What are pensions vs 401ks – What is a pension vs 401k? 1-800-566-1002 . What are the best types of pensions vs best type of 401ks and learn how you can avoid the most common mistakes that individuals have made when looking into a pension vs 401k.
The 401k Vs A Traditional Pension Plan – Which Is Best For You?
The American Dream traditionally involved getting a job with a company for 40 years, building up a big pension and then retiring to enjoy your golden years on that pension. Sadly, this notion of the American Dream has become a fantasy for most Americans over the last 20 years. Although retiring and living comfortably is still an option, the 401k plan has surpassed the pension plan as the retirement vehicle of choice.
Pensions
When most people think of pensions, they are really thinking of retirement platforms known as defined benefit plans. These plans offer a guaranteed payout amount when one retires. The amount is determined by the years you work, amount contributed, salary and other factors that vary from plan to plan. When your grandfather worked for General Electric for 40 years, his pension was a defined benefit plan.
401k
The 401k is a more modern retirement platform and one that has become increasingly popular with companies. Ready to be surprised? 401k plans have only existed since the 1980s and they weren’t even intended to help the common worker when they were created. Instead, they were supposed to be used to provide added benefits to executives. Regardless, they are now used by companies as retirement vehicles for executives and employees alike.
The modern 401k plan is really a defined contribution plan. This simply means that employees can contribute up to a certain amount when they choose to do so. Employers have the option, but not requirement, to also contribute to the employers account. Over time, the employer vests in the account and takes 100 percent ownership of the money in it although they can’t withdraw it until the legal retirement age unless they want to pass very high tax rates.
Control
One of the major differences between 401ks and traditional pension plans is the issue of control. Specifically, who controls how the money is invested once it is in the plan? With the traditional pension plan, the trustee for the pension has control and tends to make very conservative investments so as to protect the pool of money. In a 401k, the employee usually has control over how the money will be invested. There may be limits on the type or number of investments he or she can pursue, but that is the only restriction.
Which Is Best?
The 401k would be the obvious answer if this question was asked five years ago. Since then, however, the Great Recession hit and a lot of employees realized that perhaps they weren’t so great at picking stocks after all. The idea of having a stable, conservative investment like those found in pensions has started to seem a lot more attractive to such people than it did before the economic troubles came along.
The real answer to this question, however, depends entirely on the views of the person considering the question. If one is comfortable with the investment world, than a 401k makes sense. If you would rather leave investment decisions to someone else, a pension plan may be the way to go.
Personally, I prefer the 401k plan for a couple of reasons. The first is I want control of my investments. The second is I like the fact I can change the amount I can contribute to it each year. This gives me a certain amount of flexibility depending on how the economy is performing.
Ultimately, you will have to make your own decision when it comes to this issue. Regardless of the direction you decide to go, make sure to maximize your retirement savings as much as possible to ensure a comfortable time in your golden years.
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When it comes to planning for retirement, there are two main types of plans to consider: pensions and 401ks. If you’re feeling a little lost on the differences between the two, don’t worry. Here’s a Pension vs 401k for dummies guide to help you understand.
What is a pension?
A pension is a retirement plan offered by an employer. Essentially, the employer promises to pay the retiree a certain amount of money for the rest of their life once they retire. The amount is usually based on the employee’s years of service and salary.
In most cases, the employee doesn’t have to contribute any money to the pension plan. Instead, the employer funds the plan on their behalf. This means the pension is an entirely passive retirement income source. The employee simply needs to work for the employer for a certain number of years to become eligible for the pension.
What is a 401k?
A 401k is another type of retirement plan offered by an employer. With a 401k, the employee contributes a portion of their salary to the plan. The employer may also offer a matching contribution up to a certain percentage of the employee’s salary.
The employee then invests the money in the 401k plan according to their personal preference. This means that the employee is responsible for managing their own retirement savings through the 401k plan.
One main advantage of a 401k is that it is portable. If the employee switches jobs, they can take their 401k with them and continue to contribute to it. This allows for more control over the retirement savings and more flexibility in making financial decisions.
Key Differences Between Pension and 401k
The key differences between a pension and 401k are in how they’re funded, who’s responsible for managing the assets of the plan, and what kind of retirement income they provide.
– Funding: With a pension, the employer funds the plan entirely, while with a 401k, the employee contributes a portion of their salary to the plan.
– Asset Management: With a pension, the employer manages the investing of the plan, while with a 401k, the employee is responsible for managing the assets of the plan.
– Retirement Income: A pension offers a set retirement income for the rest of the employee’s life, while a 401k provides a lump sum of retirement savings that the employee must manage to provide their own retirement income.
Which is Better?
There’s no easy answer to whether a pension or 401k is better. It ultimately depends on your personal preferences and financial needs.
A pension offers a guaranteed income for life and requires no management from the employee. This makes it a reliable source of income in retirement. However, pensions are becoming less common, and not all employers offer them.
A 401k requires more responsibility for the employee to manage their retirement savings and investments, but it also offers more control and flexibility. If the employer offers a matching contribution, the employee can also benefit from free money by contributing to their 401k.
In conclusion, when deciding between a pension and a 401k, it’s important to consider all the factors, including your financial goals, risk tolerance, and retirement plans. Talk to a financial advisor to determine which plan is best suited for you.
The most unbiased comparison ever
Okay so I have different amounts deducted toward pension for my paycheck each week. What happens if I leave the company before retirement? Is that money forfeited?
Are IRA's and 401k's different?
For dummies and I still didn’t get it or have any idea what you even saying with the big galaxy brain words used in this video.
Anyone please in layman’s term and normal English, what’s a pension and how is it different from 401
So what do I do with my 401k now that I moved over to a company that does pensions?
great work on thisThank you for your super offerThank you for this site
Pensions are in every single way superior to 401(k)s, which were never intended to replace pensions but to supplement them, but thanks to loopholes in ERISA, companies in the 1980s ditched their pensions as a cost-saving measure and shifted all of the risk to workers. THIS is the reason millions of us who are past 65 cannot ever retire. Public employees are practically the only workers these days to have pension plans because unions have been gutted in the private sector.. Pensions are deferred compensation, and they are always better because they last for life, where the do-it-yourself savings plans last only as long as there is money. People have NO concept of how much money they would have to save in order to equal even the most modest pension, and by modest I mean a couple hundred dollars a month. It is easily in the low six figures. Nobody who is single can save that much over a lifetime.. 401(k)s are a complete and total failure.
Thanks for the easy explanation.
Very clear. Thank you.
Thank you this is very helpful information
I'd kill for a 1% match. My employer offers a 0% match and acts like I should be happy about it. That's why I got an IRA instead.
Lack of the pension plan having the money to pay
Great video! Thanks for the help.
I liked the video…all except the part when he railed against taking the single payer option…meaning when you (the pensioner) died.. that's it. No one gets anything else…Well that's the option I took. What he forgot to tell you, is that with the constant rise of inflation, you need all the money you can muster…I agree however, with his assessment of having life insurance vehicles for you family…because that's what I did…If I go, the beneficiaries will get the monies…
I have them both, I have a pension and 401k which i have seen on a roller coaster ride up and down seen it drop to almost nothing to growing like crazy. I don't really trust either one so why not have them both
I have been retired 12 years with defined benefit and a 2.5 Cola, I am receiving 72000 a year . I am 58, so when I am 68 it will be 90000
Great video! Thank you for sharing.
I have a Pension having worked for 33 years at a Firm. I had many opportunities to leave , had some very bad bosses, was on thin ice at times, had to earn my job every day , was always under pressure to produce and upgrade skills and they stopped funding at one point reducing my pension by 22 percent overnight. Now they send me a monthly check which I earned the real hard way. Having a Pension is great at retirement but you do sacrifice mobility during your career. I stayed partly because of The Pension.
One thing you forgot to mention was the different types of pensions, You have public employee pensions which typically are pretty solid given theyre funded by taxpayers, which you pointed out. then you have the private sector for example Ford, GM etc.. Usually these can be risky because if the employer goes bankrupt or the fund gets robbed. You are essentially screwed, and lastly you have the building trades unions. Our pensions are unique because all signatory employers with the local union collectively pay into a pension fund. There is no burden of risk left to a single employer. One important thing about pensions is the value always increases when you retire, when you start your 30 year career the amount they predict is always lower than what you’ll get because typically contributions are increased over the years.
I find it fascinating how employers can even afford to pay somebody who's retired for potentially decades after they've stopped working.
An example of why I do not trust traditional defined benefit pensions:
https://www.bloomberg.com/news/articles/2017-09-15/down-20-billion-boeing-stuffs-pension-fund-with-its-own-shares
Traditional pensions offered by the Federal govt. are sound. DB pensions offered by corporations or unions are regulated, and insured by the PBGC up to $54K/person/year. However the unfunded liabilities of state & local govt. DB plans probably exceed $5 trillion; hence these DB pensions are gravely at risk.
I prefer 401ks, especially the Roth variety, because there is no gambling over what the Revenue Code will be like decades down the road. DB pensions reward long service. 401ks and the like are much better suited for a career where one holds many jobs.
"401k plans have only existed since the 1980s…"
1981, to be precise. A predecessor to the 401k were the Keogh plans, introduced in 1962.
"…they were supposed to be used to provide added benefits to executives."
Wrong. From the outset, Federal law required that 401ks be offered to all full time employees. The only debate was over how much service was required in order for the employer's contribution to "vest".
"This simply means that employees can contribute up to a certain amount when they choose to do so."
Typically the employee is required to contribute a minimum percentage of his/her annual salary. The employee can choose to contribute more, up to maximums set by the Revenue Code (the %age maximum that I faced in the 1980s and 90s was 24%.)
The employer's contribution, which is voluntary, "vests" after a period of time, ranging from zero (immediate vesting) to a maximum amount set by Federal law.
"Over time, the employer…"
The EMPLOYEE.
"…takes 100 percent ownership of the money in it…"
All withdrawals are taxed as ordinary income. While withdrawals are possible at any age, withdrawals before age 59.5 are subject to a 10% penalty income tax.
"With the traditional DB pension plan, the trustee for the pension has control of the plan's assets, and tends to make very conservative investments so as to protect the pool of money."
Wrong. Underfunded DB pension plans have often invested in commercial real estate, hedge funds, private equity and venture capital, all high risk assets.
"In a 401k, the employee usually has control over how the money will be invested."
This is strictly true only when the 401k assets are invested in a mutual fund, and account owners have the right to move part or all of their money from one fund to another fund in the same fund family.
"Which Is Best?
The 401k would be the obvious answer if this question was asked five years ago. "
Wrong. 401ks looked very bad during 2008-11, because the value of the American stock market declined by more than 50%. But since the 2009 bottom, stocks have risen more than 4x.
"…a lot of employees realized that perhaps they weren't so great at picking stocks after all."
This is true over bull and bear markets. This is why a large majority of retirement investors should invest in low cost mutual funds.
"The idea of having a stable, conservative investment like those found in pensions has started to seem a lot more attractive to such people than it did before the economic troubles came along. "
A DB pension plan in no way is stable or conservative. Rather, the risks that it takes are not visible to those having a claim on such plans. DB pension plans do not reduce risk, but only shift it from employees to employers.
"If one is comfortable with the investment world, than a 401k makes sense."
That is why during my career, I always opted out of a pension plan, and always went with a 401k or equivalent.
"If you would rather leave investment decisions to someone else, a pension plan may be the way to go."
The only real investment decision that needs to be made, is how much of one's 401k assets should be invested in a stock market index fund, with the balance being invested in low risk long term bonds.
"I want control of my investments."
This control opens the way to grave mistakes.
"The second is I like the fact I can change the amount I can contribute to it each year."
This is meaningful only if one's income fluctuates a fair bit from year to year. A good thing to do with a one off surge in annual income, is to invest it in a 401k.
"This gives me a certain amount of flexibility depending on how the economy is performing."
Readers should appreciate that few of us have the ability to anticipate what the economy will do in the near future. The best strategy is to invest a minimum amount every year, investing more when one gets a temporary surge in income.
I have a worry that the contributions of corporate employers to 401ks are set to decline as this century unfolds, esp. if the FICA tax is increased.
yes the rider I like to know more about this
i have a state pension ..i must work at least 10 years before i can collect anything…pensions are when people worked 20-30 years at the same company..that does not really happen anymore. another thing about a pension is you cannot borrow from it under any circumstance like a 401k..at least not my plan you cant.
The key to managing 401k is to have access to change your investments quickly as in website access so you can move your money quickly before the market crash