Minimum Cash Value plan and the IRS
04-09-2019, 03:46 PM
#41
Gets Weekends Off
Joined APC: Jun 2015
Posts: 4,116
I know my ramblings are sometimes not clear, but as pilots we have a history in financial calculations of not appreciating the executive suite understanding of the terms ownership and value.
Just as a cash balance plan has the sales point of a minimum value ROI, it will also come with a ROI cap. The PBGC and corporations are not so foolish to obligate for an open ended ROI to plan beneficiaries. General practices indicate this cap is typically around 6%.
Being that in our case the plan sponsor will be both the payer of contributions, and the recipient of those contributions as holder of the trust, the exchange between employer-employee-trustee is nothing more than an accounting exercise.
Presently, when a pilot receives excess 401 payment it is a tangible exchange. It shows up in your paycheck and bank account. You can spend it, save it, or give it away.
In the proposed cash balance plan you will still see the accounting of the exchange on your pay statement. As tax deferred income.
And you will see a corresponding 'deposit' to the CBDB plan.
But understand this will not necessarily be a tangible exchange.
IF.....the trust asset base performance ROI exceeds the capped value, and the trust actuarial calculation supports the ROI adjusted basis to pay (your) accrued benefit levels..... the plan sponsor (delta) is not compelled to make the earned tangible exchange.
So delta simply takes the money out of one corporate 'pocket', and puts it the other corporate 'pocket'. And you....the employee, are none the wiser. The excess 401 cash you thought you 'earned'...was instead represented by an over performance of the trust assets above the capped ROI.
While the alpa 'experts' will tell you the CBDB plan will 'always' be funded at 100%......what is not said is the plan will likewise NEVER be funded over 100%. Or as close to it as the management custodians can call it.
There is no requirement to do so on the part of the plan sponsor. So there will never be 'excess' funding for that rainy day, when delta and the economy falls on hard times.
Just as a cash balance plan has the sales point of a minimum value ROI, it will also come with a ROI cap. The PBGC and corporations are not so foolish to obligate for an open ended ROI to plan beneficiaries. General practices indicate this cap is typically around 6%.
Being that in our case the plan sponsor will be both the payer of contributions, and the recipient of those contributions as holder of the trust, the exchange between employer-employee-trustee is nothing more than an accounting exercise.
Presently, when a pilot receives excess 401 payment it is a tangible exchange. It shows up in your paycheck and bank account. You can spend it, save it, or give it away.
In the proposed cash balance plan you will still see the accounting of the exchange on your pay statement. As tax deferred income.
And you will see a corresponding 'deposit' to the CBDB plan.
But understand this will not necessarily be a tangible exchange.
IF.....the trust asset base performance ROI exceeds the capped value, and the trust actuarial calculation supports the ROI adjusted basis to pay (your) accrued benefit levels..... the plan sponsor (delta) is not compelled to make the earned tangible exchange.
So delta simply takes the money out of one corporate 'pocket', and puts it the other corporate 'pocket'. And you....the employee, are none the wiser. The excess 401 cash you thought you 'earned'...was instead represented by an over performance of the trust assets above the capped ROI.
While the alpa 'experts' will tell you the CBDB plan will 'always' be funded at 100%......what is not said is the plan will likewise NEVER be funded over 100%. Or as close to it as the management custodians can call it.
There is no requirement to do so on the part of the plan sponsor. So there will never be 'excess' funding for that rainy day, when delta and the economy falls on hard times.
04-09-2019, 04:05 PM
#42
Gets Weekends Off
Joined APC: Jul 2014
Posts: 429
Originally Posted by BobZ
As to the sales pitch this type of plan offers significant 'growth' advantages for younger pilots.....one must have excess 401 cash to make available to this plan in the first place.
this means earning something in the vicinity of $300K. I wonder how many younger pilots find themselves in that boat?
And I wonder how many of those pilots would then think its a good idea with $56K a year already going into a tax deferred retirement acoount with brokerage link access, to allocate the excess 401 cash to an investment account that advertises a 3-4% ROI target, with maybe a 6% cap on growth?
Any growth of the trust asset base above the capped ROI value simply offsets the cost and contributions required by the corporation to fund the plan.
Oh great. So we are going to turn our money over to the corporation to invest, and any ROI beyond what CD rates used to be is gravy for them.
Gee, what a great deal.
this means earning something in the vicinity of $300K. I wonder how many younger pilots find themselves in that boat?
And I wonder how many of those pilots would then think its a good idea with $56K a year already going into a tax deferred retirement acoount with brokerage link access, to allocate the excess 401 cash to an investment account that advertises a 3-4% ROI target, with maybe a 6% cap on growth?
Any growth of the trust asset base above the capped ROI value simply offsets the cost and contributions required by the corporation to fund the plan.
Oh great. So we are going to turn our money over to the corporation to invest, and any ROI beyond what CD rates used to be is gravy for them.
Gee, what a great deal.
Didn't someone suggest investing in stuff outside DL maybe in real estate? Maybe something to give you more control over your taxation? I have one foot out the door... 85 DL hire. Have had a great career and I have a problem with my tax deferred accounts. I think I may have too much in tax deferred accounts. Thus I'm planning to Roth convert a bunch a $ to give me better control of my retirement tax bracket. I could be wrong, but planning on deferring large sums into a lower bracket can backfire. Once RMDs start and you find yourself in a mega bracket it may be too late to fix. If I were hanging around I would want more money in my name. Had a pension and it was overrated. OFG
04-09-2019, 04:11 PM
#43
Gets Weekends Off
Joined APC: Jun 2015
Posts: 4,116
Originally Posted by OldFlyGuy
Didn't someone suggest investing in stuff outside DL maybe in real estate? Maybe something to give you more control over your taxation? I have one foot out the door... 85 DL hire. Have had a great career and I have a problem with my tax deferred accounts. I think I may have too much in tax deferred accounts. Thus I'm planning to Roth convert a bunch a $ to give me better control of my retirement tax bracket. I could be wrong, but planning on deferring large sums into a lower bracket can backfire. Once RMDs start and you find yourself in a mega bracket it may be too late to fix. If I were hanging around I would want more money in my name. Had a pension and it was overrated. OFG
Under existing PWA retirement a pilot is going to manage 16-20% minimum of earnings deposited to a self directed deferred account.
Outside of the alpa 'experts' most financial planners will tell you 'more' is not always necessarily better. Self directed savings are a lockbox. With confined deposit AND withdrawal considerations. Not to mention successorship issues.
04-09-2019, 04:14 PM
#44
Gets Weekends Off
Joined APC: Apr 2018
Posts: 2,987
Originally Posted by OldFlyGuy
Didn't someone suggest investing in stuff outside DL maybe in real estate? Maybe something to give you more control over your taxation? I have one foot out the door... 85 DL hire. Have had a great career and I have a problem with my tax deferred accounts. I think I may have too much in tax deferred accounts. Thus I'm planning to Roth convert a bunch a $ to give me better control of my retirement tax bracket. I could be wrong, but planning on deferring large sums into a lower bracket can backfire. Once RMDs start and you find yourself in a mega bracket it may be too late to fix. If I were hanging around I would want more money in my name. Had a pension and it was overrated. OFG
04-09-2019, 04:39 PM
#45
Gets Weekends Off
Joined APC: Oct 2013
Position: 7ERA
Posts: 938
Originally Posted by OldFlyGuy
Didn't someone suggest investing in stuff outside DL maybe in real estate? Maybe something to give you more control over your taxation? I have one foot out the door... 85 DL hire. Have had a great career and I have a problem with my tax deferred accounts. I think I may have too much in tax deferred accounts. Thus I'm planning to Roth convert a bunch a $ to give me better control of my retirement tax bracket. I could be wrong, but planning on deferring large sums into a lower bracket can backfire. Once RMDs start and you find yourself in a mega bracket it may be too late to fix. If I were hanging around I would want more money in my name. Had a pension and it was overrated. OFG
04-09-2019, 05:42 PM
#46
Property of Scheduling
Joined APC: Sep 2006
Position: Bus driver
Posts: 2,524
And guys who were hired in 1985 are retiring with too much money now? Don’t tell that to mgmt. Being that I was born in 1985 and have been doing the max ROTH for 401k and IRA for myself and the wife, we are in different seasons of life. At the same time, the contract applies to all of us that still hold an active seniority/employee number. Some guys have more stuff outside of DL in terms of side gigs, some have none. Some have numerous ex-wives and lake houses, some kept the originals. At the end of the day, we all have the same sections of the contract. No TA will be appeasing, to all sections of the contract, for each pilot. That being said, the contract as a whole must be to the majority. Each pilot has priorities, retirement plans (hopefully), and for the sake of discussion -desires- of what they want to see. In this thread of retirement options, my overall concern at the opener level is simple...
If the Union is going to propose and negotiate a market based cash value plan, as mentioned in the opener, what is the overall mindset, pros and cons, and long term view of the idea? All for new ideas, but is this is short term plan for the 50% retiring in the next 10-ish years to try and make a dent in the loss of the pension for those hired pre-9/11? Is this a new idea that is hopeful on an ALPA national stance for all carriers for everyone now and going forward? In researching such a plan, it has merits, and those are typically always presented as medical practice folks who are lining up retirement money at the end. That’s where the numbers make sense. Yes, they are also “highly compensated employees”, but do we fall into the same horizon for planning. With every good plan, there is a downfall. Pensions had a reliance on the company remaining solvent to pay the cost, DC plans have the onus on the markets. This idea of a “hybrid” based on the market now does both, but presumably at the cost of potential returns.
While union politics are always fun to watch, and not fun to be involved in, an overall synopsis of where, why, how, and the “when” (age, recession, retirement, funding, distribution) of this current negotiating stance should be conveyed so everyone can understand. As I stated, I love new ideas, and am open to such an idea as a MBCBP, but the overall concept needs to be explained from start to finish. The DALPA video of retirement ideas months ago was informing and well presented. Now that a strategy was agreed on, let’s have something similar discussing the overall ideas of such a plan with the positives, negatives, and limitations presented to the scope of the pilot group that is collectively being proposed.
If the Union is going to propose and negotiate a market based cash value plan, as mentioned in the opener, what is the overall mindset, pros and cons, and long term view of the idea? All for new ideas, but is this is short term plan for the 50% retiring in the next 10-ish years to try and make a dent in the loss of the pension for those hired pre-9/11? Is this a new idea that is hopeful on an ALPA national stance for all carriers for everyone now and going forward? In researching such a plan, it has merits, and those are typically always presented as medical practice folks who are lining up retirement money at the end. That’s where the numbers make sense. Yes, they are also “highly compensated employees”, but do we fall into the same horizon for planning. With every good plan, there is a downfall. Pensions had a reliance on the company remaining solvent to pay the cost, DC plans have the onus on the markets. This idea of a “hybrid” based on the market now does both, but presumably at the cost of potential returns.
While union politics are always fun to watch, and not fun to be involved in, an overall synopsis of where, why, how, and the “when” (age, recession, retirement, funding, distribution) of this current negotiating stance should be conveyed so everyone can understand. As I stated, I love new ideas, and am open to such an idea as a MBCBP, but the overall concept needs to be explained from start to finish. The DALPA video of retirement ideas months ago was informing and well presented. Now that a strategy was agreed on, let’s have something similar discussing the overall ideas of such a plan with the positives, negatives, and limitations presented to the scope of the pilot group that is collectively being proposed.
04-09-2019, 06:52 PM
#48
Trimming my beard
Thread Starter
Joined APC: Jul 2014
Position: 7ERB
Posts: 241
Originally Posted by BobZ
I know my ramblings are sometimes not clear, but as pilots we have a history in financial calculations of not appreciating the executive suite understanding of the terms ownership and value.
Just as a cash balance plan has the sales point of a minimum value ROI, it will also come with a ROI cap. The PBGC and corporations are not so foolish to obligate for an open ended ROI to plan beneficiaries. General practices indicate this cap is typically around 6%.
Being that in our case the plan sponsor will be both the payer of contributions, and the recipient of those contributions as holder of the trust, the exchange between employer-employee-trustee is nothing more than an accounting exercise.
Presently, when a pilot receives excess 401 payment it is a tangible exchange. It shows up in your paycheck and bank account. You can spend it, save it, or give it away.
In the proposed cash balance plan you will still see the accounting of the exchange on your pay statement. As tax deferred income.
And you will see a corresponding 'deposit' to the CBDB plan.
But understand this will not necessarily be a tangible exchange.
IF.....the trust asset base performance ROI exceeds the capped value, and the trust actuarial calculation supports the ROI adjusted basis to pay (your) accrued benefit levels..... the plan sponsor (delta) is not compelled to make the earned tangible exchange.
So delta simply takes the money out of one corporate 'pocket', and puts it the other corporate 'pocket'. And you....the employee, are none the wiser. The excess 401 cash you thought you 'earned'...was instead represented by an over performance of the trust assets above the capped ROI.
While the alpa 'experts' will tell you the CBDB plan will 'always' be funded at 100%......what is not said is the plan will likewise NEVER be funded over 100%. Or as close to it as the management custodians can call it.
There is no requirement to do so on the part of the plan sponsor. So there will never be 'excess' funding for that rainy day, when delta and the economy falls on hard times.
Just as a cash balance plan has the sales point of a minimum value ROI, it will also come with a ROI cap. The PBGC and corporations are not so foolish to obligate for an open ended ROI to plan beneficiaries. General practices indicate this cap is typically around 6%.
Being that in our case the plan sponsor will be both the payer of contributions, and the recipient of those contributions as holder of the trust, the exchange between employer-employee-trustee is nothing more than an accounting exercise.
Presently, when a pilot receives excess 401 payment it is a tangible exchange. It shows up in your paycheck and bank account. You can spend it, save it, or give it away.
In the proposed cash balance plan you will still see the accounting of the exchange on your pay statement. As tax deferred income.
And you will see a corresponding 'deposit' to the CBDB plan.
But understand this will not necessarily be a tangible exchange.
IF.....the trust asset base performance ROI exceeds the capped value, and the trust actuarial calculation supports the ROI adjusted basis to pay (your) accrued benefit levels..... the plan sponsor (delta) is not compelled to make the earned tangible exchange.
So delta simply takes the money out of one corporate 'pocket', and puts it the other corporate 'pocket'. And you....the employee, are none the wiser. The excess 401 cash you thought you 'earned'...was instead represented by an over performance of the trust assets above the capped ROI.
While the alpa 'experts' will tell you the CBDB plan will 'always' be funded at 100%......what is not said is the plan will likewise NEVER be funded over 100%. Or as close to it as the management custodians can call it.
There is no requirement to do so on the part of the plan sponsor. So there will never be 'excess' funding for that rainy day, when delta and the economy falls on hard times.
This is different than the proposal from ALPA as I understand it in that the MBCB contributions from pilots would not be offset by the ROI of the underlying assets. Whereas in a traditional DB pension, asset over-performance could offset corporate contributions, in my understanding of this vehicle the pilot contributions would be made in dollars and used to purchase an asset. If not then I agree with you, it is a shell game where the given is that the return is zero. Even tax deferred zero is a slow growth rate. A solution would be to have the fund managed by somebody not DAL.
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04-09-2019, 07:46 PM
#49
Gets Weekends Off
Joined APC: Apr 2018
Posts: 2,987
Originally Posted by SparkySmith
A solution would be to have the fund managed by somebody not DAL.
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04-09-2019, 08:32 PM
#50
Gets Weekends Off
Joined APC: Jun 2015
Posts: 4,116
Originally Posted by SparkySmith
This is different than the proposal from ALPA as I understand it in that the MBCB contributions from pilots would not be offset by the ROI of the underlying assets. Whereas in a traditional DB pension, asset over-performance could offset corporate contributions, in my understanding of this vehicle the pilot contributions would be made in dollars and used to purchase an asset. If not then I agree with you, it is a shell game where the given is that the return is zero. Even tax deferred zero is a slow growth rate. A solution would be to have the fund managed by somebody not DAL.
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How do Cash Balance Plans work?
In a typical cash balance plan, a participant's account is credited each year with a "pay credit" (such as 5 percent of compensation from his or her employer) and an "interest credit" (either a fixed rate or a variable rate that is linked to an index such as the one-year treasury bill rate). Increases and decreases in the value of the plan's investments do not directly affect the benefit amounts promised to participants. Thus, the investment risks are borne solely by the employer.
************
The investment 'risks'....this means downside as well as excess upside, belong to the plan sponsor. our employer. Its one thing if a CBDB is funded with the corporations money on top of employee earnings, but in our case this plan will primarily be funded WITH OUR OWN EARNED MONEY.
Make no mistake, if the asset base outperforms, delta will reap that windfall. One way or another.
Your personal ROI 'guarantee' has NOTHING to do with the asset base performance. What you are getting is an IOU in a paper sack based on the agreed upon indexing ROI formula.
As I said, CBDB plans usually have an ROI index floor to protect the beneficiary.....but ALSO install a ROI cap to protect the corporation/plan sponsor AND the backstopping agency....the PBGC.
You best DYODD. ERISA and Dept of Labor regs are a good place to start. Believing in what you think alpa 'experts' tell you is done at your own peril.
Those 'experts' also told us the terminated pension was secure. Right up to the bankruptcy filing. Of course the day after the bankruptcy filing, the first piece of paper put in front of the judge was to terminate the unqualified pension payments to retired pilots.
But then im just a dumbass airline pilot, and I wouldn't recommend ever taking investment advice from one of those.
Last edited by BobZ; 04-09-2019 at 08:44 PM.
