Dalpa R&I Roadshow
09-13-2018, 09:19 AM
#91
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Thread Starter
Joined APC: Sep 2008
Position: Kickin’ Back
Posts: 6,971
Some thoughts so far..... I think we all agree that the company should me making significant contributions to our retirement accounts. We would all certainly like to see more, no doubt about it and I will always vote for that. Where those additional funds end up is what seems to be in question. I am absolutely open to finding additional ways to maximize tax savings now and increase account balance in the future. Unfortunately, much of this is just educated guessing.
A lot of people are saying, this mandatory annuity option (that's EXACTLY what this is) may not be best for "you" but it may be whats best for the collective. So, I think we need to define what it is that we think is best for our labor group. Personally, to me what is best for the group would be MORE MONEY.
I disagree. This Market Based Cash Balance Plan is NOT an annuity. If you wanted to buy a annuity with it upon retirement, you could. Upon retirement, this plan would be rolled over into a traditional IRA. You can purchase an annuity then. They did talk about a Variable Annuity Plan a bit. This is what the FEDEX pilots are trying to switch their traditional DB too.
To me, this annuity option could lead to ADDITIONAL money in retirement, yes. However, we would not be realizing the full potential of our money. That is to say, this option will most certainly stunt the growth of our funds and it will not result in our money working for us. Instead, we will be paying a management company management fees, we will be paying fees on the annuity and we will be getting a small return as a result. We will be working to pay the management company.
You need to attend one the roadshows.
I don't believe we should be letting taxes drive this decision, I believe it is being very short sighted. To say we should vote for this NOW, because my tax bill NOW is high isn't looking that the entire picture.
Nobody is saying vote on this right now. The discussion by the R&I committee is entirely exploratory to see how the pilot group as a whole feels.
Yes, a lot of us are paying large tax bills right now, but I am focused on 30 years from now, growing and managing my own money and creating WEALTH for the future. If we invest that way and generate real wealth, the taxes will take care of itself. Yes, we could have a tax advantage now, but perhaps when we do retire, the tax rates will be significantly higher than they are now, even if our financial needs are lower in the future. It was mentioned that these contributions will be rolled into an IRA upon retirement; consider a person that contributes to this over to course of 30 years will then be required to make RMDs from this roll over into an IRA in addition to their 401k RMDs, Traditional IRA RMDs and so on. You may very well end up in a tax bracket which is not optimal, one that you were not planning on. It seems people think they'll be in a much lower tax bracket in retirement than they are now, but that is just a guess.
There are a lotta "ifs" in what you posted above. I would say IF what you say comes true, you will be in a position to not have to worry about how much tax you are paying.
With this option the government will FORCE you into a higher tax bracket.
I disagree. I think the vast majority of pilots will be in a lower tax bracket after retirement. After retirement, do a Roth conversion.
Being FORCED to make distributions from this option is a huge negative to me. I'd rather invest my own after tax money, have the option to leave it as is when I retire or, cash in and pay long term capital gains (assuming they still exist in the future). You could convert these TIRA funds into Roth funds to avoid RMDs, but that too will create a tax bill and given the short window (a little over 5 years) before you hit the RMD age and given the potential balance of these accounts, the tax bill will be significant. Converting 2.6 million dollars from a TIRA to a Roth over 5 years won't be cheap.
No, but it would be a good problem to have.
Personally, I think we would be better off having the company fully funding our HSA accounts (which can be indexed at present) AFTER they fully fund the maximum allowed by the IRS in our retirement accounts. These funds can be withdrawn TAX FREE in retirement and assuming you keep your medical receipts over the course of your career, you could very easily use these funds in retirement to pay for regular expenses or medical expenses if you so choose.
Agreed.
So what is the solution? To me, it is education. I completely reject the fact that this is the best option for the collective because people "don't understand investing". We should make money management and investing for retirement required curriculum. So, I am against the fact that I have to accept 0-2% returns after inflation over 30 years because people can't be bothered learn about investing, saving and money management. This could cost me millions if we go this option, a price I will have to pay because people don't want to put in the effort. It's really as simple as indexing, set it and forget it. I believe even after we pay ordinary income taxes, over time, we would be much better off, although this may not necessarily be true for those retiring in the next few years.
I would like options where nothing mandatory, unless the rules and flexibility for this new account are similar to that of our current 401k. Perhaps, the deferred compensation plan is a good option as it is optional, but whether or not we will be able to self manage those funds has yet to be seen.
A lot of people are saying, this mandatory annuity option (that's EXACTLY what this is) may not be best for "you" but it may be whats best for the collective. So, I think we need to define what it is that we think is best for our labor group. Personally, to me what is best for the group would be MORE MONEY.
I disagree. This Market Based Cash Balance Plan is NOT an annuity. If you wanted to buy a annuity with it upon retirement, you could. Upon retirement, this plan would be rolled over into a traditional IRA. You can purchase an annuity then. They did talk about a Variable Annuity Plan a bit. This is what the FEDEX pilots are trying to switch their traditional DB too.
To me, this annuity option could lead to ADDITIONAL money in retirement, yes. However, we would not be realizing the full potential of our money. That is to say, this option will most certainly stunt the growth of our funds and it will not result in our money working for us. Instead, we will be paying a management company management fees, we will be paying fees on the annuity and we will be getting a small return as a result. We will be working to pay the management company.
You need to attend one the roadshows.
I don't believe we should be letting taxes drive this decision, I believe it is being very short sighted. To say we should vote for this NOW, because my tax bill NOW is high isn't looking that the entire picture.
Nobody is saying vote on this right now. The discussion by the R&I committee is entirely exploratory to see how the pilot group as a whole feels.
Yes, a lot of us are paying large tax bills right now, but I am focused on 30 years from now, growing and managing my own money and creating WEALTH for the future. If we invest that way and generate real wealth, the taxes will take care of itself. Yes, we could have a tax advantage now, but perhaps when we do retire, the tax rates will be significantly higher than they are now, even if our financial needs are lower in the future. It was mentioned that these contributions will be rolled into an IRA upon retirement; consider a person that contributes to this over to course of 30 years will then be required to make RMDs from this roll over into an IRA in addition to their 401k RMDs, Traditional IRA RMDs and so on. You may very well end up in a tax bracket which is not optimal, one that you were not planning on. It seems people think they'll be in a much lower tax bracket in retirement than they are now, but that is just a guess.
There are a lotta "ifs" in what you posted above. I would say IF what you say comes true, you will be in a position to not have to worry about how much tax you are paying.
With this option the government will FORCE you into a higher tax bracket.
I disagree. I think the vast majority of pilots will be in a lower tax bracket after retirement. After retirement, do a Roth conversion.
Being FORCED to make distributions from this option is a huge negative to me. I'd rather invest my own after tax money, have the option to leave it as is when I retire or, cash in and pay long term capital gains (assuming they still exist in the future). You could convert these TIRA funds into Roth funds to avoid RMDs, but that too will create a tax bill and given the short window (a little over 5 years) before you hit the RMD age and given the potential balance of these accounts, the tax bill will be significant. Converting 2.6 million dollars from a TIRA to a Roth over 5 years won't be cheap.
No, but it would be a good problem to have.
Personally, I think we would be better off having the company fully funding our HSA accounts (which can be indexed at present) AFTER they fully fund the maximum allowed by the IRS in our retirement accounts. These funds can be withdrawn TAX FREE in retirement and assuming you keep your medical receipts over the course of your career, you could very easily use these funds in retirement to pay for regular expenses or medical expenses if you so choose.
Agreed.
So what is the solution? To me, it is education. I completely reject the fact that this is the best option for the collective because people "don't understand investing". We should make money management and investing for retirement required curriculum. So, I am against the fact that I have to accept 0-2% returns after inflation over 30 years because people can't be bothered learn about investing, saving and money management. This could cost me millions if we go this option, a price I will have to pay because people don't want to put in the effort. It's really as simple as indexing, set it and forget it. I believe even after we pay ordinary income taxes, over time, we would be much better off, although this may not necessarily be true for those retiring in the next few years.
I would like options where nothing mandatory, unless the rules and flexibility for this new account are similar to that of our current 401k. Perhaps, the deferred compensation plan is a good option as it is optional, but whether or not we will be able to self manage those funds has yet to be seen.
Denny
09-13-2018, 09:45 AM
#92
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Joined APC: Jun 2015
Posts: 1,749
That's what I thought too. When speaking of a CASH BALANCE ACCOUNT DB It's not an annuity.
It's a mandatory rate of return. The ROR is the "Defined Benefit".
When you retire, at your option you can:
1) Take all the money and interest, and roll-it to an IRA... just like the 401k. You can then self-direct what you want to invest in. Stock, CDs, mutual funds... whatever. And at whatever institution you want: Fidelity, Troweprice, TDAmeritrade, whatever.
2) Take an annuity calculated only on: the balance of your account.
If right now you do 70% stock and 30% bonds in your retirement portfolio (401K), you could conceiveably do 100% stock in 401k and have the DPSP CASH do the Cash Balance Account DB at 5% as a proxy for the 30% bonds, and have equal risk with less taxes.
09-13-2018, 09:50 AM
#93
Gets Weekends Off
Joined APC: Feb 2011
Posts: 766
You’re right, Denny. There are a lot of ifs in my statements. Both sides are based on if statements. We can only make assumptions that taking the tax break now would be more beneficial than the future. The other side is making an assumption by saying they are better off paying taxes now instead of in the future.
As for this not being an annuity, perhaps it’s not an annuity in name, but tell me how they can say they will generate 5% annually? My guess is by adding some sort of insurance product, mingled with some sort of bond mixed with some sort of equity. I’d have to dig further, but when you start mixing things like that it becomes very confusing and very expensive. It doesn’t provide for a lot of transparency in what is going on with our money.
I would reiterate that, it’s my beliefe most people believe they’ll be in a lower tax bracket in the future. If you have 5 years to retirement, that’s probably a safe assumption. If you have 30 years, not so much. Depending on the timeframe you have to start converting IRA to Roth and depending on the amount you plan to convert, you may very well end up in a higher tax bracket than you think and possibly negating the benefit of this type of plan.
I believe the R&I committee will do their best to explain to us how these plans were explained to them. But we need to remember the person that explained it to them, is quite possibly the person trying to collect management fees from us. Maybe not, but it’s possible.
I can’t completely grasp how exactly these funds would be invested and guaranteed a rate of roughly 5% annually. In that respect, I should speak to the R&I committee, but I suspect I already know the answer. I suppose what’s important to me is understanding, within this tax advantaged account, what exactly is going on with my money.
As for this not being an annuity, perhaps it’s not an annuity in name, but tell me how they can say they will generate 5% annually? My guess is by adding some sort of insurance product, mingled with some sort of bond mixed with some sort of equity. I’d have to dig further, but when you start mixing things like that it becomes very confusing and very expensive. It doesn’t provide for a lot of transparency in what is going on with our money.
I would reiterate that, it’s my beliefe most people believe they’ll be in a lower tax bracket in the future. If you have 5 years to retirement, that’s probably a safe assumption. If you have 30 years, not so much. Depending on the timeframe you have to start converting IRA to Roth and depending on the amount you plan to convert, you may very well end up in a higher tax bracket than you think and possibly negating the benefit of this type of plan.
I believe the R&I committee will do their best to explain to us how these plans were explained to them. But we need to remember the person that explained it to them, is quite possibly the person trying to collect management fees from us. Maybe not, but it’s possible.
I can’t completely grasp how exactly these funds would be invested and guaranteed a rate of roughly 5% annually. In that respect, I should speak to the R&I committee, but I suspect I already know the answer. I suppose what’s important to me is understanding, within this tax advantaged account, what exactly is going on with my money.
Last edited by mispoken; 09-13-2018 at 10:04 AM.
09-13-2018, 09:52 AM
#94
Line Holder
Joined APC: Oct 2010
Position: 320B
Posts: 46
Trip7/Gunfighter,
A few points, there is a difference in capital intensive aspects and liquidity. Unless there is a market meltdown, one can execute a "sell" trade on their stock positions by the close of business of the markets and be "out". Are you saying you can do that with real estate? It sure didn't work for Bear Stearns or Lehman Brothers. Real estate is very capital intensive and may be illiquid at times.
If you have the "Schlitz" to cover the cash flow aspects on multiple properties you owe debt (leverage) in a major downturn, then you are good to go. If not, you may be forced to liquidate at fire sale prices or at some point, file for bankruptcy.
Unless you have the financial horsepower to walk into a banker's office and secure a $1,000,000 line of credit to buy these portfolio of properties at once, you may be doing this over time. As interest rates go up, it will cost you more to service the debt with each acquisition.
How you run your money is your business. Plenty of people have made lots of money in real estate. Plenty of people have gone bankrupt as well. I am not naïve enough to believe that one always makes 12% on their money, just get the best tenants, you won't have to deal with potential litigation and your property manager will always be on top of things so you can sit back and enjoy a Mai Tai
One more thing, natural disasters, are you up on all of your insurance needs as an owner? "Everything" is covered? If not, someone will be on the hook for it all.
A few points, there is a difference in capital intensive aspects and liquidity. Unless there is a market meltdown, one can execute a "sell" trade on their stock positions by the close of business of the markets and be "out". Are you saying you can do that with real estate? It sure didn't work for Bear Stearns or Lehman Brothers. Real estate is very capital intensive and may be illiquid at times.
If you have the "Schlitz" to cover the cash flow aspects on multiple properties you owe debt (leverage) in a major downturn, then you are good to go. If not, you may be forced to liquidate at fire sale prices or at some point, file for bankruptcy.
Unless you have the financial horsepower to walk into a banker's office and secure a $1,000,000 line of credit to buy these portfolio of properties at once, you may be doing this over time. As interest rates go up, it will cost you more to service the debt with each acquisition.
How you run your money is your business. Plenty of people have made lots of money in real estate. Plenty of people have gone bankrupt as well. I am not naïve enough to believe that one always makes 12% on their money, just get the best tenants, you won't have to deal with potential litigation and your property manager will always be on top of things so you can sit back and enjoy a Mai Tai
One more thing, natural disasters, are you up on all of your insurance needs as an owner? "Everything" is covered? If not, someone will be on the hook for it all.
Last edited by jetnwa; 09-13-2018 at 10:18 AM.
09-13-2018, 10:08 AM
#95
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Thread Starter
Joined APC: Sep 2008
Position: Kickin’ Back
Posts: 6,971
You’re right, Denny. There are a lot of ifs in my statements. Both sides are based on if statements. We can only make assumptions that taking the tax break now would be more beneficial than the future. The other side is making an assumption by saying they are better off paying taxes now instead of in the future.
As for this not being an annuity, perhaps it’s not an annuity in name, but tell me how they can say they will generate 5% annually? My guess is by adding some sort of insurance product, mingled with some sort of bond mixed with some sort of equity. I’d have to dig further, but when you start mixing things like that it becomes very confusing and very expensive. It doesn’t provide for a lot of transparency in what is going on with our money.
I would reiterate that, it’s my beliefe most people believe they’ll be in a lower tax bracket in the future. If you have 5 years to retirement, that’s probably a safe assumption. If you have 30 years, not so much. Depending on the timeframe you have to start converting IRA to Roth and depending on the amount you plan to convert, you may very well end up in a higher tax bracket than you think and possibly negating the benefit of this type of plan.
I believe the R&I committee will do their best to explain to us how these plans were explained to them. But we need to remember the person that explained it to them, is quite possibly the person trying to collect management fees from us. Maybe not, but it’s possible.
And that would be an absolute yes. Price Waterhouse Coopers. But there are 23,000 of these plans out there and more than one company offers them. I understand what you are saying but don't totally discount the idea because of this.
I can’t completely grasp how exactly these funds would be invested and guaranteed a rate of roughly 5% annually. In that respect, I should speak to the R&I committee, but I suspect I already know the answer.
As for this not being an annuity, perhaps it’s not an annuity in name, but tell me how they can say they will generate 5% annually? My guess is by adding some sort of insurance product, mingled with some sort of bond mixed with some sort of equity. I’d have to dig further, but when you start mixing things like that it becomes very confusing and very expensive. It doesn’t provide for a lot of transparency in what is going on with our money.
I would reiterate that, it’s my beliefe most people believe they’ll be in a lower tax bracket in the future. If you have 5 years to retirement, that’s probably a safe assumption. If you have 30 years, not so much. Depending on the timeframe you have to start converting IRA to Roth and depending on the amount you plan to convert, you may very well end up in a higher tax bracket than you think and possibly negating the benefit of this type of plan.
I believe the R&I committee will do their best to explain to us how these plans were explained to them. But we need to remember the person that explained it to them, is quite possibly the person trying to collect management fees from us. Maybe not, but it’s possible.
And that would be an absolute yes. Price Waterhouse Coopers. But there are 23,000 of these plans out there and more than one company offers them. I understand what you are saying but don't totally discount the idea because of this.
I can’t completely grasp how exactly these funds would be invested and guaranteed a rate of roughly 5% annually. In that respect, I should speak to the R&I committee, but I suspect I already know the answer.
As far as the 5% goes, it's not a guarantee that investment vehicle will make 5% annually. The idea is to shoot for an average annual return of 5%. Some years will be higher and some lower. I suspect what ROR this investment vehicle would shoot for is somewhat negotiable.
Denny
09-13-2018, 10:17 AM
#96
Gets Weekends Off
Joined APC: Dec 2007
Posts: 5,572
Trip7/Gunfighter,
A few points, there is a difference when in capital intensive aspects and liquidity. Unless there is a market meltdown, one can execute a "sell" trade on their stock positions by the close of business of the markets. Are you saying you can do that with real estate? It sure didn't work for Bear Stearns or Lehman Brothers. Real estate is very capital intensive and may be illiquid at times.
If you have the "Schlitz" to cover the cash flow aspects on multiple properties you owe debt (leverage) in a major downturn, then you are good to go. If not, you may be forced to liquidate at fire sale prices or at some point, file for bankruptcy (as many people or companies have in the past).
Unless you have the financial horsepower to walk into a banker's office and secure a $1,000,000 line of credit to buy these portfolios at once, you may be doing this over time. As interest rates go up, it will cost you more to service the debt with each acquisition.
A few points, there is a difference when in capital intensive aspects and liquidity. Unless there is a market meltdown, one can execute a "sell" trade on their stock positions by the close of business of the markets. Are you saying you can do that with real estate? It sure didn't work for Bear Stearns or Lehman Brothers. Real estate is very capital intensive and may be illiquid at times.
If you have the "Schlitz" to cover the cash flow aspects on multiple properties you owe debt (leverage) in a major downturn, then you are good to go. If not, you may be forced to liquidate at fire sale prices or at some point, file for bankruptcy (as many people or companies have in the past).
Unless you have the financial horsepower to walk into a banker's office and secure a $1,000,000 line of credit to buy these portfolios at once, you may be doing this over time. As interest rates go up, it will cost you more to service the debt with each acquisition.
As far as downturn and selling, I'm not sure you understand the concept of income properties. Rents tend to go UP in a downturn. Especially if you have properties in affordable housing range ($800-1200 rents). Covering your mortgage is not an issue with income properties.
As interest rates go up it will be up to each investor to analyze future properties and decide if the cash flow is worth the investment.
No one is saying this is easy. IMO, I'd rather take the DPSP Cash, put in a little effort and get far superior returns than handing money to a money manager and paying them handsomely for a 5% return.
In 30 years our 401k DC can can get you around 60% FAE. In 10 years Real Estate can get you 100% of your current earning.
It's an excellent asset class to create wealth
09-13-2018, 10:29 AM
#97
Gets Weekends Off
Joined APC: Feb 2011
Posts: 766
Denny,
This will be something I try my best to get an answer on from the R&I Committee. What our money is invested in and the management fees associated with it are extremely important. I'll discuss with R&I and get back to the thread on that.
My thought so far, if it's not an annuity but there is a MANDATORY ROR, how does a company achieve this? My suspicion is through lots of bonds and lots of insurance. The end result; an annuity named something else like a "risk averse asset allocation". But again, before I totally commit myself I will speak to R&I about it.
Thanks for the input, this is a excellent and very necessary discussion to be had!
This will be something I try my best to get an answer on from the R&I Committee. What our money is invested in and the management fees associated with it are extremely important. I'll discuss with R&I and get back to the thread on that.
My thought so far, if it's not an annuity but there is a MANDATORY ROR, how does a company achieve this? My suspicion is through lots of bonds and lots of insurance. The end result; an annuity named something else like a "risk averse asset allocation". But again, before I totally commit myself I will speak to R&I about it.
Thanks for the input, this is a excellent and very necessary discussion to be had!
09-13-2018, 11:28 AM
#98
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Joined APC: Mar 2015
Position: stake holder ir.delta.com
Posts: 10,427
For me this all comes down to theory. Is some loss of control acceptable for a potential gain? I am not willing to use a specifically designed tax advantaged plan to save for retirement only. The true path to secure retirement is wealth building. The 401k is the only vehicle that allows for personal control and is fully vested. Any other program only has the advantage of forgoing current taxes for a trade off of control. The 401k is the most effective tool for this and should be funded to 20%.
The only benefit any plan Delta could implement is tax sheltering funds. So is this loss of control worth the benefit? For me the answer is no. Here are some reasons why. First, excess retirement money is yours immediately to do with it as you please. It is the most liquid and tangible asset you could ever have. Second, taxes are a reality whether you pay them now or later. Tax law will change over your career and your situation will also change. Third, regardless of the protections promised for your money all you have is a claim for future value. Some other entity takes custody of your asset and projects making it more valuable by the time you would need its value. That entity will not be responsible directly to you. This could be the company, an investment firm bound by legal and businesses responsibilities, or the government which currently makes an exemption to allow gains by limiting a tax liability. All these variables are centered around tax policy which is why tax advantages are all we could ever gain. They all add their own additional risk of solvency and loss of control. The 401k already provides the tax advantage and is the most stable and structured plan available, it needs to be maxed and and excess should be left to the individual to manage for their own goals and risk tolerance.
Before I am accused of just wanting money let me say that removing restrictions for using my seniority to manage my own schedule is very important and a completely separate issue. I would like the ability to work less if I choose because more is always an option given our current PWA. The less time committed to Delta allows me to assign a value to it I deem appropriate. Just like managing my own money. Time is a finite resource and we need to take control (more control) of it and remove the same impediments to control as our compensation. Paying the same hours for training and vacation as line flying means my time with Delta has a consistent value, and if more of my time is requested, then I can agree to spend it at work or not based on a value proposition.
The key point is the immediate exchange, my time for money is all I’m interested in. Delayed gratification needs to be an individual choice. I want control of the time for money transaction and how I choose to use my resources should not be managed by someone else. If there is to be an additional exchange which I am not able to affect (reroutes, IAs, or any other forced overtime) it needs to all be at an agreed premium, but limited in the amount of my resource (time) that can be taken.
The only benefit any plan Delta could implement is tax sheltering funds. So is this loss of control worth the benefit? For me the answer is no. Here are some reasons why. First, excess retirement money is yours immediately to do with it as you please. It is the most liquid and tangible asset you could ever have. Second, taxes are a reality whether you pay them now or later. Tax law will change over your career and your situation will also change. Third, regardless of the protections promised for your money all you have is a claim for future value. Some other entity takes custody of your asset and projects making it more valuable by the time you would need its value. That entity will not be responsible directly to you. This could be the company, an investment firm bound by legal and businesses responsibilities, or the government which currently makes an exemption to allow gains by limiting a tax liability. All these variables are centered around tax policy which is why tax advantages are all we could ever gain. They all add their own additional risk of solvency and loss of control. The 401k already provides the tax advantage and is the most stable and structured plan available, it needs to be maxed and and excess should be left to the individual to manage for their own goals and risk tolerance.
Before I am accused of just wanting money let me say that removing restrictions for using my seniority to manage my own schedule is very important and a completely separate issue. I would like the ability to work less if I choose because more is always an option given our current PWA. The less time committed to Delta allows me to assign a value to it I deem appropriate. Just like managing my own money. Time is a finite resource and we need to take control (more control) of it and remove the same impediments to control as our compensation. Paying the same hours for training and vacation as line flying means my time with Delta has a consistent value, and if more of my time is requested, then I can agree to spend it at work or not based on a value proposition.
The key point is the immediate exchange, my time for money is all I’m interested in. Delayed gratification needs to be an individual choice. I want control of the time for money transaction and how I choose to use my resources should not be managed by someone else. If there is to be an additional exchange which I am not able to affect (reroutes, IAs, or any other forced overtime) it needs to all be at an agreed premium, but limited in the amount of my resource (time) that can be taken.
09-13-2018, 12:07 PM
#100
Gets Weekends Off
Joined APC: Jun 2015
Posts: 1,749
Denny,
This will be something I try my best to get an answer on from the R&I Committee. What our money is invested in and the management fees associated with it are extremely important. I'll discuss with R&I and get back to the thread on that.
My thought so far, if it's not an annuity but there is a MANDATORY ROR, how does a company achieve this? My suspicion is through lots of bonds and lots of insurance. The end result; an annuity named something else like a "risk averse asset allocation". But again, before I totally commit myself I will speak to R&I about it.
Thanks for the input, this is a excellent and very necessary discussion to be had!
This will be something I try my best to get an answer on from the R&I Committee. What our money is invested in and the management fees associated with it are extremely important. I'll discuss with R&I and get back to the thread on that.
My thought so far, if it's not an annuity but there is a MANDATORY ROR, how does a company achieve this? My suspicion is through lots of bonds and lots of insurance. The end result; an annuity named something else like a "risk averse asset allocation". But again, before I totally commit myself I will speak to R&I about it.
Thanks for the input, this is a excellent and very necessary discussion to be had!
A perpetuity is a stream of payments that lasts forever. (ex. You pay a large sum to a cemetery and they cover groundskeeping and maintenance from the interest theoretically forever).
From what I am reading today, a Cash Balance DB account would take an influx of deposits individually from the pilots by some agreed upon methodology (as a possibility: all DPSP Cash), and then collectively invest the sum to achieve more favorable institutional pricing and access to investment instruments as defined by the plan's "charter". I would assume the manager of this plan (Fidelity? TBD) would use various products to hit the target ICR of perhaps 4-6%. The ICR is whatever the plan participants agree to when they start the plan with the manager. If the union wants to modify the ICR in the future, it is possible, but difficult and cumbersome. The financial instruments likely include things a normal pension plan would use: treasury notes, treasury bonds, corporate bonds, TIPS, maybe commercial paper, perhaps some degree of equity. In years when the plan's returns exceed the ICR, the collective plan keeps the money in a reserve account. In years when the plan's returns fall short of the ICR, the collective plan must still pay the ICR from its reserve funds. BUT, you still have an individual account.
I haven't researched enough as to what happens if the plan runs out of reserves. It likely falls on the plan's participants, just like a 401k has risk of going negative. Due to pension reform law, probably there are certain thresholds of reserves the plan must keep much like State Farm or Chase Bank has to keep reserves. The key is the plan only cares about the ICR. It has a 1-year forward look, not 20 or 30 for funding. Some plans have a floating ICR linked to the 30-yr treasury note. Some plans float to the 30-year, but have a floor of 0% ROR.
More really good info on ICR: https://www.manning-napier.com/insig...ce-plan-assets
"The Interest Crediting Rate
Cash Balance plans use a variety of ICR. As of 2014, the categories of allowable ICRs are:
Segment Rates—the first, second, or third segment rate described in Internal Revenue Code §417(e)(3) or §430(h)(2)(C);
Cost-of-Living Index—indices equal to the rate of increase on an eligible cost-of-living index described in Treasury regulation §1.401(a)(9)-6, A-14(b);
Annuity Contract Rates—the rate of return for an annuity contract issued to an employee by a licensed insurance company;
Rate of Return on a Regulated Investment Company—the rate of return on a regulated investment company (e.g., a mutual fund) as defined in Internal Revenue Code §851, that is reasonably expected to be not significantly more volatile than a broad US or international equities market;
Bond Index Rates—rates equal to the sum of a bond interest rate and any associated margin;
Fixed Rate of Interest—for example, “4.5%”; and
Actual Rate of Return—the actual rate of return on plan assets, so long as they are diversified sufficiently to minimize volatility.
Under current regulations, a flat rate of return (i.e., not an index but a fixed percentage) cannot exceed 6%. The most commonly used index definition is the 30-Year Treasury Securities rate as of one of the five months prior to the beginning of a plan year. For calendar year plans, these five months are August, September, October, November and December. Despite the various definitions allowed, most ICRs fall between 4% and 6% effectively."
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