undefined | Better HN

0 pointslotsofpulp3y ago0 comments

Defined benefit (DB) pensions are excessively expensive due to the advent of low cost broad market index funds.

With a DB pension, you have to add agency risk to the equation. There is no need for that now when you can get a Vanguard/Fidelity/Schwab 401k and pay the same 0.03% expense ratio to get the same investment performance that a pension fund manager would. And you never have to worry about the pension fund manager stealing from it, or the politician directing investments to their nephew’s real estate company.

I would rather have whatever normal cost the employer is contributing for DB pension given directly to me so I can drop it in VOO and cut out all the middlemen and reduce agency risk.

> The long-term cost of this is around 16-18% of payroll - 8-9% from my employer, 8-9% from me.

Assuming you work for the government in the US, this is false. Government entities in the US are allowed to use whatever nonsense assumptions they want to value liabilities, and obviously they undervalue them now and lay the extra cost on future taxpayers. Hence the underfunded DB pension and retiree healthcare crisis plaguing many taxpayers.

Finally, DB pensions and deferred benefits in general make it hard to compare compensation offers from different employers, which is also bad for workers trying to negotiate the highest price. Very few people are equipped to be able to properly price the value of a DB pension from one entity to another.

0 comments

cool_dude853y ago

>With a DB pension, you have to add agency risk to the equation. There is no need for that now when you can get a Vanguard/Fidelity/Schwab 401k and pay the same 0.03% expense ratio to get the same investment performance that a pension fund manager would. And you never have to worry about the pension fund manager stealing from it, or the politician directing investments to their nephew’s real estate company.

>I would rather have whatever normal cost the employer is contributing for DB pension given directly to me so I can drop it in VOO and cut out all the middlemen and reduce agency risk.

It's a tradeoff. The risks you describe are real, on the other hand, no reason why the pension needs to be actively managed. It's certainly perfectly viable for the pension fund to be managed by plopping money into a few low cost vanguard funds, and the reason it doesn't work that way is probably partly inertia and partly job justification. But your individual investment has a big risk too - what happens when you turn 80 (90? 100?) and the money runs out? What happens if the market takes a shit the day before you turn 65? Time to start buying Alpo if you're not in a pension.

>Assuming you work for the government in the US, this is false. Government entities in the US are allowed to use whatever nonsense assumptions they want to value liabilities, and obviously they undervalue them now and lay the extra cost on future taxpayers. Hence the underfunded DB pension and retiree healthcare crisis plaguing many taxpayers.

You're confusing the pension fund liability with the actual long-term cost of the plan. The cost of the plan can indeed be gamed, but there's not much point. It's just an actuarial calculation with all the assumptions that entails, and the actuary shows that long term, investment of this amount is sufficient to cover all costs.

The liability is the part that can be gamed for political purposes - either maximized to spread fear/blame, or minimized to get a politician money to spend today. But importantly, the liability doesn't really have much to do with the long term cost of the plan, except to express that past funding has not been sufficient to cover all costs.

lotsofpulpOP3y ago

> But your individual investment has a big risk too - what happens when you turn 80 (90? 100?) and the money runs out? What happens if the market takes a shit the day before you turn 65? Time to start buying Alpo if you're not in a pension.

You can buy target date funds to minimize how much you have to manually reallocate between equities and bonds, and you can buy an annuity from an insurance company to guarantee a certain income.

I do not understand your distinctions between liability and cost of a DB pension.

> The cost of the plan can indeed be gamed, but there's not much point. It's just an actuarial calculation with all the assumptions that entails, and the actuary shows that long term, investment of this amount is sufficient to cover all costs.

There is a point…to contribute less than necessary for the pension plan to have sufficient funds, in order to make benefits appear cheaper today. For private company DB pension recipients, this results in them not being paid, hence strict laws like PPA 2006 and ERISA 1974. For taxpayer funded pensions, politicians just continuously increase taxes, so it is not as apparent of a problem.

For the DB pension recipient, they have the risk that the DB pension sponsor will come up short, either due to incompetence or corruption. That is a cost. Even taxpayer funded DB pension recipients have had their benefits cut when state and local governments could not come up with the cash.

Unless I had a federal government DB pension, I would assume there is nonzero risk of benefits being less than expected. Also, as a US resident, I have no doubt that even CPI adjusted benefits will be cut in real terms due to impending demographic issues and that is just how the game will be played. Feds will bail out equities over and over, and people with fixed incomes will continuously have less purchasing power.

Either way, I would rather own the assets being bailed out directly so that I can gain the most from the bail out, rather than pension fund gaining it and then still giving me a fixed benefit.

1 more reply

j / k navigate · click thread line to collapse