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| The Basics | Tap into Americas best pension plans
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Who you work for can make a big difference in your retirement income. Heres where to find the best defined-benefit pension plans.
By Liz Pulliam Weston
The traditional pension may be as endangered as the black rhinoceros. But these plans, like the rhino, still exist and even thrive in certain protected environments.
It can be worth hunting them down. In sharp contrast to 401(k) plans, the traditional defined-benefit plan offers a guaranteed paycheck in retirement that typically lasts for life -- and often for a spouses lifetime, as well. No investment acumen on the workers part is required. The plan is managed by professionals and the company is on the hook to make up any shortfalls.
Some of the most generous plans, though, may contain the seeds of their own destruction. Expensive pensions are a common target for cutbacks and even elimination, as youll see below.
About 20% of private-sector workers are covered by defined-benefit pensions, according to the U.S. Department of Labor, down from 39% three decades ago. By contrast, most public-sector workers, who make up about 10% of the workforce, are covered by a defined-benefit plan. Because the two types tend to work differently, well examine them separately.
Private-sector pensions
The best hunting grounds for traditional pension plans are large manufacturing companies and those in profitable industries that encourage long-term employment, including pharmaceuticals, insurance, oil and aerospace.
Companies that want to retain smart, skilled older workers are most likely to have a defined-benefit plan, said Steve Vernon, a pension analyst with Watson Wyatt benefits consultants and author of the upcoming book, Live Long and Prosper: Invest in Your Happiness, Health and Wealth for Retirement and Beyond (December 2004, John Wiley & Sons).
If you want the people you attract to think and analyze and plan ahead, theyre going to be the ones who really appreciate (a defined-benefit plan), Vernon said. These people are going to realize, I have a chance of outliving my 401(k) plan.'"
Pension experts say a good private defined-benefit plan will replace 40% to 45% of an average, long-time workers salary in retirement. The companies that are usually singled out for offering the best retirement packages typically combine a solid traditional pension plan with a great 401(k) or other defined-contribution plan.
6 companies with strong plans
Take Philip Morris, the tobacco company whose benefit package has been repeatedly touted by Money magazine as having the best benefits in the nation. A 25-year employee who retirees at age 60 receives pension checks that equal about 40% of the employees final pay, said spokesman Bill Phelps. Add in the average payout from the companys deferred profit-sharing plan -- in which employee contributions are matched by a variable company contribution, depending on Phillip Morris net income -- and the average retirees compensation is boosted to 53% of final pay.
Include Social Security, which replaces 20% to 40% of a typical workers salary, and youve got a comfortable retirement.
Schering-Plough, the pharmaceutical company, manages a 75% average salary-replacement rate, according to spokesman Stephen Galpin. Its defined benefit and 401(k) plans provide 50% to 55% of a worker's final pay, while Social Security typically covers the difference.
The company's 401(k) is particularly generous, offering an automatic 3% contribution whether or not the worker opts to put any money in. There's no waiting period, and employees who do contribute get an additional dollar-for-dollar match for up to 2% of their pay.
Mining company Phelps Dodge offers its 8,100 U.S. employees a defined-benefit plan that replaces 30% of a 30-year employees pay at age 60, according to company retirement director Stacey Koon. Thats supplemented by a 401(k) that has a dollar-for-dollar match for up to 3% of pay, plus an additional 50% match on the next 2% of pay the worker contributes to the plan. Finally, a profit-sharing plan kicks in an additional company contribution of up to 6% of pay.
The defined-benefit plan not only helps the company retain longtime employees, Koon said, but also burnishes the company's image in the small-town areas where it mines.
"It's really important to our reputation as an employer to make sure (retirees) have a lifetime income," Koon said.
Other companies with strong pension packages include Chevron, Unocal and Lockheed Martin.
Controversial cash-balance plans
Some companies in the same industries that used to have strong, traditional pension plans -- such as ConocoPhillips, BP, Boeing and Northrop Grumman -- have since switched to cash-balance plans. These controversial plans look more like 401(k)s, with accounts for each worker that are credited with a certain amount of money each year. This setup tends to benefit younger workers who are less likely to spend their entire career with a single company. But cash-balance plans dont have the guarantees and age-weighted benefits that accrue under traditional plans.
Many companies have switched to cash-balance plans as a way to contain the costs of a traditional pension plan. When money really gets tight, pensions can go out the door altogether.
Several distressed steel manufacturers, for example, have abandoned their pension plans in recent years, arguing the move was necessary to stay afloat.
The public sector
Public-sector jobs often dont pay as much as their private-sector counterparts. The payoff for government workers comes later, in retirement.
Public defined-benefit pensions differ from similar private-sector pensions in a couple of key ways:- Participants often contribute a portion of their salary to the plan. The median contribution is 5%, according to public-pension expert Keith Brainard, research director for the National Association of State Retirement Administrators. Most private-sector defined-benefit pensions dont accept employee contributions.
- The plan may take the place of Social Security. Many, but not all, public-pension plans opt out of the Social Security system. That means covered workers dont pay 6.2% of their salaries in Social Security taxes, like the rest of us do, and their pension benefits are typically higher to compensate for the lack of Social Security payments in retirement.
When a public-pension plan does coordinate with Social Security -- in other words, workers and their employers contribute to and benefit from both -- the workers pension benefit is typically calculated using a multiplier of about 1.8%. So, the employees years of service are multiplied by 1.8%, and the result is multiplied by the employees salary to determine the pension-check amount. Someone with 30 years of service, using a 1.8% multiplier, would be entitled to a pension benefit equal to 54% of his pay. The benefit may be reduced by whatever amount he gets from Social Security.
If a public pension is meant to replace Social Security, the typical multiplier is 2.2%, Brainard said. That would boost the 30-year employees take to 66% of pay.
California: a special case
Thats what is typical. Some public employees in California, however, get a much better deal.
The California Public Employees' Retirement System uses a multiplier of 2% for most workers, who also participate in Social Security, said spokesman Brad Pacheco. As a result, employees with 30 years service can retire at 55 with pensions equal to 60% of their pay, although their benefit is reduced by whatever they get from Social Security. (These workers contribute 5% of their pay to the CalPERS system in addition to paying Social Security taxes.)
One in three workers, though, really hit the jackpot. Prison guards and highway patrol officers get a 3% multiplier (the cops get it at age 50, the guards at 55). That means they can retire early with 90% of pay after 30 years service.
The state also has gradually increased the categories of workers considered public safety employees who qualify for a 2.5% multiplier. As a result, this group -- which for a long time consisted mostly of prison cooks, plumbers and others with at least some inmate contact -- now includes a much wider variety of non-prison jobs, including Department of Motor Vehicle driving examiners and public-health inspectors. These folks can retire at 55 with 75% of their pay. Like cops and prison guards, the public-safety jobholders dont participate in the Social Security system.
Cutbacks in state plans
As California has struggled with budget shortfalls, however, the CalPERS system has come under fire. Gov. Arnold Schwarzenegger recently approved a change that will keep new hires out of the pension system for their first two years of employment. Their contributions will accumulate in separate accounts, which can be rolled over into CalPERS if the workers continue on the job.
Other rich public pension plans also have faced cutbacks.
Public-pension experts declared the Oregon Public Employee Retirement System one of the most generous in the nation. An analysis by the states leading newspaper, The Oregonian, earlier this year found one in four longtime workers received pensions that were equal to -- or better than -- their final years paychecks. On average, those who worked 30 years or more got a pension equal to 87% of their annual pay, The Oregonian found.
The state legislature decided to close the plan to new hires, who are shunted to a new and somewhat less generous pension program.
A somewhat similar fate seems in store for city workers in Houston. Taxpayers recently gave city government the right to renegotiate pensions promised under the Houston Municipal Employees plan, which can give a 25-year worker 90% of her salary in retirement, complete with a 4% annual cost-of-living increase. Among Mayor Bill Whites proposals is one that would require city workers to work longer to get their payouts.
Even with some trimming, though, public-pension plans go a long way toward ensuring longtime workers have enough money in retirement. If the idea of a guaranteed payout appeals to you, public-service employment might be the way to go.
Liz Pulliam Weston's column appears every Monday and Thursday, exclusively on MSN Money. She also answers reader questions in the Your Money message board.
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