What do I do with this damn pension?!

April 20, 2016 3:09 PM

Leaving my job long before retirement - do I roll over my pension contributions or wait to take the money?

So here’s the relevant background: I’m 27, about to start grad school, and have been working for the University of California for the last five years. All UC employees – me included – are a part of the UC pension plan, and it turns out I’ll be vested in the plan by the time I leave UC. Since I’ve started working at UC, we’ve had to contribute a certain percentage of our pretax income to the plan, which sits in some kind of internal account that collects interest at a rate of 6%. I’ll have around 30 grand in that account by the time I leave later this year.

The thing is, I’m not sure if I should take this money+interest and roll it over into my traditional IRA at Vanguard when I leave, or just leave it in the plan and bank on the pension being there when I retire. If I retire at 60 (hopefully!) which is when the benefits max out, I’d be getting roughly ~$1,000/month in current dollars for the rest of my life, but the plan increases the income used to calculate those benefits by 2% every year before retirement, so that’d be ~$1900/month in 2049 when I (again, hopefully) retire. Once I start collecting, that 2% goes out of the window and an annual cost-of-living adjustment kicks in.

That said – it seems kind of ridiculous to even be thinking about all these details when there’s no guarantee the plan will even be around, or what the broader economic landscape will be like then. Were I closer to retirement, I’d obviously feel more confident trusting the plan, and absent all this uncertainty, taking the pension feels like it’d be a no-brainer. That assumes 30K invested in the market at 7% for 33 years, giving 280K, which at the oft-recommended 4% annual withdrawal rate would give me half the amount I’d be getting from the pension by then. (Is that the right way to be going about it?)

Anyway, I'm not sure how to go about all this - I'm going to be talking to the HR folks here and see what they think, but I'd really appreciate any perspectives on this that you guys could offer. Thanks, Green!!!

posted by anonymous to Work & Money (18 answers total)

When I left the last company I was at, I took my retirement funds out and transferred them to a locked-in retirement savings plan that I can manage on my own - can't withdraw until I retire, but I can manage the investments, which is just fine by me.

I simply didn't want to take a chance on leaving my retirement savings to be managed by some company I no longer actively work for, for 30 years, if only because there's no way of telling whether that company will still BE there in 30 years' time. I don't know if I'd have been able to stay in the loop regarding ongoings in the company regarding the pension fund to ascertain any risks or not. Also, they gave me a finite time limit to decide on "take my $$ out or agree to stay in forever" which made up my mind for me.
posted by lizbunny at 3:32 PM on April 20, 2016

Uhhhh. If I were you I would not bank on any pension backed by the State of California being around in 33 years. If you have a way to get the money out without a tax hit, I'd put the money in your own retirement account, where you can keep an eye on it. It's immaterial what promises the pension fund or HR makes about what's going to happen to the pension 30 years in the future, and I would not take that into any consideration or calculation. I don't have any experience with the UC pension system though, so maybe others have more specific advice.
posted by permiechickie at 3:32 PM on April 20, 2016

I had the same sort of option, some years ago. I chose to leave the plan in the care of the prior employer. One reason is that they will pay the costs of keeping the funds. If I were to transfer to an IRA at a broker, my costs would be higher. I expect that the funds at Vanguard have a higher cost basis because you are an individual rather than an institution.

The other benefit of leaving the funds is that you are diversifying your holdings. Some future employer plan will have different investment options, with different risks.
posted by Midnight Skulker at 3:33 PM on April 20, 2016

over the years i have generally opted to leave things as they are. some things flowered, others died. but to my eyes the advantage is that you spread the risk - if you move everything into one fund, that then has problems, you lose everything (i did lose everything in one fund - that was equitable life, if anyone in the uk remembers that disaster).
posted by andrewcooke at 3:39 PM on April 20, 2016

It may be time to talk to a fee-based financial adviser. I started a state job about a year ago and had an option between a defined benefit pension plan like the one you described and a defined contribution plan, which basically works like a 401k. Also like you, I'm quite a long ways from retirement. My adviser's advice was that the state pension plan was more generous than anything that's out there on the private market right now, which would be good if I was planning on retiring soon, but it probably also suggests that the benefits would be cut by the state between now and when I'm likely to retire. Since I wanted more certainty and control over what the account would yield, I went with the 401k-like plan. But as others have said, if you are planning on working somewhere else with different retirement options, this may be one way to diversify risk.
posted by craven_morhead at 3:47 PM on April 20, 2016 [1 favorite]

I'm older than you (36) but in a similar situation with my current employer, where I'll get a small pension when I hit 65 now that I've put in my five years. I've looked on my pension plan's website for information about their financial stability and found that info to be comforting. Here's a small blurb about the UCRP's financial state. Perhaps you could get in touch with the UC actuary mentioned there to find out more? In your position (which I'm kind of in, but without the option to cash out), I'd leave the money where it is to diversify my retirement holdings unless I thought the plan was in danger of going under.
posted by jabes at 3:50 PM on April 20, 2016

I'm still stunned that just five years of contributions would yield a benefit of that size--seriously, that's astonishingly generous and I'd be hard pressed to cash it in.

I would definitely make sure you have all of the numbers right before making any decisions, because I agree with MoonOrb, what you have laid out sounds super super generous. The UCRP disclaimer on my balances page says this: "UCRP is a defined benefit pension plan described under IRC section 401(a). Retirement benefits are based on your age at retirement, your years of service, and your average salary, not on your UCRP balance."

Your departmental HR may not be able to clarify, though you can start with them. I think you need to call UCRP customer service; you can find contact info here.

(I'm also a UC employee, fyi)
posted by JenMarie at 4:35 PM on April 20, 2016 [3 favorites]

You need to talk to someone at UCRP or a financial adviser familiar with the plan. I've spotted a few mistakes in your understanding of the plan and I'm just Joe Employee, not an expert.

First, the retirement estimator on the UCOP site assumes you will continue working at your current salary until the age listed in order to get that monthly amount; if you leave now, you won't get nearly as much. Second, monthly benefits do not max out at 60. They continue to increase (assuming you continue to work, same as point 1). And third, your lump sum cashout is not the same as your plan balance, and I'm pretty sure you can't cash out of the defined benefit plan at all before age 50. If you are in the 457 or 403 plans, of course you can roll those over.
posted by expialidocious at 4:58 PM on April 20, 2016

Mod note: From the OP:

Thanks, everyone. I’m now leaning towards keeping my contributions in the plan for now, but I would appreciate any insights if anybody’s got them. Didn’t expect to see so many fellow UC employees here too – thanks guys!

To clarify some things:

1) JenMarie, and MoonOrb, yes, I know the amount is kind of stupidly generous, but my HAPC is a smidgen over 8000/month to begin with. Using the 2.5% age factor for a retirement age of 60, times five years in the plan, results in a monthly pension of (12.5% of $8000) = $1000. That’s before the 2% annual HAPC modifier, however, which is how I arrived at the ~$2000/month at 60 figure.

2) expialidocious, thanks for the comments - I know my contributions to the plan don’t determine my future pension benefit, and that I can’t take the lump sum until age 50 - though the lump sum is probably a bad deal in this case. However, the UCRP booklet I’m looking at seems to make it pretty clear that, since I’ll be leaving vested (and thus inactive), I can take these contributions with me at any point before retirement: “After leaving the University, an inactive member may, at any time before (and in lieu of) retiring, request a refund of accumulations. If you elect a refund of accumulations, you waive the right to any future Plan benefits.”

Thanks, again, everyone :-)

posted by restless_nomad (staff) at 5:38 PM on April 20, 2016

I would leave it, because I'm assuming that if you ever go back and work at UC again, you'll be able to keep adding to that retirement fund. You may not be planning on that now, but it could happen sometime in the next 30+ years.
posted by chickenmagazine at 6:41 PM on April 20, 2016 [2 favorites]

I'd suggest rolling it over because it becomes difficult to keep track of all your various accounts the more places you work -- and it's easiest to do when you are leaving.
posted by bluedaisy at 7:55 PM on April 20, 2016

*I know the amount is kind of stupidly generous*

It is so generous that I would be strongly inclined to bet that the legislature will retcon the pension agreement at some point before you get to retirement. I would also bet that ex-employees that have not yet retired would be one of the easiest targets to talk voters into stripping benefits from.

If you feel that the pension system is safe and will not be renegotiated by force, leaving the money in is a no brainer.
posted by Candleman at 8:14 PM on April 20, 2016

I worked at a different state university for a couple years and rolled my pension money into an IRA when I left. Fast-forward through another job and grad school 4 years later, and I found myself working a county job that participates in the same pension fund. Turns out that I have the option to "buy back" my previous years of service in the pension fund. Depending on whether or not I turn out to be a "lifer" at this job, I may do that.

So, maybe against all odds you end up back at UC. Or maybe a different employer in the same pension fund. It's worth seeing if there's a "buy back" option so you can make this choice with your eyes wide open.
posted by Maarika at 8:51 PM on April 20, 2016 [1 favorite]

*I know the amount is kind of stupidly generous*

It is so generous that I would be strongly inclined to bet that the legislature will retcon the pension agreement at some point before you get to retirement. ...

One of the many obscure provisions jammed into a last-minute budget bill in 2014 endorsed and signed by President Obama is leading to what would be the first cuts in earned pension benefits to current retirees in over 40 years.

The Washington Post reports that the Treasury Department is on the verge of approving an application from the Central States Pension Fund – a plan that covers Teamster truckers in several states – to cut worker pensions by an average of 23 percent, and even more for younger retirees. Over 250,000 truckers and their families would be affected. Workers over 75, or those who have acquired a disability, would be exempt from the changes. ...

posted by jamjam at 9:02 PM on April 20, 2016

It is so generous that I would be strongly inclined to bet that the legislature will retcon the pension agreement at some point before you get to retirement.

The pension plans have changed over the years, but not retroactively. They add new "tiers" (with modified/reduced benefits) based on hire date. Obviously things can change and be wary if this is your only retirement plan, but it doesn't sound like that will be the case.
posted by JenMarie at 5:06 AM on April 21, 2016

They add new "tiers" (with modified/reduced benefits) based on hire date.

Something else to consider is if you do go back to work for UC, whether having existing service credit will qualify you for whatever pension tier was in place when you were first hired (~2011). This may not be the case, maybe it's "most recent first hire date", but if so, could be another benefit in leaving the money in the pension in case you return.
posted by pennypiper at 10:35 AM on April 21, 2016

All UC employees – me included – are a part of the UC pension plan, and it turns out I’ll be vested in the plan by the time I leave UC.

According to UC, 1976-2013 pension tier allows a lump sum cash out. My employer only allows it if you are vested and have less than 5k to withdraw.

You have a fairly clear understanding of what do to with the money if you roll it over into an IRA. That's great! And yea, 6 percent of 96k a year for five years should be basically 30k of 'accumulations'. So lets talk about the pros and cons of keeping those accumulations in the pension.

Pro: You get basic life insurance. I get a similar benefit costing about a dollar a month, so meh.
Pro: Defined benefit plan. If the market fucks up, or the actuarial math doesn't work out, that's on them. This is a fairly valuable benefit you'd have to buy far dated put options to recreate in an IRA. But the furthest out CBOE goes on S&P 500 options is 60 months, not 25 years.
Con: Your pension benefit is overseen by a political process that may undermine the put option value of defined benefit.
Con: Many state pensions are looking... underfunded. A quick review of google news didn't suggest any major actuarial holes in the plan. Probably PBGP insures your pension. And California is running a surplus. For now. But this can change, and you'll have to be ever vigiliant.
Pro:You can roll over whenever. This isn't a decision you must make now, but now is when you have the most leverage to get answers from HR.
Pro: you can start drawing benefits at age 50. Useful if you want to retire early and don't have a lot of Roth contributions available.
Pro: the internal rate of return assumed for pensions is generally higher than is sound for an individual managing their own account.
Con: The internal rate of return for your pension may not be sound for pensions either =(

So you're really left with a question: is the additional benefit you receive worth the risk that California and its pension system fails to honor your pension benefit? At least in my situation, I have enough annual income and retirement savings options to consider accepting that risk. But it also depends on the state. Oregon is only slightly a problem. My Kansas pension I really need to figure out how to roll over ASAP.
posted by pwnguin at 12:16 AM on April 22, 2016 [1 favorite]

Here's another wrinkle: UC does not participate in the same pension plan as other state employees (CalPERS). There is reciprocity, see the brochure about it. So the financial health of UCRP is not as closely tied to that of the state of California as CalPERS is. You need to look specifically at UCRP, not CalPERS or the state of California overall, unless you plan to work for another CA government agency (including CSU or community colleges) in the future. The state's contribution to the UC budget has been declining over time and shows no sign of increasing again. UC has been aggressively pursuing other revenue (grants, corporate partnerships, individual donations, increased tuition and fees, higher enrollment of out-of-state and international students) and will continue on that path.

As you alluded to in your question, UCRP is also deducting from employee salaries to cover anticipated plan obligations. This restarted in 2010 and is the reason you have a balance in the plan. I didn't know you could withdraw it other than as a retirement cashout, that's good to know.

I'm assuming you are non-represented given your HAPC. The deduction percentage for non-represented employees can be changed unilaterally by management, though they usually provide a lot of notice and there's unlikely to be a change before you leave. But anyway, it's a sign that UCRP is paying attention to the health of the plan, which may be on the Pro side for leaving your money there. Whether the deduction percentage is reasonable given the performance of the plan investments is something that I'll leave to a finance whiz to figure out.
posted by expialidocious at 1:21 PM on April 26, 2016 [1 favorite]