Wednesday, June 23, 2010

Choosing a Retirement Plan

Most of my part-time jobs have no benefits, such as vacation, insurance or holidays. However, one of my jobs participates in a public employee retirement system, instead of contributing to social security. There are three retirement plan options from which to choose.

Although I won't be earning much from this job, I thought it would still be worthwhile to review my retirement plan options before making a decision. The three options are: 1) a defined benefit (a pension), 2) a defined contribution with a match (similar to a 401k) and 3) a 50/50 combination of defined benefit and defined contribution. A brief summary the defined benefit and defined contribution plans is shown in the table below. I didn't include the combined plan in the table since it is essentially a 50/50 allocation of funds into both plans.

Retirement Plan Comparison


Defined Benefit

Defined Contribution

Employee Contribution



Employer Match



Vesting of Contributions

Employee 100%

Employee 100%
Employer 0-100%

Investment Responsibility



Monetary Payment

Monthly amount for life
based on highest
3 years of salary

Final account value

Health Insurance



Health Savings Account


Yes at 4%

Maintenance Fee


$2-6 per month when

The most attractive element of the defined benefit plan is the lifetime monthly payments based on the 3 highest paying years. Thus, I could work my part time job for 20 years, and then work at a full time position for 3 years to maximize my pension payments. However, this scenario (years of service or salary increase) is unlikely to happen. The most attractive element of the defined contribution plan is the 100% match and the 100% vesting of the match after 5 years. Thus, my contribution would increase by 100% by just investing the funds in a money market fund. In addition, the employer contributes 4% of my salary to a health savings account with a guaranteed return.

Since I have retired early from another company, my approach to evaluating these programs may be different than if I were a younger employee. First, I don't expect to work more than 10 years in a job that contributes to this retirement system. Thus, my yearly pension would be about $500-800 per year after 10 years of employment. Second, I already have health insurance from a company from which I retired, which I plan to keep, unless eliminated by the Health Care legislation.

Based on my situation, I have decided to participate in the defined contribution plan. I like the idea of the 140% employer match and being 100% vested after 5 years. Also, I'd rather get a lump sum of my contributions than receive a pension payment of $500-800 per year. The main downside I see is the maintenance fee which is charged in the months that I am not employed and contributing. Another downside is the volatility of investments, but I feel the 14% match by my employer will mitigate any drop in the stock market.

For more on The Practice of Personal Finance, check back every Wednesday for a new segment.

This is not financial advice. Please consult a professional advisor.

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