Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
It was decided decades ago that 401(k) was a better model than pension, and so employers have gradually phased out pension and opened 401(k) as an alternative. It's been a generation's duration now, and I'm sure a lot have changed in people's perspectives. So let's revisit this topic. Which retirement benefits model is superior?
The only thing decided decades ago was that employers did not want to fund employee retirement plans via a pension. Pension costs were largely borne by the employer although the employee could contribute a portion as well. In the end, these plans were extremely costly for employers as long-term employees were paid out for life after retirement. The long-term costs caught up with the short term benefit.
The 401K is a self administered retirement plan. Employers offer a match up to a certain amount (usually a small amount like 2-5%) but it is largely funded by the employee. In other words, employers no longer want to foot the retirement bilsl via expensive pensions and therefore 401Ks were promoted as a means for employees to fund their own retirement plans. This is why I don't get your question about which is superior? If I was an employer, I'd hate pension plans because they are so costly. If I was an employee with long-term intentions, I would love a pension thank you.
How the funds are invested are a wash at best IMO. I don't think the everyday joe on the street would be any wiser investing his money versus a large professionally managed pension fund like a Calpers for e.g. who can invest in so many things like real estate, private equity funds, stocks, international bonds, etc. Very few people would do better on their own over the long run. Some can but most the public is not that financial astute to beat out a professional fund using a trading account that just pushes certain products to them.
You can't adequately compare the two models since they're very different animals. The pension is a set income for life but that amount can vary depending on years of service and the employer. The 401k could be used to purchase an annuity which would set a certain set amount for life, but that varies on the value of the 401k. The 401k is dependent on the length of time you invested, plus the amounts invested. The most recent recession devastated many 401ks.
Ideally the 401k would be more beneficial for you if you contributed the maximum amount (pre tax) for 45 years AND your investments were managed in ways which avoided the large fluctuations which occur roughly every 7-10 years. Personally I wouldn't purchase an annuity, but some people like that guaranteed income. It's a matter of choice and individual need.
There are too many derivatives of defined benefit pension pans out there to compare with a self administered 401K.
Should you have been fortunate enough to have belonged to an employer sponsored "defined benefit" plan with a fixed employee contribution amount, you would have the best of both worlds to some extent because those plans usaually have a feature of employee representatives either elected or hired professionals sitting on the board of directors or trustees of those plans. Those directors would oversee things such as timely actuarial assessments and also report back to employees on things like the company taking contribution holidays, not funding the plan when it runs into unfunded liabilities, or questionable investment practices.
Those funds are usually considered the "Cadillac" of pension plans and are heads and shoulders above the 401K self administered funds that must rely upon your knowledge or lack thereof for long term investment strategy to make interest gains against market trends. If you have a feature whereby your employer contributes a matching portion into your 401K and you choose badly on your investment picks, you've squandered what would have garnered you a fine pension had it been a "defined benefit" plan instead.
Of course employers hate defined benefit plans because any investment shortfall or fund insolvency must be made up by them to avail the members of their "contractually agreed upon" retirement benefit.
It was decided decades ago that 401(k) was a better model than pension, and so employers have gradually phased out pension and opened 401(k) as an alternative. It's been a generation's duration now, and I'm sure a lot have changed in people's perspectives. So let's revisit this topic. Which retirement benefits model is superior?
Not true at all. Companies just decided to get rid of pensions, because of social security. Why pay out money, when someone gets social security? Its cheaper and better for me to give a few paltry dollars to an employee's 401K, instead of paying a pension.
That is the problem with society today, they have no clue what it is they are saying.
401Ks are "portable", while defined-benefit pension generally activate only after an employee has spent decades with the employer. For employees who jump from one employer to another, or who get downsized with a corporate reorganization, the 401K is probably better. For a life-long employee remaining with one firm, a defined-benefit pension probably offers more advantages.
Defined-benefit pensions are purportedly guaranteed; they pay an annual benefit regardless of how long the retiree lives, or what happens in the stock market. For people who live for decades after retirement, or who have the misfortune of retiring at the beginning of a secular bear-market, the defined benefit pension is a bonanza. For the person who croaks 6 months after retiring from a 45-year career, and who has no spouse, the defined-benefit pension is useless. He or she would be better off with a 401K, which the heirs can inherit.
Motivated savers and knowledgeable investors are better off with a 401K. Those lacking the motivation and/or knowledge would be better off in a defined benefit pension. That is presumably the majority of people.
One would think that employers acted in their self-interest, when replacing defined-benefit with defined-contribution schemes. The latter places the risk onto the employee. The employee might actually end up with a better pension if it's defined-contribution, depending on factors such as the aforementioned. But he/she gets to carry the risk. The risk comes off of the corporate books. That is the principal benefit for the employer.
It was decided decades ago that 401(k) was a better model than pension, and so employers have gradually phased out pension and opened 401(k) as an alternative. It's been a generation's duration now, and I'm sure a lot have changed in people's perspectives. So let's revisit this topic. Which retirement benefits model is superior?
Quote:
Originally Posted by Delahanty
For obvious reasons, I'd wager that employers prefer defined contribution, while retirees would prefer defined benefit.
Delahanty is correct. Defined contribution is better for the employers, while defined benefit is better for retirees. Under defined contribution pensions, once the employee retires, then the company washes its hands of the matter and has no further obligations; it doesn't matter whether stock markets go up or down, or whether longevity demographics go up or down.
On the contrary, retirees with defined contribution pensions will always have the concern about outliving their money if they should happen to have greater than average longevity, so it matters greatly how long they will live and whether markets go up or down. In addition, they have the potential to create a disaster for themselves by withdrawing too much too soon.
Now with defined benefit pensions, retirees are simply set for life, with the important proviso that the pension provides inflation protection. They assume no long-term liability and don't have to worry about withdrawal rates or market volatility or how long they will live.
Please register to post and access all features of our very popular forum. It is free and quick. Over $68,000 in prizes has already been given out to active posters on our forum. Additional giveaways are planned.
Detailed information about all U.S. cities, counties, and zip codes on our site: City-data.com.
Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
"Better" and "superior" for whom, exactly?
