Union pension fund vs. 401K plan
In the last five years, the company has contributed 5.5% of my annual gross earnings and allows me to contribute up to 15% of my own money. After seven years I am fully vested.
However, with the union plan my money would go into one big pension plan. If I leave chances are I might not get anything unless I put in 20 years or more.
Which do you think we should go with?
A: Well, first let me answer this question in general.
First some definitions. A 40lk plan is called a defined CONTRIBUTION plan, because there is no guarantee of what the plan will be worth to you at retirement, only a guarantee that the amounts you contribute are YOURS, to be increased or decreased only by your own investment decisions. A pension plan is a defined BENEFIT plan, which guarantees a fixed monthly benefit, based on years worked or other negotiated agreements. The company or union is obligated to invest enough to produce that benefit and give you the promised check. (Company pension plans are insured by the Pension Benefit Guarantee Corporation up to a certain annual total amount. But as memory serves me, I do not believe that union pension plans are covered by that same guarantee.)
I almost always favor using a 40lk plan, when given a choice. The money you invest is yours immediately -- and can be rolled over to an IRA if you leave that employment or union. There may be some restrictions on the matching contributions made by the company, but after at least 7 years, that money is also yours. Having a 40lk plan puts the investment responsibility on your own shoulders. But there is plenty of advice available. (For example go to www.FinancialEngines.com and use their inexpensive service to evaluate your investment deicions and get advice.)
With a 40lk, unlike a pension, you can take out some or all of your money after age 59-1/2 -- or delay withdrawals until at least 70-1/2. You don't get a promised monthly check, but you have more flexibility -- both on withdrawals and on the investments remaining inside the plan. I'd opt for that flexibility over the promised monthly pension benefit, almost without exception.
Given your concerns about your union's pension funding, I'd say the choice is easy. If you don't trust them, trust yourself and stick your money in the 40lk plan -- and then pay attention!!
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