Iam Retirement

[uafa21]

With a pension plan your vested in 5 years. You leave the company after 5 years and you will still get something when you reach the age when you can draw. With a 401K, you withdraw before age 59 1/2 you'll pay over 40% in tax and penalty. If you quit a job with a 401K you may or may not be able to keep it. Depends on the company and the plan. It may need to be rolled over. If you quit there will be no company match either.

The nice thing about the pension plan is in poor plan management you'll still get a guaranteed pension, in a 401K with bad personal management you could get little or nothing. Plus in a 401K the employee usually has to contribute to get a company match. Lower paid employee's may not be able to contribute. That is what the company is banking on. In a pension plan the employee doesn't contribute directly, it is automatic.

These are the differences.

 

[synchronicity]

With a pension plan your vested in 5 years. You leave the company after 5 years and you will still get something when you reach the age when you can draw.

And IIRC, that age is 59 and a half.

With a 401K, you withdraw before age 59 1/2 you'll pay over 40% in tax and penalty. If you quit a job with a 401K you may or may not be able to keep it. Depends on the company and the plan. It may need to be rolled over. If you quit there will be no company match either.

Actually, you are ALWAYS 100% vested in your own contributions in a 401k. The vesting schedule rules for a 401(k) (for the company match part) are 3 year cliff or 5 years @20% each year, unless they've changed since I studied this stuff.

So if you quit a job with a 401K, you ARE "able to keep it" save for whatever part of the company contributions you are not vested in, as detailed above.

With UAL, at least for IAM PCE employees, there is no company match in the 401K. Bummer, but there ya go...

As for taxes and penalty, it's NOT "over 40%", unless you are in a high enough tax bracket. The penalty is 10%. It's considered to be ordinary income in the year you took it out, which means it's taxed as regular income at whatever your regular income tax rates are. For most UAL employees, this is likely a top marginal rate of 15% or 25%, although for some it could be 28% or 33% (FWIW, in 2005 the 25% bracket starts at 29.7K taxable income for single filers (or a minimum of 37.9K for most filers including the 3.2K exemption and 5K standard deduction), the 28% bracket at 71,950, taxable income, and the 33% bracket at 150,150 taxable income. For married filing jointly, these numbers are higher. For more specifics, see: http://www.irs.gov/pub/irs-pdf/f1040es.pdf standard deduction is on page 2, tax rate charts are on page 5.

Of course, many states also tax this income as ordinary income. Depending on your state and city, these rates could reach as high as almost 11.5% (anyone live in New York City?), although in Illinois the income tax is a flat 3%. In addition, if you itemize your state taxes are deductible from your federal in most situations. But anyway...

Point is, you pay similar penalties and taxes if you take an early distribution of either 401K funds or DB pension funds (assuming the DB pension even allows you access to funds early).

As for losing a company match if you quit, you obviously don't get any future company match as you're no longer with the company. As mentioned above, you may be vested in some or all of the company match you have already received.

The nice thing about the pension plan is in poor plan management you'll still get a guaranteed pension, in a 401K with bad personal management you could get little or nothing. Plus in a 401K the employee usually has to contribute to get a company match. Lower paid employee's may not be able to contribute. That is what the company is banking on. In a pension plan the employee doesn't contribute directly, it is automatic.

Those are two important points. Most important, IMHO, is that a 401K forces the burden of management to the employee. Many people either can't or won't manage their funds prudently, because they lack the time or the ability or both to do so. Sound financial management requires a certain investment of time to learn the subject matter, as well as ability to act on it in the proper fashion. Even the smartest of people don't always have the time to learn (doctors are notorious for being bad with their investments, and most of them are pretty intelligent).

I'm currently assisting one of my wife's co-workers in rolling over a 401K from an old job into an IRA, and it's taking time to explain the issues to her and find a strategy that will fit her needs as well as her personal risk tolerance.

As for "lower paid employees not being able to contribute", this is true to some extent (not that they can't, but in general the less one earns the more difficult it is to find "spare cash" to set aside as savings, even with the tax break). As for "that's what the company is banking on", I don't understand this statement. From the company's perspective, it makes little or no difference whether you save in your 401K or not, anymore than they care whether you spend your paycheck at the grocery store or in online poker. In fact, the company would probably prefer that lower paid employees invest in their 401K's, as it makes it easier to meet certain "non-discrimination" rules that keep 401K's qualified and allow higher paid employees to save the full amounts they can in 401K's.

Last, there are some companies that set up an "automatic" contribution to your 401K that employees opt out of (rather than requiring employees to opt in). Those companies generally show higher participation rates. It's an inertia thing that is common to human nature.

FWIW, we save the max we can in our 401K's (for me it's a SIMPLE), as well as maxing out Roth IRA's every year. It means we have a lot less money to spend on luxuries and requires some tight budgeting, but we still get by and the savings adds up awfully fast. But then, my background is well-suited for self-directed investing. I believe that having some form of "defined benefit" pension plans, even on a low level, are beneficial to society in the long run.

[post="275272"][/post]​

-synchronicity

 

[uafa21]

You forgot to assume your State taxes for early withdrawal of a 401K. I know in Colorado you would have an additional 7% tax. Also a rollover is an easy step in a 401K as there are many Bank investment advisors. I would also suggest speaking to your CPA prior to doing a rollover.

The reason companys likes for employees not to participate in a company match 401k is, if the employee doesn't contribute neither does the company. Also, if a employee isn't vested and decides to move on to another job they will lose some or all of their company match.

Like I say, lower paid employees are much better off with a defined pension plan. You can argue all day long on it, but it may be the only way that they will have a future retirment other than Social Security.

 

[700UW]

The IAM Pension Plan is not controlled by the IAM it is seperate:

Information About The Fund

Q: How old is the Fund?
A: The Fund was established in 1960.

Q: Who manages the Fund's assets?
A: The Fund's assets are managed by professional managers who follow the investment objectives set down by the Fund's investment committee.

Q: Who oversees the Fund's operations?
A: The joint Board of Trustees is responsible for overseeing the Fund's operations and performance. The Fund Director oversees its day-to-day operations.

Q: What does the Fund do with earnings on investments?
A: The Fund is a not-for-profit organization. All earnings are used to provide benefits and benefit improvements, and to cover the cost of running the Fund.

Q: Is the Fund financially sound?
A: Yes. Unlike many single-employer or company pension plans, the I.A.M. National Pension Plan is fully funded and financially sound.

Meet the Board of Trustees

Q: How are the Trustees selected?
A: Union Trustees are selected by the I.A.M., and Employer Trustees are selected by the existing Employer Trustees.

Q: What is the function of the Board of Trustees?
A: The Board of Trustees is responsible for setting the Fund's objectives, monitoring its investments, and determining eligibility for benefits.

Q: What is the benefit of having some Trustees representing employers and some representing the I.A.M.?
A: Multiemployer joint labor-management pension plans are required to have an equal number of Trustees from labor, the union, and management, the employers. The reason for this is to ensure that both sides are fairly represented and that participants are always the primary focus of the Fund.

 

[synchronicity]

You forgot to assume your State taxes for early withdrawal of a 401K. I know in Colorado you would have an additional 7% tax.

[post="275325"][/post]​

I don't know if this was directed at me or not (the "outline" function shows it as a reply to the first post in the thread, which obviously it's not), but if so, I did state:
(From my earlier post):

Of course, many states also tax this income as ordinary income. Depending on your state and city, these rates could reach as high as almost 11.5% (anyone live in New York City?), although in Illinois the income tax is a flat 3%. In addition, if you itemize your state taxes are deductible from your federal in most situations.

Offhand, I believe living and working in Yonkers, one might have the highest combined income tax burden of anywhere in the country (Fed/State/City/Surtax), although I haven't thoroughly researched that. Obviously, California's 9.3% top marginal rate (at income levels of roughly 35K) is nothing to sneeze at, either.

The reason companys likes for employees not to participate in a company match 401k is, if the employee doesn't contribute neither does the company. Also, if a employee isn't vested and decides to move on to another job they will lose some or all of their company match.

Well, so far UAL's 401K doesn't have a company match. Also, my understanding is that the new "defined contribution" plan (for the mechanics, apparently) has UAL contributing 6% or whatever the amount is, regardless of whether or not the employee contributes. (In fact, I believe the DC plan worked out with the mechanics is not a "401K" plan per se, although I have not researched the details of this and prob ably won't since it's not my wife's union.)

As to the vesting, as I've stated before, both DB and DC plans have similar (if not identical) vesting rules, so those aren't an advantage for one plan over the other.

In fact, given the nature of most DB plans, where the benefit grows considerably during the last 5-10 years before retirement, a DB plan may well be "better" for the employer (in terms of "less liability") if they have a workforce that experiences considerable turnover (or where, say, a certain high paid employee group has to retire at an earlier age, like pilots at age 60).

The thing that companies do like about DC plans is that it removes their responsibility (and need to keep up the "infrastructure") for hiring someone to manage funds in a DB plan, with all the issues that go along with that (it's a lot more time and effort to keep fund levels within certain limits and have investment managers and actuaries and the whole lot that goes with a DB plan). The responsibility for management gets pushed down to each individual employee. And the company has no responsibility to hold the employee's hand (in fact, the company is opening themselves up to legal liability if they start giving advice on how to invest. Usually employers will simply let the investment firm running the 401K plan send out general info about investing).

Like I say, lower paid employees are much better off with a defined pension plan. You can argue all day long on it, but it may be the only way that they will have a future retirment other than Social Security.

And I agree with this. To me, the best combination is some level of DB plan, with a 401K offered as well (and have the 401K be an "opt out" rather than an "opt in", which will often get more employees contributing to the plan). At my old job, we had a DB plan (which was changed from a traditional DB to a "cash value" DB, but was still a plan where one accumulated a benefit without pre or after tax contributions), and a 401K with a company match of up to 3.5% if the employee contributed 6% or more. The DB plan was 5 year cliff vesting, I forget the DC plan but I was fully vested even though I left shortly before being there 5 years. Since the DB plan was "cash value", had I stayed 5 years I could have taken my accumulated benefit and rolled it into an IRA. (FWIW, the "cash value" was generally better for younger workers/worse for older workers, and this is usually the case among employersw that make that type of switch)

Which is more than you ever wanted to know. Anyway, I agree that some level of DB plan is especially important for lower paid workers, and I decry the trend towards pushing responsibility for investing for retirement away from companies (and with the SS proposal, the government) and on to individuals. Some people are good at DIY retirement investing and enjoy the process, but for most people it's an investment of time (to learn) and/or money (to have someone tell them what to do) that could be better applied elsewhere. I don't know how to fix my car, and am glad there are mechanics who can do so. I'd rather have that then have my car company give me a small cash credit every year and tell me to fix the car myself.

-synchronicity

 

[Bob Owens]

The IAM Pension Plan is not controlled by the IAM it is seperate:

Information About The Fund

Q: How old is the Fund?
A: The Fund was established in 1960.

Q: Who manages the Fund's assets?
A: The Fund's assets are managed by professional managers who follow the investment objectives set down by the Fund's investment committee.

Q: Who oversees the Fund's operations?
A: The joint Board of Trustees is responsible for overseeing the Fund's operations and performance. The Fund Director oversees its day-to-day operations.

Q: What does the Fund do with earnings on investments?
A: The Fund is a not-for-profit organization. All earnings are used to provide benefits and benefit improvements, and to cover the cost of running the Fund.

Q: Is the Fund financially sound?
A: Yes. Unlike many single-employer or company pension plans, the I.A.M. National Pension Plan is fully funded and financially sound.

Meet the Board of Trustees

Q: How are the Trustees selected?
A: Union Trustees are selected by the I.A.M., and Employer Trustees are selected by the existing Employer Trustees.

Q: What is the function of the Board of Trustees?
A: The Board of Trustees is responsible for setting the Fund's objectives, monitoring its investments, and determining eligibility for benefits.

Q: What is the benefit of having some Trustees representing employers and some representing the I.A.M.?
A: Multiemployer joint labor-management pension plans are required to have an equal number of Trustees from labor, the union, and management, the employers. The reason for this is to ensure that both sides are fairly represented and that participants are always the primary focus of the Fund.

If its the members fund why have employers sitting on it? Represented fairly? Just mail the check!

[post="275352"][/post]​

Ok fine. So what happened at TWA/IAM?

From what I was told, by Ed LaClair and Sito Pantoja, TWA owed the IAM a huge chunk of change for the pension. AMR used that as leverage to get the IAM to agree to waiving their successorship clause when AMR took over. So the TWA employees got screwed because the IAM did not want to be left with the bill.

 

[700UW]

All the TWA employees still got their pensions from TWA and the IAM national Pension Plan, that is the the TWA had the "B" plan and Ichan had to fun it.

But I can check with Sito and find out the exact circumstance, but Eddie has passed on.

 

[Bob Owens]

All the TWA employees still got their pensions from TWA and the IAM national Pension Plan, that is the the TWA had the "B" plan and Ichan had to fun it.

But I can check with Sito and find out the exact circumstance, but Eddie has passed on.

[post="275444"][/post]​

Sorry to hear it. But the TWA guys I work with say that they cant retire, they will be working for a long time because their pension is minimal.

It could be because they had accepted huge paycuts for many years also.

In answer to uafa's comparasion, if I were just starting out I think I'd go with the company match 401K. The EAL and Pan Am guys had DB pensions and they got screwed, a promise from an airline usually isnt worth more than money in the bank. As far as lower earners not being able to afford to contribute and get the match it would be worth their while to borrow the money if they have to because if the company matches the first 5% they effectively are making a 100% return on their money. Being a low earner with a DB might give you a little something, but in the case of EAL and Pan Am it really didnt matter, they got screwed too.

 

[synchronicity]

As far as lower earners not being able to afford to contribute and get the match it would be worth their while to borrow the money if they have to because if the company matches the first 5% they effectively are making a 100% return on their money.

[post="275449"][/post]​

Plus the tax break on the employee portion.

Again, I don't have the specifics and should probably check, but my limited understanding of AMFA's DC plan is that it's not a "company match", but rather that UAL is putting 5 or 6 or whatever % in regardless of employee contribution.

But as to the lower paid employee borrowing the money, the problem is cash-flow. If you "can't afford" to contribute to your 401K and would have to borrow money in order to contribute, then you're setting yourself up for problems pretty quick. The only way to pay off that loan would be to (at some point) borrow from your 401K to pay off the initial loan, then you'd find yourself with no excess money to pay off the 401K loan, unless you borrow again.

Of course, people can get by at almost any income level, but unfortunately they're bombarded with messages about how it's a great idea to buy tons of cr@p they don't really need, preferably on credit (at often usurious CC interest rates), because then people will be impressed with them. Not much glamour in having a fully funded IRA, sadly.

-synchronicity

 

[Boomer]

With a pension plan your vested in 5 years. You leave the company after 5 years and you will still get something when you reach the age when you can draw. With a 401K, you withdraw before age 59 1/2 you'll pay over 40% in tax and penalty. If you quit a job with a 401K you may or may not be able to keep it. Depends on the company and the plan. It may need to be rolled over. If you quit there will be no company match either.

The nice thing about the pension plan is in poor plan management you'll still get a guaranteed pension, in a 401K with bad personal management you could get little or nothing. Plus in a 401K the employee usually has to contribute to get a company match. Lower paid employee's may not be able to contribute. That is what the company is banking on. In a pension plan the employee doesn't contribute directly, it is automatic.

These are the differences.

[post="275272"][/post]​

Plus the tax break on the employee portion.

Again, I don't have the specifics and should probably check, but my limited understanding of AMFA's DC plan is that it's not a "company match", but rather that UAL is putting 5 or 6 or whatever % in regardless of employee contribution.

But as to the lower paid employee borrowing the money, the problem is cash-flow. If you "can't afford" to contribute to your 401K and would have to borrow money in order to contribute, then you're setting yourself up for problems pretty quick. The only way to pay off that loan would be to (at some point) borrow from your 401K to pay off the initial loan, then you'd find yourself with no excess money to pay off the 401K loan, unless you borrow again.

Of course, people can get by at almost any income level, but unfortunately they're bombarded with messages about how it's a great idea to buy tons of cr@p they don't really need, preferably on credit (at often usurious CC interest rates), because then people will be impressed with them. Not much glamour in having a fully funded IRA, sadly.

-synchronicity

[post="275456"][/post]​

---------------------------------------------------------

To Chime In:

The plan AMFA negotiated at UAL seems to be more similar to the standard APA Pilot "Variable "B"" fund in that the contributions are not based on the employee matching anything; the percentage placed into the variable paln is a direct percentage of the employee qualifying wages.

Further, the amount placed in the "B" fund does not offset the amount legally allowed into the 401(k).

If an Employee made 50K/yr. and was matched 5%, they would have $2500.00 placed into their account and still be allowed to contribute the full $14000.00 into their 401(k) while investing all amounts into funds of thier choosing.

 

[synchronicity]

---------------------------------------------------------

To Chime In:

The plan AMFA negotiated at UAL seems to be more similar to the standard APA Pilot "Variable "B"" fund in that the contributions are not based on the employee matching anything; the percentage placed into the variable paln is a direct percentage of the employee qualifying wages.

Further, the amount placed in the "B" fund does not offset the amount legally allowed into the 401(k).

If an Employee made 50K/yr. and was matched 5%, they would have $2500.00 placed into their account and still be allowed to contribute the full $14000.00 into their 401(k) while investing all amounts into funds of thier choosing.

[post="275474"][/post]​

First, thanks mch for the info on the AMFA DC plan. Much appreciated.

Second, I'm not sure if you were implying this or not, but FWIW:

An employer match amount is never counted against the 14K amount you can deposit pre-tax into your 401K. There is a limit on the maximum amount that can be put as a match into a 401K, I don't know that off the top of my head but could look it up if anyone's interested. There's also generally a limit on the total amount of compensation that can be deferred/matched by the company in all qualified plans, and no, I don't know those totals offhand, either. However, those limits are the major reason why companies have non-qualified plans in place for highly paid executives.

-synchronicity

 

[ualdriver]

It's not the amount of compensation that can be deferred or matched that is limiting from my understanding. It is the total amount, per year, that can be put into ANY defined contribution tax advantaged account (401K's, IRA's, B-fund, C-fund, etc.). Sync, if you look it up, correct me if I'm wrong. But I was told that the amount that can be tax advantaged/deferred/deducted is a little over $40,000/year. I wish I had that kind of problem : )

 

[synchronicity]

It's not the amount of compensation that can be deferred or matched that is limiting from my understanding. It is the total amount, per year, that can be put into ANY defined contribution tax advantaged account (401K's, IRA's, B-fund, C-fund, etc.). Sync, if you look it up, correct me if I'm wrong. But I was told that the amount that can be tax advantaged/deferred/deducted is a little over $40,000/year. I wish I had that kind of problem : )

[post="275519"][/post]​

Sorry, when I'm saying "compensation", I'm thinking any amounts put into a "qualified" plan (including company match, if I didn't make that clear).

FWIW, I just googled it up, and the annual limit for DC plans in total is 42K/yr in 2005 (exactly as you were told). Like you, I wish I had that kind of problem. The people that have those kinds of problems are also in "non-qualified" plans where the terms of the agreement leave a "substantial risk of forfeiture" for the funds (otherwise the money would be taxable to the recipient in the current year). This is actually an area where I should be learning more since it's something we work with in my job, but instead I'm posting on a UAL message board. Go figure.

Obviously, I don't know the specifics of UAL's executive deferred comp plans, but it's possible that at least some of those plans may have been exposed to creditors. Not that I'm crying overly much for people for whom 42K in contribs per year isn't enough, but still...

-synchronicity

 

[Boomer]

One thing for those that do not contribute to their 401(k)'s to think about: the money contributed to your 401(k) is pre-tax dollars. You don't pay taxes on that money until you begin to withdraw it.

There is a break even point between what you pay in taxes for gross income and the percentage of that income you could put into a 401(k) on a pre-tax basis. In other words: if you do not contribute to your 401(k) at that break even point, you're just giving the money away to Uncle Sam.

Below is a very simple example of the way that contributing to a 401(k) reduces your taxes and leaves more of your income under your control.

(1)
Gross Income: $50,000
Total Tax Bite: 30%
Your Tax Bill: $15,000
Your Net Income: $35,000
Amount Saved: $0

(2)
Gross Income: $50,000
5% 401(k) Contribution: $2500
Taxable Gross Income: $47,500
Total Tax Bite: 30%
Your Tax Bill: $14,250
Your Net Income: $33,250
Amount Saved: $2500

Saving the money in the 401(k) cost you $1,750 per year in your total bring home but also lowered your taxes by $750 for that same year: the cost to you was $1000 or about $20 a week.

I'm sure that there are others out there that can put a finer edge to the numbers than I, but in the end we've all seen where trusting anyone but yourself gets you. I guess my point is that most of us will never make enough money to NOT FUND our 401(k)'s. Even without a match and very conservative investments, the more you put away on your own; the less you have to trust anyone else.

 

[synchronicity]

Saving the money in the 401(k) cost you $1,750 per year in your total bring home but also lowered your taxes by $750 for that same year: the cost to you was $1000 or about $20 a week.

I'm sure that there are others out there that can put a finer edge to the numbers than I, but in the end we've all seen where trusting anyone but yourself gets you. I guess my point is that most of us will never make enough money to NOT FUND our 401(k)'s. Even without a match and very conservative investments, the more you put away on your own; the less you have to trust anyone else.

[post="275782"][/post]​

Good points. I'll also mention that IRA's (regular or Roth) are available to almost everyone. $20/week saved is just over $1,000/yr. If you save 1K a year for 30 years, put that in an investment that gets 7% a year (a fairly conservative return from a 60-40 stock-bond index fund mix), you'd end up with just under 100K. Even assuming 3% inflation and adjusting for that, in "today dollars" you'd have just over 40K. I assume everybody here wouldn't mind an extra 40K lump sum for retirement.

We max out our 401K's and our Roth IRA's every year. I realize not everyone can afford to do that (it's not easy for us, either), but even a modest savings ($20/week) can add up to a big difference when you want to retire. It also gives you options when you reach your 50's and your employer starts becoming a bigger PITA than usual.

Any Boomer, agree with you completely, just adding on because I think your point is an excellent one. I'm all for social safety nets and the like, but in the end, nobody will watch out for you as much as yourself.

Last note- one of my favorite books on investing/finance, straightforward but chock full of good advice, is Andrew Tobias' appropriately named The Only Investment Guide You'll Ever Need

-synchronicity