FedEx is closing its pension plan.  But the story isn’t a simple one.

24 thoughts on “Forbes post, “Understanding The FedEx Pension Closure”

  1. I am a current FedEx employee and planning on retiring early in the next decade. After reading the news about the pension closure in 2021 and the new 401k match the latter sounds more appealing for my situation. Besides, the portable pension that has been fully in place since 2008 is purely supplemental to begin with.

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    1. Fedex says one thing but does another, I’m also an employee for 28 years they make promises and turn around and break them ,just like they did with our pension when they went to the portable plan 35 percent less retirement benefit. P.S Getting rid of the Portable plan put more cost on the employee and less on the company.

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  2. Very informative article. Especially great considering it was published less than 12 hours after the announcement!
    One question please: Can you please explain your comment In regards to the 401k match? You mentioned “a combination of fixed/noncontingent contributions as well as the traditional match”. This was followed by another reference “likely, again, a combination of noncontingent and matching contributions”, this time leaving out the reference to the word “fixed”. I must say, I’m a bit confused as to what exactly “fixed” or “non-contingent” means in regards to 401K matching?
    Thank you much!
    Jim

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    1. Hi, Jim,

      Fixed or noncontingent means that employers will sometimes provide a benefit of, say, 2% whether or not you contribute yourself, plus a match only if you contribute. So an 8% employer contribution with a 6% employee, might mean 2% regardless, and a $1.00 per $1.00 match, or 5% regardless and $0.50 per $1.00 match. Does this make sense?

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      1. They get the 3.5% because they match 100% of your first 1% contribution. Then they match 50% of your next 5% contribution. So if in total you put in 6% of your pay they match it at 3.5% under the current plan

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  3. Is that just not a QACA as outlined in IRC 401(k)(13)? That uses auto-enrollment and a match of 100% for the first percent deferred plus 50 cents on the dollar for the next five. So anyone at 6% of more for their deferral rate gets their match capped at 3.5%.

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  4. Yes indeed. That absolutely makes sense. I don’t believe the current 401k works that way, but it seems logical that the new one might since it will be taking the place of a guaranteed pension source.
    Thank you much!!!
    Jim

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  5. “After all, would you choose a fixed but low interest credit or take your chances yourself?”
    No doubt I would chose the PPA option. Let’s do the math on this using a $100 paycheck as an example for simplicity purposes:
    Scenario A – PPA plan you get at least 5% per year (up to 8% depending if you work forever at FedEx) plus a small interest as you mentioned. So it would be $5 and let’s say 1% return on it which would be $5.05 as the end result.
    Scenario B – 401k plan you would get 4.5% to start with (difference between the new 8% vs the current 3.5%), so $4.50. To reach the $5 alone (not considering the interest earned on the $5) you would need a 11.11% return on your funds (4.5 x 1.11 = 5). I don’t know about you but I much rather get a guaranteed amount than bet that year after year I would be making an 11% return.

    Granted, you wouldn’t get the $4.50 as a lump sum but throughout the year, but still I’m not confident I would be able to outperform a 10%+ return year after year…

    It’s crystal clear that this was both a cost savings AND risk reduction move for FedEx.

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      1. I still wouldn’t, just to make up for the difference you need an average of 11% yearly return, and that applies regardless if it’s one year or 20 years. The ‘compounding’ interest factor in the stock market is not as it seems because people are buying shares with their money and the return comes from stock appreciation/dividends and the ‘interest on interest’ concept doesn’t apply. That’s my thought, I would stick with the PPA plan.

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      2. Actually, compounding is just as applicable to stock appreciation as it is to interest in a bank account or on a mortgage. Over time, 4% vs. 6.75% can make a very significant difference.

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    1. I run 12% lifetime return average through our limited Vanguard Mutual Plan options so it is very possible if you monitor your plan on a regular basis. Those that set it and forget it may not be so lucky with the target year funds. I welcome a 8% match, which should have been done years ago, since I already contribute 10% right now. Next step is to free us to invest in any of the funds out there through Vanguard. I run about 23% return in my Roth at Vanguard.

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      1. My key question to you here would be “lifetime” since what year? Because the market has gone up quite a bit in the last 10 or so years. Really long term the stock market average is 10% return, but it can vary from 8% to 12% or less or more…I believe it’s better to stick with the guaranteed funds, particularly since at retirement, with the cash balance plan, you would have the option for a guaranteed annuity (if you don’t take the lump sum). Granted, the guaranteed annuity may not be much but it’s guaranteed regardless if the market does poorly, and it’s insured by the PBGC. By keeping PPA no would would be giving up their ability to invest in the 401K, so one can keep the best of both worlds.

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    1. Info conveniently left out of the announcement. Since we do not contribute to the PPA it may depend on tax status if I had to guess. If the FedEx PPA payment is classified as a pre tax contribution for the company then it may be able to transfer to the 401(k) and if it they pay taxes before it goes in then I would guess it could be rolled into a IRA. Hopefully we will get more clarification in the coming days but I doubt we will hear anything else until we are given a short time period to chose our position.

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  6. My guess is that the ppa funds will stay in place until distribution time. I severed a good pension years ago. Costly mistake! Unless more compelling information is released I would probably keep the ppa. But not everyone’s situation is the same. I could make more with the 8% over the long run vs the extremely low ppa interest but my situation may be different. I’ve been pumping up the 401K’s for over 30 years now. I really just want something else to diversify my retirement income. There’s not going to be a correct answer for everyone.

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  7. Hi all, I just had my one year anniversary, so I’m in before the pension is gone for new hires. Any advice for me? I’m not really sure how the pension works. I plan to put in about 25 years. I already contribute to the 401k. Sounds like Janet and many others here would stick with the ppa.

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    1. Like J says below, Max out what you can afford. We usually get a 3% pay increase every year. Bump your contribution 1-2% if you can afford it each year. Most will ignore the save big early advise. I was one of them but I got going asap and am better of for doing it. I know people that don’t contribute to the 401(k) and mistaking think the PPA and SS will take care of everything. Log in to the pension site and see what your projected payout will be. I will have $300 after 30 years in if I stay in the PPA. Once I have all the info I can decide better but right now I plan to take the new 401(k) match.

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  8. Hi Owen. Regardless of your choice, the #1 thing to do at any company is to max your 401k while you’re young. Not saying just max the match percentage. I’m talking max the whole thing out at the current regulatory limits of 19k or 19.5k for 2020. I know that sounds like a lot but it’s not bad once you get accustomed to it. Remember this hit is before taxes which significantly minimizes the bring home impact. It also reduces your yearly taxable income, which is huge. I spent many years at various companies just putting in enough to get their match. Once I started truly maxing it out I was floored by the growth. Here’s the problem with putting in the min match followed by increasing 401k contributions; First of all, your 401k balance will grow painfully slow. Secondly, your bring home amount will also increase very slowly because over the next 10-12 years you will need to use some of it to gradually increase 401k contributions. On the other hand, if you reverse common logic and max out the 401k right out of the gate you will build an enormous amount of wealth that might never happen otherwise. From the point of max going forward you will be very satisfied to see all of your increases make it to the bring home line on every paycheck. You also won’t have to worry about those dreadful catch up contributions after the age of 50.

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