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Legacy US HP Retirement (Pension) Plans -- "DPSP" and "RP"
Advice and reference info from members. (Updated Nov 19, 2019.) Questions or comments to: email@example.com
These topics are discussed on the HPAA's Finance Forum. Ongoing discussions of US personal finance issues -- such as retirement planning and Social Security -- from an ex-HP/HPE perspective. Join the HPAA Finance Forum
If you received a "Potential Private Retirement Benefit Information" notice from Social Security, it is usually based on outdated information -- as indicated by the "Year Reported" date on the form included in the body of the notice. Here's how to decode it: https://www.hpalumni.org/PotentialBenefitLetter
The two legacy US HP retirement plans
"This HP Retirement Plan and HP Deferred Profit Sharing Plan SPD [Summary Plan Description] applies to eligible HP employees, former employees, and beneficiaries with vested benefits that have not been fully paid.
• You may have a benefit in the HP Deferred Profit Sharing Plan (the "DPSP") if you were an eligible DPSP participant before November 1, 1993. DPSP benefits are payable separately from the HP Retirement Plan, but are considered in determining the amount (if any) of your HP Retirement Plan benefit for service before November 1, 1993.
• You may have a benefit in the HP Retirement Plan (the "RP") if you were employed by HP in an eligible position on or before December 31, 2002.
The HP Retirement Plan was closed to new participants on January 1, 2003, and existing participants stopped accruing additional benefits on December 31, 2005 or December 31, 2007, depending on age and qualifying years of service. The HP Deferred Profit Sharing Plan was closed to new participants on November 1, 1993, and no further contributions were made after that date."
--from the RP and DPSP Plan Description Dated January 2008 but still current. Note that there are addresses in the document for appeals (page 40.) (Fully interpreting this 43-page legal document requires expertise in retirement plan law. The pdf file is of an HP document entitled "2008 HP RP-DPSP SPD _all populations_v4_FINAL_.doc" -- it was downloaded from the Fidelity website in November 2019.)
Lump-sum or monthly pension?
The following summarizes points that were made during a discussion in 2014 on the HPAA's Finance Forum about the choice between taking HP pension plans as a lump sum distribution versus taking a monthly pension payment. (Minor revisions July 21, 2018.)
HPAA's Finance Forum. Ongoing
discussions of US personal finance issues --- such as
retirement planning and Social Security -- from an
Join the HPAA Finance Forum
There are two HP pension plans. For years before 1993, the Deferred Profit Sharing Plan (DPSP) applies. It is a defined contribution plan. Every year before 1994, HP put a percentage of profits into the plan and your current value and future pension amount rose based on the investment growth of the plan.
The other plan is the HP Retirement Plan (RP). It is a defined benefit plan that covers the years after 1993 and puts a floor on the benefits before 1993.
That is, if you have years of service under the DPSP plan, when you retire they calculate the pension benefit you would get from DPSP and the pension benefit you would get for those years under RP.
If the amount you would get from DPSP is less than the RP amount, RP brings your benefit up to the RP amount. If the amount you would get from DPSP is higher, you get the DPSP amount.
Over the years, the DPSP plan investments did quite well. Even though my salary increased quite between 1993 and 2005, the DPSP benefit amount was well over the RP floor for those years.
When people say that the HP retirement amount goes up just at an interest rate growth, that applies to the RP plan. The benefit under the DPSP plan rises depending on how well the investments do until you start taking payments when the amount is locked in.
If you took Enhanced Early
Retirement (EER), a separate rule applies to the EER bonus.
The principle amount doesn't grow during the period from
when you got the bonus until you start taking payments. When
you start taking payments, the EER bonus amount is used to
calculate an additional benefit.
With a defined benefit plan like HP RP, you are entitled to a stream of pension payments starting at age 65. If you take a lump sum distribution, a calculation is done to determine the present value of the pension payment stream. The calculation requires an interest rate. The interest rate is based on investment grade corporate bond interest rates (Pension Protection Act of 2006). Lower interest rates mean higher lump sums.
On the other hand, with a defined contribution plan like HP DPSP, you are entitled to the lump sum that the invested contributions have grown to over the years. If you take it as a stream of pension payments, a calculation be done based on life expectancy and interest rate to determine the pension the lump sum can provide. Higher interest rates mean higher pension payments.
So, rising interest rates are
more favorable to lump sum distributions and falling
interest rates are more favorable to pension payments.
If you have DPSP years, you can take a lump sum for the DPSP plan or both the DPSP and RP plans. HP doesn't allow taking a lump sum for just the RP.
From what has been mentioned on
this forum, in recent EER rounds, you have the option of
taking just the EER amount as a lump sum without taking the
other two plans. Unless you are going to start taking your
pension right away, rolling out EER is best because it isn't
going to grow.
If you die before you begin receiving benefits, your beneficiary will receive 50% of the present lump sum benefit amount for the RP plan. Your beneficiary receives the full value of your DPSP account. If you aren’t starting pension payments immediately, this is a strong argument in favor of taking the lump sum so that your spouse or other beneficiary doesn't lose 50% of the lump sum value.
If you decide you want to wait and take the pension, you might consider the effect of losing 50% of the lump sum from the RP plan when you assess your life insurance needs.
If you elect to take the pension (these were the options recorded when my husband left HP in 2005, if they have changed, please post to the list so this summary can be corrected), you can take:
- a single life annuity where the pension continues as long as you live; your beneficiary gets noting after you die.
- a 50% joint & survivor annuity where your beneficiary gets pension payments at 50% of your pension amount if you die first.
- a 75% joint & survivor annuity where your beneficiary gets pension payments at 75%
- 100% joint & survivor annuity where your beneficiary gets pension payments at 100%
Electing the joint and survivor options reduces your initial benefit amount. The higher the survivor benefit, the lower the initial benefit amount.
If you take the pension benefit, you have a benefit for life and don't have to worry as much about longevity risk (i.e. outliving your savings). On the other hand, if you take the pension benefit, payments stop when you (or you and your beneficiary for joint & survivor) die, your heirs get nothing.
With a lump sum, you need to
allow for the possibility of living well past your life
expectancy when deciding how much you can draw, but if you
die, your heirs will get what remains.
In some states, some or all of pension payments are exempt from state income tax. In most states with an income tax, income from 401(k) and IRA withdrawals is taxable.
There may be tax implications particular to your situation. For instance, my husband is over 65 and I’m still working. If he had elected to take the pension, then when pension benefits started at age 65, they would have been taxed in our current high marginal tax bracket. By rolling the lump sum into an IRA (or 401k) he can wait to start taking withdrawals until mandatory withdrawals kick in at age 70 ½ when I'll probably be retired.
If you have a low income year,
you could do a Roth conversion on some of the lump sum money
to reduce later mandatory withdrawals. But if you also have
lots of 401(k) or IRA money from other sources, you could do
the conversion with that money.
This is difficult to predict. If you roll it out, you can have investment losses if the market tanks. There were a rocky couple of years in our roll out when the market dropped in 2008. Fortunately, due to a good investment manager, we didn't go down as much as the market and in the years since we have had a good recovery.
I recall one post here where the poster said that when the market went down in 2008, the poster decided the market was too risky and moved it all to bonds. That is about the worst thing you can do because you are selling low and then putting the money into bonds when interest is low and missing benefiting from the recovery. If that sounds like something you might do, you may be better off leaving the money with HP. You need to think about your own investment personality.
Money to pay the pensions is held in a trust. HP can't use it for other purposes and that money isn't affected if HP should go bankrupt.
At the time we decided to roll out, the HP RP plan was underfunded. I.e. based on the predicted growth of the money in the retirement trust, HP might have to kick in more money at some point to pay the benefits. It might not be underfunded now. There has been some pretty strong investment growth in recent years.
If the fund runs out of money and HP doesn't kick in more, the Pension Benefit Guarantee Corp (PBGC) comes into play. They pay up to a maximum which in 2014 is about $57K per year if you start receiving benefits at 65.
A relative of ours had his pension reduced by his company without the plan going to PBGC. I'm not sure when that can occur - details available to us were hazy, but it influenced our decision to take the lump sum. Some other posters have mentioned something similar happening.
So there is not a clear winner on safety. You have to think about which you are more comfortable with.
How is your crystal ball? If you take the lump sum, manage it well (e.g. paying attention to things like diversification, not panicking in a downturn), you may be ahead with a lump sum.
Insert disclaimer on “Past performance does not guarantee future returns.” here. We rolled our money out near the end of 2005 so its approaching 9 years now. I'll be 65 in 3 years. Comparing to the age 65 pension and lump sum projections that I used to analyze the decision, I've got an amount that is well ahead of the RP defined benefit amount.
About half my years were covered by DPSP. When I look at the scenario comparing my benefit including DPSP to where my investment is now and where it might be at 65. I'm somewhere between about even to significantly ahead. There is more uncertainty there because the scenario assumed a number for DPSP rate of return: 7%
The interest rate for the lump
sum calculation was pretty favorable when we took the lump
sums. That helped the results above. With a less favorable
lump sum calculation, I might have been behind on the DPSP
scenario. There is more margin in the RP scenario.
In past discussions, it has been mentioned inflation as a reason to roll out a lump sum. The argument is that your pension doesn't increase with inflation and a lump sum allows you to start drawing conservatively and increase with inflation.
I don't think that's a good reason. If you are disciplined enough to take less at the start and control your expenses, you could take the pension, live on part of the initial pension payment and save the rest to use for covering inflation. Also if you have saved a good amount in an IRA or 401(k), you can start living just on the pension amount and use the IRA or 401(k) to level it up.
See also: Retirement Plan Overview
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