibility to continue even after death of employee, until death of spouse. When I did my computations, this comes out to around 65K a year, if she is able to stay for 25 years (a big if) and maintains her current salary.
I did not know that a DBP may affect future SS eligibility, which is a very good point. Are there any resources that may explain this? I scoured through her DBP paperwork and did not see mentioned a chance to affect future SS eligibility.
Thank you!!

[Silverdoc]

I'm an academic surgical subspecialist with a somewhat similar plan, and I generally veer toward the safety of the defined benefit plan, while also maximizing the 403b and 457 with additional employer contributions to my 401a. However, more details are required to make a more informed decision for your wife.

Is the 6% of salary annually separate from the defined benefit? My PERS divides their program into 2 components: one is a pre-tax contribution of around 15k from my salary, and it grows tax-deferred. Disbursement at retirement can be all at once or over 10 years. It used to be paid by my university, but they started requiring that we contribute to this plan about 4 years ago to keep the university solvent. The second is the formula similar to your wife's: 1.5% x # years of service x average of 3 highest annual salaries. The state capped the salary calculation for me at 288k. This cap has changed over the years. Older employees had no cap on their salary calculation. Newer employees have a salary calculation cap of around 190k, a significant reduction in total potential annual pension. My plan vested in 5 years.

Have you looked into these details? If her salary calculation cap is very high, and if she is confident she can last at least 10 years, then I would go for defined benefit. I like the idea of a 100-120k stable pension for the rest of my and my wife's lives.

Thanks for your inputs OldSoul! The salary caps are very similar, vesting is 10 years. The 6% is the contribution by the employee, the university is supposedly making contributions as well to allow for an annuity to be bought at the start of retirement. If the return in this managed investment is less than 6.9%, the employee and university share a 2% additional contribution to ensure that the defined benefit could be met.

The stable pension of 100-120k sounds great, but at her current salary of 200,000K (with a cap of 280K), if we are to assume an average salary of 200K, that would just be 65K after 25 years (multiplier is 0.013 in her case).

[Yowza]

As someone who has never lasted more than 6 years in a given job, I would strongly recommend the immediate vesting option.

That's a lot of risk/golden handcuffs for the 10 year vesting. What if she is let go without cause?

[ENT Doc]

Thank you GasFIRE, for your reply.
It is not yet clear if this will be her forever job. We are thinking of possibly part time work when the kids are in high school, just so she can be more available for them.
I have a job with another healthcare system, and I just have a 401k, that's it.
Yes, basically buying an annuity. Distribution options are 1) as a straight annuity, or 2) annuity with possibility to continue even after death of employee, until death of spouse. When I did my computations, this comes out to around 65K a year, if she is able to stay for 25 years (a big if) and maintains her current salary.
I did not know that a DBP may affect future SS eligibility, which is a very good point. Are there any resources that may explain this? I scoured through her DBP paperwork and did not see mentioned a chance to affect future SS eligibility.
Thank you!!

I believe the ability to affect SS benefits is state dependent. That was the case with me in residency where my SS statement shows $0 income for multiple years even though I did have earned income. Check with HR on this.

Regarding the options, it sounds like the match and immediate vesting is the way I would go if there’s a reasonable chance of her not being there for 10 years. Even if she stayed, assume she makes 200k for 25 years. That’s $13k of employee and $13k of employer benefit yearly. For simplicity, $26k compounded at 6.9% for 25 years is $1.621M in YOUR MONEY. The annuity may pay $65k a year but that stops. You could draw down from that $1.621M at a 4% rate and get the same payment and still have money growing.

[StarTrekDoc]

10 years is LONG vesting time. Double check if your choice allows to enter the pension at a 5 year mark or not. We have this at UCalifornia system to allow those with the matching program, but then say -- hey; I LOVE UC system and enter the pension at year 5 -- but as a year 0 pensioneer.

It's split relatively evenly for our new hires -- all depends on their individual horizon and own desires and strategic plans --- PSLF play.

[Silverdoc]

How long does she anticipate working and what are the payout options?

Payout options include a straight annuity at retirement, or a reduced monthly benefit so that the benefit can continue even after the employee's death, up until the spouse dies as well. There are early retirement options (starting at 58), but the monthly benefit is reduced.

[Silverdoc]

[QUOTE=ENT Doc;n275906]

I believe the ability to affect SS benefits is state dependent. That was the case with me in residency where my SS statement shows $0 income for multiple years even though I did have earned income. Check with HR on this.

Regarding the options, it sounds like the match and immediate vesting is the way I would go if there’s a reasonable chance of her not being there for 10 years. Even if she stayed, assume she makes 200k for 25 years. That’s $13k of employee and $13k of employer benefit yearly. For simplicity, $26k compounded at 6.9% for 25 years is $1.621M in YOUR MONEY. The annuity may pay $65k a year but that stops. You could draw down from that $1.621M at a 4% rate and get the same payment and still have money growing.[/QUOTE

This is a great argument for doing the alternative plan (not defined benefit). Thanks ENT Doc!

[Silverdoc]

10 years is LONG vesting time. Double check if your choice allows to enter the pension at a 5 year mark or not. We have this at UCalifornia system to allow those with the matching program, but then say -- hey; I LOVE UC system and enter the pension at year 5 -- but as a year 0 pensioneer.

It's split relatively evenly for our new hires -- all depends on their individual horizon and own desires and strategic plans --- PSLF play.

StarTrekDoc yes, so many things can happen in ten years. Actually the document doesn't make any mention what happens to monies before the ten year mark; it appears that none of what had been paid is returned! So the ten year mark is a big milestone. Hard to tie yourself to just one thing for ten years.

[GasFIRE]

Thank you GasFIRE, for your reply.
It is not yet clear if this will be her forever job. We are thinking of possibly part time work when the kids are in high school, just so she can be more available for them.
I have a job with another healthcare system, and I just have a 401k, that's it.
Yes, basically buying an annuity. Distribution options are 1) as a straight annuity, or 2) annuity with possibility to continue even after death of employee, until death of spouse. When I did my computations, this comes out to around 65K a year, if she is able to stay for 25 years (a big if) and maintains her current salary.
I did not know that a DBP may affect future SS eligibility, which is a very good point. Are there any resources that may explain this? I scoured through her DBP paperwork and did not see mentioned a chance to affect future SS eligibility.
Thank you!!

I post this as an example, it may or may not apply to your situation now or in the future:

https://www.ssa.gov/benefits/retirement/planner/gpo-calc.html