We’ve received a lot of information since I first posted about the Market Based Cash Balance Plan (MBCBP). I worry that some pilots are latching on to incomplete information and risk making decisions they’ll regret.
So, I’m trying to put out some better information with a hint of context. Other than saying the MBCBP is a good opportunity for most pilots, I’m trying to avoid outright opinion. Why? Because this is not tax, investing, or official finance advice. This discussion is for informational purposes only.
No matter what you hear or read from anyone, you should absolutely talk with a professional financial advisor before you do anything permanent. Speaking of permanent…
Maintain Status Quo
As promised, the Delta MEC preserved each individual’s choice to participate in the MBCBP…to the maximum extent allowed by law.
However, the way this works is not what I’d hoped. Instead of being something that pilots can jump into or out of, participation in the MBCBP is a one-time, irrevocable decision.
Don’t let this scare you too much. The volunteers at your MEC have been working on this for more than 5 years because you asked for help reducing your tax burden, and increasing your tax-advantaged retirement savings. This is the best tool we’re going to get for meeting those objectives.
This type of plan is not uncommon in the corporate world. These plans are governed by the Department of the Treasury, an organization with reach far wider than a few pilots at one airline. The Treasury’s rules require that if an organization offers a plan like this, all employees must be included, no exceptions. This isn’t something that Delta or ALPA decided, it’s a mandate from the Treasury.
The only counter to this is that our beloved Railway Labor Act protects maintenance of the status quo above all else. This usually hurts us, a lot. However, in this case the Treasury is allowing the Labor Department’s rule to take precedence. Since the status quo for most of us hasn’t included a MBCBP, each of us has the opportunity to elect to maintain that status quo by not participating in the plan. This is a forever decision. You’ll continue to see the phrase: “one-time, irrevocable.”
This only applies to pilots hired before 1 June 2023. For anyone hired on or after that date, the Treasury and Labor departments decided that the MBCBP is part of their status quo, so they must participate.
Don’t Rush!
I feel like some pilots are acting like they must make a decision on this immediately. That would be a bad choice.
If you do nothing between now and the end of July, you’ll be automatically included in the MBCBP. For most pilots this is a good opportunity. It’ll be an easy, transparent, passive way for you to increase your savings and decrease your tax burden, two things I strongly advocate in Pilot Math Treasure Bath.
If you want to maintain status quo instead, and not be part of the plan, you will have to take action to file paperwork within a specific window from 1 June to 31 July.
Don’t rush. That’s two full months to make a decision.
Research everything you can about this plan. Then, go speak with a professional financial advisor! They can help you take a look at your specific financial situation and figure out what works for you.
Even they may not have the full perspective you need. We’ll discuss some of that later.
LIRIX
We have an official answer that the MBCBP will be invested in a 40/60 portfolio of stocks and bonds. Yes, this still reduces overall return, but also reduces risk (volatility).
For now, our provider has selected BlackRock’s LifePath Index Retirement Fund, LIRIX, to fill that role. No, it won’t remain invested in that forever because LIRIX is a lifecycle fund and will gradually shift away from that 40/60 balance. Our provider will have to adjust our investments to ensure that 40/60 balance.
LIRIX’s 10 year return is only 4.35% right now. However, note that the entire market is down this year. For just the year 2022, LIRIX was -15.31%, but VTI (Vanguard’s Total Stock Market ETF) was at -19.51%. So, LIRIX actually did 4.2% better than the overall market in a down year.
Prior to our recent recessionary environment, LIRIX had a long-term return in the 7.8% – 8.3% range. Past performance does not predict future gains; however, if you look at a chart comparing LIRIX to the overall market (using Vanguard’s VTI as a proxy) it looks like a less volatile version of the same thing with less overall performance. For example, here’s a chart comparing these two funds over the last year:
There’s roughly a 5% difference in performance, but you can see that LIRIX resembles a less volatile VTI. Here’s the 5-year chart:
When (not if) you talk with a professional financial advisor about all of this, they’ll complain that LIRIX has low returns. They’ll be correct, but these returns aren’t low like I thought they’d be. Over the very long run, it appears that LIRIX has only lagged the overall market by 3% or so.
You also need to ask yourself what your financial pro is trying to talk you into, if they say they don’t like LIRIX. If they’re advocating you simply invest in something like VTI instead, then they’re getting you better performance. If they’re trying to get you to let them pick stocks on your behalf, you’re much more likely to underperform the market.
Also note that if they want you to let them buy shares of VTI on your behalf, they’re likely charging you extra fees. The kinds of advisors you’re probably working with may want as much as 1% Assets Under Management (AUM). This would be a bad deal. I strongly recommend you only work with a fee-only financial planner. It’ll feel like it costs a lot upfront, but it’s far better than losing 1% of your investment every year.
Fees and Losses
Another good part about this new MBCBP is that we have official word that Delta will cover all fees for this plan. Also: your capital is protected. If the market is down when you retire, and your balance in the plan is less than the capital invested for you, Delta will make up the difference out of pocket when you retire.
There’s good and bad there, right?
You’d rather it be invested in something that will protect against loss. Sadly, that’s never guaranteed, no matter what you invest in. Even if you opt for status quo and choose your own investments, if the MBCBP is down then your other investments may be down as well, except that your personal investments wouldn’t be backed by Momma D’s deep pockets to at least make you whole.
It’s monumentally good that nobody else has access to the money in the MBCBP, not Delta, not ALPA, and not Delta’s creditors! Nobody can take the assets of this plan in case of a bankruptcy (God forbid!) However, if a pilot happened to retire during a bankruptcy, the market would probably also be in the tank. In that case, it is possible that Delta would not have the financial capacity to make that pilot whole, or that a bankruptcy court would allow Delta to evade that responsibility. Worse has happened to Delta pilots.
I feel like the MBCBP is far safer than the old Defined Benefit pension plan, but it’s not perfect. However, there is a good deal to help:
In-Service Withdrawals
We’ve officially received word that each pilot will be able to take an in-service withdrawal and roll their MBCBP funds over to a personal retirement account (like an IRA) starting at age 59 ½. Even better, each pilot will be able to continue doing these roll-overs annually until retirement.
This is huge!
I’ve noticed a lot of hand-wringing about the fact that this money is tied up, just like the funds in your 401k, TSP, IRA, etc. Getting access at 59 ½ is a great deal.
For most pilots, this gives you a lot of time to work with a professional financial advisor and prepare a place for that money to go. You’ll even have the option to roll your MBCBP dollars into a self-directed IRA and use it for alternative investments.
I speak with a lot of pilots who say, “I could make better returns and get superior tax benefits with my 401k Excess money by investing in alternatives like real estate or starting my own business.” This is true; however, it takes time and effort to find and learn those things. In discussions about the MBCBP, I’ve been telling pilots that if you aren’t already actively participating in those types of investments, you’re probably better off participating in the MBCBP.
There’s a lot of aspirational thinking in this world. The step from doing nothing to actually taking meaningful action toward alternative investing is a gigantic one. The learning curve from that to being effective at those investments is even steeper.
If you aren’t involved in alternative investments, but think you might be some day, why not participate in the MBCBP for now? Give yourself some time to learn and make mistakes. Then, by age 59 ½, you’ll have things wired. You’ll know some very effective ways to employ capital. You’ll be able to roll your MBCBP funds into a self-directed IRA and use that capital infusion to turbocharge your successful investment activities.
I worry that a pilot might avoid the MBCBP, but not do what it takes to effectively get into something like serious real estate investing, and end up regretting the fact that they spend several years doing nothing (or worse) with their money.
ALPA Dues
Right now, ALPA takes 1.85% dues from our 401k Excess dollars, even though those dollars have only ever been intended as retirement dollars in replacement for a lost pension. This is a bad deal that Delta pilots have been fighting and losing at ALPA National for years.
The MBCBP is inarguably a retirement account, so ALPA will not charge us dues on that money. This means choosing not to participate in the MBCBP costs you a 1.85% penalty upfront.
If you don’t like that, talk to your LEC reps. They’ll probably commiserate. They won’t be able to fix it though.
If you were to maintain status quo and hire someone to manage your money at 1% AUM, you’d be losing 1.85% upfront by paying dues, and then another 1% per year forever to pay your pro. That’s a lot of ground to make up for when specifying your investment return assumptions in my calculator. Speaking of which…
My Calculator
I built a spreadsheet to help individual pilots evaluate what the MBCBP can do for them. You can make a copy of or download the original one here. Please, please don’t ask to edit my copy. You can’t. Please use:
File -> Download
Or
File -> Make a Copy
To get your own version to edit.
Although this calculator will tempt you to make a decision about participating in the MBCBP, I strongly recommend that you speak with a finance professional anyway. This calculator is a great tool for facilitating that discussion. If you set up your numbers as best you can, then send it to your pro, they’ll be able to spend 10 seconds looking at it and launch into their advice. Please use it this way!
I originally built this calculator when I thought that we’d have the opportunity to jump in or out of the MBCBP more than once. The intent was to optimize the point in your career at which you would start participating.
Since the actual plan won’t work that way, the original point of the calculator is moot. I built an updated version that identifies a different kind of optimal point for participating. This is the columns and boxes in purple, or shades thereof.
This calculator only considers one year at a time – the next year of your participation in the plan. I built it that way because if it makes sense to participate in the plan now, it continues to make sense to participate in it until you retire.
If you participate in the MBCBP, your taxes will decrease. This calculator assumes that you invest those tax savings, every year, in a brokerage account of your own. If you don’t have the discipline to do that, the MBCBP becomes somewhat less attractive.
This calculator does account for taxes, in the current year and when you cash out your investments in future years. Yes, it differentiates between ordinary income and capital gains at appropriate places, within the assumptions I’ve mentioned.
The calculator shows you one year of ALPA dues saved by participating in the MBCBP. It does not show the ongoing effect of paying dues if you don’t participate in the MBCBP. Sorry, I just didn’t have time to cleanly program all of that once I found out about this.
Could this calculator be edited to show total balance over many years, allow you to specify changing aircraft over time, project pay increases or changing tax rates, or more? Absolutely! Please edit your copy to your heart’s content. It took a fair amount of programming to get my calculator to do the point it’s at, and I just didn’t have it in me to update it with any of those features. I apologize that it’s an imperfect tool. Sometimes you get what you pay for.
Part of the reason I feel okay not updating the calculator is that I don’t think this needs to feel like as big a decision as some people are making it out to be. For most pilots, it’s a good opportunity.
As I run the calculator, the MBCBP makes a whole lot of sense for anyone within about 25 years of retiring (and that’s not necessarily age 65). I think it also makes sense for any pilot not interested in adding a second full-time job as a real estate investor or business owner. Some pilots are already doing exactly that, and they already know what’s best for them.
There’s a small group of people who are getting hired so young that they’ll have closer to 35 or 40 years until retirement. They’re the subset of people on the bubble where it might make sense to run things on their own. However, that can only be decided after some serious discussions with family and a professional financial advisor.
Zoom Discussions
I hosted an unsponsored, unendorsed, non-authoritative discussion about the MBCBP a few days ago, and I think it was valuable for everyone who participated. I’m hosting two more of these discussions on Thursday, June 1st at 9:30 am and 9:00 pm Eastern time.
Before you attend, I ask that you at least be familiar with the contents of this post and both of these videos (original video and update video).
Here are the invite links. Please share them with your friends, but don’t post them on social media.
Topic: MBCBP Discussion with PMTB
Time: Jun 1, 2023 09:30 AM Eastern Time (US and Canada)
Join Zoom Meeting
https://us06web.zoom.us/j/89980523226?pwd=RnlKMERqM0JTOFcrWklmNG0vRjhadz09
Meeting ID: 899 8052 3226
Passcode: 506052
Topic: MBCBP Discussion with PMTB
Time: Jun 1, 2023 09:00 PM Eastern Time (US and Canada)
Join Zoom Meeting
https://us06web.zoom.us/j/81047768069?pwd=U2hnS053SkYweWxXazhESjNhcmQ1Zz09
Meeting ID: 810 4776 8069
Passcode: 954231
Any airline pilot is welcome, though we’re not going to spend time explaining MBCBP basics to non-widget pilots. Also, this is not an opportunity for ranting or pontification if you’re angry. This is an informational discussion, and an opportunity to ask questions.
My Zoom subscription allows a pretty large group. I don’t expect to exceed those limits, but if we do I apologize. If you want to get in, and can’t, please shoot me a message and we’ll look at setting something up another day.
MBCBP for Non-Widget Pilots
I’m ensuring this information is available to pilots from other airlines so can be fore-armed if (or more likely when) you’re presented with a similar option.
This plan is a marked improvement in retirement savings for US airline pilots. Delta has officially made it the industry standard. American’s recent AIP specified formation of a MBCBP. I suspect pilot at other airlines will soon get similar offers.