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Home » 401K, Retirement Planning, Workplace Finance

Pensions Vs. 401K’s: Why you should Care that Pensions are Going Extinct

Last updated by on 52 Comments

Check out a more updated breakdown of pensions/401K’s in my post on defined benefit vs. defined contribution retirement plans.

Today’s Retirement Reality

Most twenty-somethings have never and (unfortunately) probably will never sniff the sweet security provided by a pension plan. So what are these mysterious things called pensions that many of our parents and grandparents lean on in their retirement? Why are they disappearing? And what are our chances of ever getting one? This is an essential issue for our generation, and I encourage you to read on and actively lobby your employer should you see fit. If you want change, it has to start with someone. Why not you?

What is a Pension?

pension vs 401kA pension is basically another word for a retirement plan. There are two types of pensions.

1. Defined Contribution Plan

A defined contribution plan is a type of pension where an employee, employer, or both contribute funds to an employees retirement plan. 401(k)’s are defined contribution plans. These plans are dependent on the returns of the investments that are chosen within them.

2. Defined Benefit Plans

A defined benefit plan is what most of us commonly refer to as a ‘pension’. These plans offer guaranteed automatic payouts in retirement based on a formula that usually takes into account your salary and years of service. The longer you work and the more you make, the higher your automatic payouts. Most employers offered defined benefit plans at one point. Social Security is a type of defined benefit plan.

The History of the Pension

For generations, pensions were the retirement plan standard for just about every employer. This may be hard to believe, but it wasn’t until the early 1980’s that 401(k)’s even existed. Ironically, 401(k)’s were originally added to the IRS code as a way for companies to offer additional retirement benefits to high ranking executives, above and beyond their defined pensions. This didn’t last long.

Over time, most employers have made the shift from defined benefit pensions to 401(k)’s. 401(k)’s were sold as the fresh new thing, giving employees all of the power to choose their own investments. In reality, they were often times a low to modest cost savings over their defined benefit counterparts. The combination of the appeal to the American individualistic ambition and cost cutting possibilities were the perfect storm to sell 401(k)’s over their elder relative.

A Pension Story that Hits Home

My father retires on May 1st. He put in 36 years with the State of Michigan. At one point in the early 90’s, the State offered him a 401(k) cash exchange for the existing value of his defined benefit pension. He turned it down. It was the wisest decision he ever made. In May, he will begin to receive over $3,000 per month in pension benefits above and beyond his living expenses. And this doesn’t even include Social Security, or the 401(k) that he started from scratch! He’s set for life and has the security in knowing that his pension benefits are safe and guaranteed.

Could he have had a bigger payout if he switched? Maybe, but most likely not. The stock market hasn’t advanced in the last 12 years, after all. Either way, I’m almost positive that he’s been able to sleep a whole lot easier back then and he certainly is now.

Eliminating the Security of Pensions

Unfortunately, stories like my father’s are disappearing. Not only has the guaranteed security of pensions been attacked, but I fear that we’ve hit a critical point of no return. 401(k)’s are now so ingrained in our culture that pensions are viewed as a Jurassic, boring old benefit of yesteryear.

To add insult to injury, employers have not only changed the plans, but they’ve scaled back the benefits as well. Many of my peers have 401(k)’s that only offer a 2 or 3% max 401K match. How can anyone retire on that, especially in light of recent market turmoil?? That kind of limited benefit is an absolute tragedy.

Even Social Security, a type of defined benefit pension, is under attack. Had the Bush administration gotten its wish, it would have shifted to private management as well. Right before one of the biggest drops in stock market history.

An Increase in Employee Turnover Without Pensions

Another unintended consequence of this benefit switch is employee turnover. At present, the employer turnover rate in the U.S. is over 40% per year! It didn’t use to be that way. Defined benefits offered employees a strong incentive to stay around and be loyal to their employers. How many baby boomers do you know that have been at their job for 20, 30, or 40 years? Sure, there has been a cultural shift away from loyalty in the workplace, but with the disappearance of pensions, is there any wonder why?

Why should employers care? They were able to cut some costs, after all, and that’s good, right? Here’s why they should care – it’s been estimated that employee attrition costs 12 to 18 month’s salary for each leaving manager or professional, and 4 to 6 months’ pay for each leaving clerical or hourly employee. When employees don’t stick around for 3 years, these costs start to add up.

Instead of a loyal, efficient, 35 year lifer, you’re looking at 13 employees who come and leave as soon as they get the skills they wanted to grow, or as soon as they get bored. They have no incentive to stay! So are employers really saving money? I’d argue that they are not. They have cut off their nose to spite their face. And they are paying enormous costs to do so.

You want a Pension?

Lobby your employer. Get others to join your cause. Help your employer research the costs of running such a plan, and the potential savings benefits over 401(k)’s that come from lower employee turnover. Appeal to them on their level – they want to keep good employees, and they want to lower costs that come from having to recruit, hire, train, and get new employees up to snuff. Work with them, not against them. Any research that you can provide regarding potential cost and talent savings is going to help your cause.

Pension Vs. 401K Discussion:

  • Are you upset that you may never see the security of a pension?
  • Do you like your employer enough to want to stick around for your entire career?
  • Would you rather have a defined benefit pension or a 401(k)? Take the poll!

Would you Rather have a Defined Benefit Pension or a 401(k)?

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About the Author
I am G.E. Miller, & this is my story. My goal is financial independence ASAP. If you share that goal, join me & 7,500+ others by getting FREE email updates. You'll also find every post by category & every post in order.


52 Comments »
  • Donnie says:

    I got the impression that pensions were not very safe to begin with.

    AFAIK, If your company went bankrupt, there went your retirement savings. That doesn’t sound very diversified. With a 401(k), if your employer goes down in flames, you should still get to keep your 401(k) account, which should be diversified (I think).

    I’m not sure if the purpose is to keep employees around, or just to not spend any money, but in most 401(k) plans, you don’t get vested in your employer matches in full until 5 years on the job.

    I would rather have a 401(k) that I can take with me when I leave a job. If I worked somewhere for 15 years, and then decided to leave, I would have no retirement savings to show for my 15 years if I was in a pension plan (I don’t think you can take it with you, I may be wrong on that).

  • Andy says:

    I am in the military, one place the pension is still one of the major benefits. As Donnie pointed out, however, it does create some of its own dilemmas. If at 15 years I want to try something new, or move in a different direction, I walk away with no pension. I’m saving on the side in a Roth IRA, the TSP (our version of a 401k), as well as other taxable investments, but serving for 15 years and then walking away with no pension would be very difficult. I’m committed until my 11 year point, which will make for a very difficult decision when the time comes.

    I don’t think that 401k’s are quite as bad as you make them out, so long as they are used intelligently. If used to their fullest extent, they work just as well as a pension and offer a level of flexibility that pensions do not. The problem is not with the 401k or the employers that offer them. Instead, the problem is with financial education in our country which produces high school graduates (and often college grads) that can’t tell the difference between a pension and a 401k. If the school system doesn’t instill this type of knowledge, parents must start educating their children on the intricacies of personal finance. Bottom line, I think it is the personal responsibility of the parent and eventually the individual to learn how to take advantage of any opportunity they have to make their retirement the best they can.

    • Patrick S says:

      You don not have to work at your job your entire career to be entitled to a pension. I stayed at one job for 11 years. I have a “vested” portion of that pension. I stayed at another employer for 8 years…I have a ‘vested” portion of that pension.
      One job will pay me a benefit of $900 per month upon retirement and the second $549 per month upon retirement.

      This is then added to my 401k and Social Security. I’m not too worried.

      • Ally says:

        Seriously? What leads you to believe you’ll have Social Security upon and beyond retirement? The dwindling of pensions is a serious problem. I have saved for over 30 years in a 401K. It will not be enough to meet my needs, especially with the advent of dwindling and/or disappearing social security.

    • keely says:

      My grandfather worked for a company for 5 or 10 years. He left the company, and within the 50 years that passed, the company went out of business. The company administering the pension found my grandfather at 80 years old (it took them a while to find him from the time he retired he had forgotten about that pension) and started paying him his checks. It was only 70 dollars but it was something. That whole thing taught me the beauty of the pension. I’m pretty sure pensions can’t be treated as an asset and liquidated in a bankruptcy. And if you don’t think 401k’s are as bad as this man points them out to be ask the 60 and 70 year olds who had retirement in their grasp 10 years ago and are still working now because they lost EVERYTHING in the recession.

  • stephanie says:

    Honestly, I don’t think that it is in any twenty-first century company’s best interest to have people sticking around for 25+ years. I know this sounds crazy, especially with the cost of hiring and training new employees.

    It’s a known fact that most people who are in long-term jobs learn a skill set and then rarely bother to improve themselves or keep up with the latest technology. As the employment culture continues to shift from physical labor to mental labor, it is increasingly important that employees stay on top of the game in order to be valuable to their companies. How many people really make the effort to do that when they’ve been at a job for ten or 15 years? Look how many people have been laid off in the current economy and immediately start trying to learn new skills since they realize they are behind in the game. If someone’s resume wouldn’t make them a valuable resource to potential new employers, why do we assume they’re a valuable resource at their current job, just because of the amount of time put in there? If I were an employer, I wouldn’t want people working for me who would be happier and more productive elsewhere, but who want to put in their time so they’re vested in the company pension. If “loyalty to the company” is defined as wanting to stick around until I can get a pension, there are major potential downfalls for employers.

    My father is a perfect example of this. He’s been doing computer programing for his employer for 20 years. Right now, he does basically the same thing that he’s done since he started there (although he does travel for work significantly less than he did when he was younger). His employer hasn’t encouraged him to keep his skill set up-do-date, because the skills my dad has are perfectly fine for what his employer needs. At this point, my father would be much happier doing something else, but is too scared to pursue another path since he has a stable salary and (meager) benefits. I think this is very typical of people who have been in a job 10, 15, or 20 years. So now, my dad and his employer are both losing: my dad, because he’s not happy or fulfilled at his job, and his employer, because he has a long-term employee who has an outdated skill set and who would rather be elsewhere. I think pensions encourage this sort of situation, and I know I’ve seen it happen with people other than my father (another example: my friend’s mother, who took about 5 months of vacation time during her last year at work before retiring – please tell me how you think she was efficiently and regularly meeting with clients during that year, and how much her mind was on doing the best job she possibly could). I definitely would not want to confuse people like these with the “loyal, efficient, 35 year lifer[s]” that you see receiving pensions.

    I might write a post on this of my own sometime. I feel like I could go on about this for quite a while!

    • Ryan says:

      Many employees who have worked for the same company for years are very productive and constantly change and adapt. How else do you think they have lasted so long? In addition, many of the empolyees that have worked for so long for one company are more dedicated, loyal, trustworthy, don’t stab people in the back and have a much better work ethic than people who jump from job to job. I have known some very sharp individuals who make terrible employees because when they initially start a job, they work very hard and excel – however, after a couple of years, they become bored and move on to another job before their lack of performance catches up to them. Eventually, these people become unemployable because they have worked for so many companies and employers see them as a liability. If I was an employer, I would take the long, steady, hard working individual who is flexible over a flash in the pan any day.

  • Teacher says:

    I am a teacher in Indiana and am thankful that we still have a pension plan. It is one of the ways to account for the low salary and the lack of a 403b match.

  • Steve says:

    I don’t think GE is suggesting to do away with 401(k)’s completely, rather to still offer some sort of defined benefit pension for those who WANT to stick around for a long time at their employer. Make it an option to choose either based on your personal preferences. Sure, job hoppers won’t get much out of a pension, but why not reward those who embrace longevity with their employer????

  • G.E. Miller says:

    @ Donnie – Your first point is a common misconception. Private employers in the U.S. must pay in insurance premium to the Pension Benefit Guaranty Corp, so that if they do go out of business the PBGC oversees the plan and payments.

    @ Andy – Thank you for your service. I’m not saying that 401(k)’s are bad. I love my 401(k) because the match is great (50% of my contributions). However, I do think that 401(k)’s where the employer only matches 2-3% or less are worth much of anything. That’s a benefit of just a few hundred dollars per year, and we made the shift away from pensions for that? That type of weak benefit is not an incentive to save for retirement, or stick around at an employer.

    @ Stephanie – you bring up some good points, but I don’t agree that ‘lifers’ are all lazy and not willing or eager to learn new skills. Some just truly like their job, the people they work with, and the stability. There should be no shame in that.

    @ Steve – exactly, not saying that 401(k)’s should be eliminated, just saying that we should have the option, or have both. There are actually hybrid defined benefit/contribution plans out there and most employers with a pension plan also offer a 401(k) and 401(b) in addition to the pension. The best of both worlds! These employers should be commended.

  • Shaun says:

    Pension plans, like moth financial tools, are a double-edged sword, as a few have mentioned above. Personally, I’d rather have my retirement completely in my own hands — it both seems and feels more secure to me.

    That said, I hope to start my own business soon, so I suppose that’s a moot point. :P

  • Andy says:

    G.E.,

    I agree that a 2-3% match of a 401(k) is not an incentive to save for retirement. On the contrary, my incentive to save for retirement is the fact that I don’t want to work for the rest of my natural life. The 401(k) and other investment vehicles are simply tools to achieve that goal. Pensions, in a business sense, are suicide in today’s environment (reference the auto industry). The reality, in my opinion, is that no matter how much we lobby employers, pensions will continue to fade away as businesses realize they will not maintain a competitive advantage with them on their balance sheets. Instead, we should move towards policy that forces opting out instead of opting into smart financial decisions. The bottom line is if someone wants to achieve financial independence, they must spend less than they earn and save the difference. The bigger the difference, the quicker financial independence will come. If someone takes this route, eventually a pension will become nice, but unnecessary.

  • Neil says:

    Defined benefit pensions schemes are being shut down in the UK as well. One of the major problems is that companies took advantage of good periods of stock market growth to cut back or even stop their contributions to the schemes. Now that the stock market is falling they find the scheme has a big deficit.

    I for one would much prefer the security of a defined benefit scheme but my current employer won’t allow employees to join it until they have 3 years service! (1 year to go :) )

  • Loren says:

    I think in a post-social security America where retirement is assumed, pensions are a great benefit and likely better for company and employee than defined contribution plans. My question is about why we assume that the goal at the end of life is to stop working yet continue to receive an income. It sounds boring to me and I’d like to continue adding value and earning an income for as long as I’m healthy. I feel like it’s my responsibility to save and invest for myself after that time.

  • G.E. Miller says:

    @ Andy – I don’t think pensions are corporate suicide, but I do think that corporations want you to believe they are. GM’s pension is actually well funded.

    From U.S. News: Even during a financial downturn it may be possible for companies to continue to provide workers traditional pensions. General Motors, a company that recently asked for taxpayer funds, appears to have enough money in the pension fund to pay its more than 400,000 retirees their promised benefits for many years.

    Health care for retirees is another story. The Times reports: The total cost of these benefits in today’s dollars was estimated at $60 billion at the end of 2007, and G.M. had set aside only about $16 billion to cover the cost.

    @ Loren – what’s not to like about not working and receiving an income? See the world, spend more time with friends/family/pets, volunteer more, pick up new hobbies, leave the stress of the rat race behind. I don’t want to work until I die unless I’m bored. I have a feeling I won’t be bored in retirement though.

  • Isaiah says:

    If a business can afford to offer pensions or match more than other companies for a 401(k) then more power to them. However, I believe that we should rely less on employers and more on ourselves. Of course it would be smart to find an employer that is able to provide many benefits but I plan on living as Andy said: spending much less than I earn and investing/saving the rest.

  • Britt says:

    @GE – My dad also retired through the Virginia Retirement System after 39 years. Due to different tax treatment and not having to pay social security taxes, his take-home pay is substantially higher than the last year he worked!

    So I also witness the value in a defined benefit pension on a firsthand basis.

    I agree employers should provide the option and let employees choose.

    You can then supplement your DB pension with a 401(k), Roth IRA, traditional IRA, 403(b), etc.

    @Shaun- I also prefer to have retirement in my own hands. The problem is too many people haven’t proactively educated themselves in regard to their retirement options and the many that have lacked the discipline to carry out a viable plan.

    While I could easily say, Well, that’s their problem. It could and will become our problem when Social Security goes bankrupt and millions of voters demand that producers like us pick up the bill. You can be sure that there will be no shortage of politicians willing to promise your money to someone else.

    That said, I think one of the silver linings in the current financial crisis is that it’s forcing a lot of people to take a more realistic view of their financial situation. People are now interested in personal finance. Thrift and saving is fasionable again. I think these trends are here to stay, and it’s a good thing. In the end, it may be what says the industrialized world from bankruptcy.

  • John C says:

    There are a few reasons why we’ve seen companies move away from defined benefit pensions to defined contribution plans and Neil touched on the biggest of them. With a traditional pension plan, the company carries the investment risk. During periods of stock growth, the company can contribute little. But when markets decline (as they have recently), significant additional contributions are required – and those contributions come directly off the corporate bottom line. Above all else, Wall Street values consistent and predictable profit growth in companies and the growing volatility of investments subject corporate earnings to uncontrollable market conditions. Pension plans also face the risk of an aging population. The average 65 year old retiree in 1960 might have been expected to live to 75. Today’s 65 year old retire might be expected to live to be 85. Those extra years of pension income means the retirement cost of that employee just went up. With medical science continuing to advance, how long might the retirement of today’s 20 year old be?

    By moving away from defined benefits to defined contributions, all of those risks to corporate profits go away. They no longer have to worry about market performance. They no longer worry about longevity and how long the money has to last. They just have to make a nice predictable contribution to 401K Accounts and they are done with no future risk. Of course, the issue with that is that it is us – the workers – who then take on those risks. We now bear the risk of market returns. We are now the ones who have to worry about living longer and running out of money. More than anything else, the move from defined contributions to defined benefits is a transfer of those risks from the company to the workers.

    Perhaps the worst part about transferring risk from the company to the individual is that you lose the ability to pool and protect against those risks. Someone retiring today will have to start drawing on a 401K balance at the worst possible time. They are selling stocks at their low point. Someone who spends the first few years of retirement when the market is at its peak is in a much better position and is far less likely to deplete his retirement accounts. But when you pool market risk (as in a pension fund), all of that is averaged out. You also pool longevity risk. The person who survives to age 110 doesn’t have to worry about outliving their individual savings. Pooling of risk is the foundation of the insurance industry and it worked well with certain elements of retirements as well. But individual defined contribution accounts remove that pooling and leaves each individuals with more total risk than the company had as a whole.

    All that said, pensions were never perfect. For one, they are not owned by the individuals, but rather are an asset of the company and therefore can be raided by the company. 401Ks, as assets of the individual account holders, are more secure in that regard. And pensions gained most of their value in the last few years of a career, so they wouldn’t provide much security to someone who moves between jobs.

    Though probably the largest reason, the transfer of risk isn’t the only reason why pensions are disappearing. To a large extent, we have done it to ourselves by fixating on salary numbers and the salary number is bigger when you receive the extra money and then have to pay it into a 401K than when a pension is funded “behind the scenes”. If we had demanded a pension instead of a chasing after the biggest salary, it would have been harder for companies to abandon pensions. But we not only made it easy for them, we probably helped force them to do this to us.

    The real question will be what happens when a large wave of retirees emerge with limited savings and no pensions? Will the government be willing to let a huge number of vocal (voting) retirees live on social security benefits alone? Or will it be those of us still in the workforce who will be asked to pay “our fair share” to support those who saved nothing? In the end, did the risk really go to those individuals or will it end up on the back of tax payers?

  • Phinance says:

    Although I agree that pensions could be dangerous if your employer goes belly up, not knowing what to do with your 401k could hurt your retirement a lot as well. Most of us aren’t trained in how to deal with even the most basic of finances – that’s dangerous.

  • Andrea (Recession Proof Living) says:

    My husband is a school teacher, and the pension system is one way to retain good teachers in a tough job situation that doesn’t pay much. I’m surprised more employers don’t use this important tool. Then again, too many employers these days regard employees as disposable assets and don’t care about retention. :(

    • Sheri says:

      I completely agree. At my previous employer a standard answer from them when you had a problem was,”Quit then, we have 10 people standing in line who want your job.” This is really sad as I am a trained clinical professional and training someone to do my past job at the rate that I did took 3-4 months at least. Think of the money they lost in those 3-4 months! The position I held went through 13 employees in the six years I was there. I had trained the majority of them. They all left for the same reason…they felt a lack of loyalty from the employer.

  • belldirect says:

    My grandmother has a pension. She earned it during her youth years and tt is more than enough to keep her living comfortable. I am at my early twenty’s and I already started a retirement plan. Sad to say, many pre-need companies shut down resulting for the downgrade of pension plans credibility and reliability. The only thing that is left now is the Social Security of which is also facing a challenging time today. Though pension is not as popular as it was before, I would still go for it than the 401(K). Not only that the stock market has not advanced in the last 12 years but it is too volatile which placed 401(k) in a very shaky position. It makes me even wonder if I will be able to receive any money when I retire if I shift into 401(k). I do not think so.

  • freeannualcreditreport says:

    The pension plan is the one of the good way to account for the person who has a very low salary rate (like me).

  • nghe nhìn says:

    Thanks! I really very care of pension, because that is money which need for my life & wife

  • Evgeniy says:

    Has voted for Defined Benefit Pension.
    Good example about your father. The pension should not be exposed to risk.

  • Steve says:

    This is soooooooooooooooooooooooo true. Pensions were guaranteed money and outpace inflation. The general public has noooooo idea on how to manage their own finances in order to live a fruitful retirement.

    • Ray Ashworth says:

      The ordinary person has no idea how to manage their finances? How can you take your income and balance your expenses on an everyday basis? How can you raise children if you can’t handle money responsibly? Thousands of people would love the freedom in this world to have a paying job, a market where their money goes far and the products available are bountiful and at the lowest cost possible. They would trade their situation for the freedoms we enjoy any day of the week.
      Who better to handle your finances than you. Please sit down with your parents and learn how they did it. Most will tell you of their own accomplishments and with satisfaction and pride. Your grandparents are another source. Lastly talk to your friends and neighbors and learn some of their success in handling money. You can do it. People learn and education can help you.

  • Dan says:

    I am 55 years old and have worked for the past 15 years for a fortune 100 company. Two years ago we were given an option to stay in the pension or go to the enhanced 401K. The company gave us a chart of expected benefits. I choose to stay in the pension because of the chart. The company announced this week that it was dropping its pension for everybody in two months, and everybody will be part of the enhanced 401K.

    The charts they give us now indicate that I will loose about $220,000 in retirement benefits. This is not fair, but is it legal? I am 55 and can not make up $25K a year for 10 years to make up for my loss.

    Is there some organization that I can go to to help me fight my battle?

    • Frank says:

      This really scares me. I am doing the same thing right now and am having difficulty choosing which to go with; the enhanced 401k or pension. I was thinking of keeping the pension, OMG!!!!!

    • Frank says:

      I am being forced to choose enhanced 401k retirement plan with 31/2 percent contribution match and another 4 percent on base pay or pension plan with savings with no match. Any comments would be appreciated. I lean towards the pension but after reading one story on here, where pension was lost; I really don’t know now!

  • Steve says:

    I totally agree with Isaiah. Before we even start out in our careers we need to educate ourselves about our pension options. I mean no-one else is going to do it for us! Too many of us have this ‘live for today, worry about the future when it happens’ attitude! This is true for most 20 somethings, not just in America. I’ve just moved to Australia and they have something called superannuation here; employers have to contribute 9% on top of employee wages. Employees have to choose their own super fund to be legal to work and the market is competitive…there is soooo much choice!I’ve now been forced to consider my future investments and the scary thing is I should have worried over it sooner…

  • Deb says:

    I have a defined benefit plan and I am happy I do. When I retire I will receive 85% of my pay as well as my social security. I should have no problem getting by. The majority of my friends and family with 401k’s have lost huge amounts in their 401k’s due to the market fluctuations and now have to change their retirement plans because they are in their mid to late 50’s and can’t make up that loss by the age they had planned to retire.

  • Natalie says:

    My mother works for the state and has a very nice defined benefit plan. She never saved, but now after working for the state for 15 years she will be able to retire on time and keep her current standard of living. I, however, prefer a 401k plan because it is held by an independent company and I am not at the mercy of the company. Read Dan’s post, that’s why I’d rather have 401k than a pension.

  • Sandy says:

    I’m very, very happy to have the pension plan upon which Social Security was based (CPG). Unlike SS, it was started with a pool of money, managed well, and its capital can’t be borrowed from. It’s increased payments to match inflation every year for the last 30 years, and they’ve added other benefits as the years have gone by (Christmas bonuses, etc.). The fund is overfunded to the point that it has more than enough to pay all retirees and current employees if no new monies came in. It IS possible, don’t let people tell you otherwise.

  • Bob says:

    There have been cases of companies going bankrupt and pension plans disappearing as a result.

    Check out the government (Dept of Labor) website:

    http://www.dol.gov/ebsa/newsroom/fsbankruptcy.html

    “In a Chapter 7 bankruptcy, the company liquidates its assets to pay its creditors and ceases to exist. Therefore, it is likely your pension and health plans will be terminated.”

    The article implies that everything was hunky-dory with pension plans until greedy capitalist companies switched to the “latest thing”, which was 401k plans that offered a slight cost savings for the company and appealed to our fondness for individualism. However, pensions were not all that safe prior to ERISA and later safeguards:

    “A classic case of the unfortunate consequences of an underfunded pension plan is the 1963 shutdown of Studebaker automobile operations in South Bend, Indiana, in which 4,500 workers lost 85% of their vested benefits”

    Another huge advantage of 401k’s is the ability to pass it on. This article and the comments thus far have focused on the security of having a pension “for life”. Okay, let’s say you work for 36 years and earn a pension of $3000 per month “for life”… and then a couple of years into retirement, you die. Your pension plan is now over.

    Suppose instead, you contributed to a 401k plan for 36 years and your employer contributed a percentage of matching funds. Your contributions (the money You put in), are yours from day one. The money your employer contributes is subject to “vesting”, but would become yours after several years… so after 36 years of work, it’s all yours. You retire with several hundreds of thousands of dollars in your 401k after 36 years of contributions and company matching, plus tax-free earnings, you begin withdrawing $3000 per month… and then a couple of years into retirement, you die.

    Guess what, your heirs now get the 401k money… unlike a pension that ends when you die.

    Gee, that seems like a significant fact to leave out.

    401k plans typically offer a wide range of mutual funds (collections of stocks) and bond funds, and employees can easily spread thier money to be diversified and balance risk vs security depending on each persons needs and comfort level. When you leave a company, you rollover your 401k into an individual plan. Over time, 401k plans easily outperform pension plans. Don’t let a couple of bad years in the stock market scare you. You are investing for retirement, which is many decades away.

    The “fact” that “most people” aren’t savvy enough to know how to invest, if true, just means that people need to do a little research and educate themselves… not wish for outdated pension plans that have numerous drawbacks.

  • ambi859 says:

    If you work at a company for 15 years, you will be fully vested and receive a pension. That is my understanding.

  • Jim says:

    I am a 54 year old male that was recently faced with the dilemma of staying with a company that had a 401k with no company match, but paid about 25% more than another company which has a traditional county pension. All my life I have contributed to a 401k which now is around $200,000. That may sound like a lot but it really isn’t. The trouble with having a 401k and only social security is that unless you can accumulate maybe a million or two in the 401k you will have to spend down the principal instead of living off the interest if you live long enough. A pension is a check that will be there with you for the rest of your life (assuming the company or state doesn’t go belly up, and I know that is a big if)whereas you can go through your 401k principal very fast when getting sick as you get older. I took the job with the pension, hope its there in 12 years when I retire, and am learning to live on a lot less money then I had in the past. Good luck to all of you on what is a really big issue as you get older, even though you don’t think you ever will…

  • Olman says:

    I started out as an tech grad and worked for GE 1968-75. Got laid off and now am interested in a possible pension. So guess what, I can’t find the original GE department I worked for. Guess I got a lot of Google searching to do. When young one does not think of pensions. GE has the money I just have to figure haw to get my share. If your young, it is hard to see your future path in life. So plan ahead as best you can in these uncertain times.

  • Julia says:

    Call me competitive, but I prefer a higher salary and 401k to a pension. I don’t want to sound insensitive, but I prefer a capitalist economy to a socialist one. I take pride in having the ability to save and invest on my own because I work my ass off. I don’t think I’d get the same reward with a pension. Am I missing something?

  • Bill says:

    The elimination of employer and government provided retirement benefits is a large component of Reaganomics and the conservative principles. Taxing incomes of $250,000 or more kills jobs so what we need to do is to eliminate taxes on incomes of $250,000 or more.

  • k.s. says:

    I am a financial planner with a client that has a mandatory contribution plan. Every year, the employer(in his case the government) takes more than 10% of his income each year, and there is NO option to pay less. If he doesnt want to contribute to the pension plan, it means he doesnt work there anymore. When looking into his prospectus, it states that he has a ‘defined plan’…

    Yet when you really analyse it, it is only defined if he works at the same intensity for the next 35 years, and then he will probably get $60,000 per year. IN 35 years ask yourself what is the true worth of $60,000? We all remember the days of 1$/gallon gas, and that was just a handful of years ago wasnt it?

    I feel sorry for him, because I have calculated that if he put the same amount of money in his own investments(indexed the contribution to inflation), and we calculate a return of 6-8% return annually, he would have over 1.5million to 3.5million in his own personal account at least. By just living off the interest from his own pool of money, he could have just as much as this bloodsucking pension each year and more to do whatever he wants with. Furtheremore, with an investment horizon of 35 years even an 6-8% return year on year is a conservative estimate and most likely would be more.

    I say bloodsucking, because in pension plans, there are so many levels of management, the investments are mostly in fixed income securities, and you do not own anything. When you die, your spouse may get a fraction of the pension, and when the spouse passes away, the family gets nothing.

    Pensions are a device of unions and governments to generate their own profits at the expense of the workers’ hard work and income.

    Find an advisor you trust, and keep YOUR hard earned money in YOUR name for your family regardless of what happens to your ‘secure’ job. If a company is adding money to your contribution that’s fine, but never contribute more than 50% of your retirement contribution to a pension plan, keep the rest for yourself.

    As for my client, I am finding ways so that he can build a parallel investment plan.

    Recent history has shown us that pensions and companies and governments cannot be trusted to handle our money, so why give it away for the ‘security’ of a payout you dont own and have no control over? Pension money just doesnt appear out of nowhere because of your loyalty to the company…it has been invested in the market, and is leeched by fees that are invisible.

    You may say well, advisors and fund companies will have fees. Yes. However, they are all clearly stated. The result: you know exactly who and what you are dealing with. You may say, what if the market goes down? Well we have seen that when markets go down, when companies go down, pension plans and their contributors are often on the front line of losing. With a investment plan that has a proper risk-to-age plan implemented, market losses in and around your retirement years will have a negligible effect.

    If you look at the market for the past number of decades, there has not been one 30 year period that has resulted in a negative loss – in fact a return of 9% year on year is an entirely reasonable figure, and proven to be expected, for this length of time.

    Pensions have and always will result in less return and control and ownership for the contributor. You give up control and greater returns for ‘security’ that isnt really there.

    Let us look at it another way, How about putting your home up in a ‘company mortgage plan’? You pay into it for 30 years, and then when you retire you get to live in the house for the rest of your life, but you dont own it. You can live there without any more payments, but when you and your spouse pass away, the company gives it to another company mortgage contributor(worker).

    Sounds ridiculous doesnt it…you should own the house right? You should be able to sell it or pass it on to your family since you have been there so long and dutifully paid for it? In a pension plan, when the contributor and their spouse pass away, all their contributions go back into the pension fund and are distributed to the fees of the pension plan and the payouts of other workers.

    And dont even get me started on Annuities from insurance companies daggone it, they are the same kind of leeches pensions are!

    Have I said enough?…keep your money. period.

    • Frank says:

      I don’t know if you read my story on here but I have to choose between enhanced 401K or pension plan. I am choosing enhanced 401K, at least I can take it with me when I leave the company. I will contribute up to the company match and also to a separate Roth IRA. I plan on retiring in 20 years; I will be 70 years of age. The pension plan offered at this point is still under negotiations and is therefore not guaranteed right now. All terms can change at their discretion. This also makes me uneasy about the whole thing. I am retired Air Force and have worked for this company for approximately five years and am eligible for a partial pension plan that ends this year; available to me after retirement. Thank you for the comments left on this website!

  • Ray Ashworth says:

    This is a very misguided article. There are very few people in investing that will agree with this. You need to get around the financial realities of the world of business and investment. Do you want to own your own money and make your own choices win or loose? Or do you want to turn your money and your future over to someone else? Two classic examples of risk to pensions, Kaiser Steel in California, and United Airlines. See what happened to their pensions. When companies go down or thru bankruptcy pensions are no longer provided for. The company looses and your retirement looses too.
    This is a fools trade, your security to another’s schemes. If the stock market was so bad, then all companies, even the one you work for are all losers. Apple is not a success but an illusion. Even if you love the iphone, it would be foolish to put your retirement money in Apple. You would be so much better off if you invested it with your local state government through their retirement gaurantees. Every election cycle throws old laws up for revision.

  • Scott says:

    Pensions are the reason that GM was in Trouble, Pensions are the reason why so many state and local governments are in trouble. The reason they are so attractive is becasue they are unsustainable. A 401k with a 2% or 3% match may not seem like much but it is something. There is nothing stopping an employee from contributing more to their own retirement plan if they wish.

    If the a company is offering a Pension today you can almost guarantee thay it is Union, Government (Or Both) and ultimatley doomed for failure.

  • Gary says:

    I am one of the lucky few who had a defined benefit plan (pension) AND a 401K plan which was in place for about 20 years. I believe that one would have to call the 401K plan experiment a failure if the goal is to replace a pension. Our 401K switched administrators several times, but we were with Putnam, Strong, and Wells Fargo. The Strong and the Wells Fargo were heavy with proprietary funds.. funds only available through the 401K and not openly traded. They usually featured very poor performance in terms of returns, and your other options for investments were limited. Through the 1980’s and 1990’s this didn’t matter, but since 2000, the market has reacted differently and will continue to be a yoyo, because of the global economy, the European Financial Crisis, and the US dept crisis. We are going to see a whole generation of people ill equipped to retire….

  • wtksk8r says:

    Companies always tell you that your salary is not your total compensation and that the benefits they provide comes to almost a third more than you are paid. What I find interesting is that when GE (where I work) stopped the Pension Plan and gave the employees a more generous 401K package, the added monies put into the 401K even if the employee puts in the maximum is much less than what the growth in the Pension Plan would be for that employee. So in effect these people are taking a pay cut without feeling it now (but boy will they ever when it comes time to retire).

    Financial planners say one needs around 10x your last salary in savings if you want to retire comfortably. I started with GE’s 401K program when it was introduced and put in the maximum every year and still after 35 years it only has about 4x my current yearly salary. Add in an estimated lump sum value of my Pension and I am well over 10x and am currently looking to retire next year.

    My take on this is that folks without a pension plan should look at an added savings – IRA, Roth… and get in touch with a financial planner to map out a strategy or else it will be painful down the road.

  • Albert says:

    I have a question, I am member of a union just started a couple years ago and the pension and benefit package is fantastic and really the only way to go I’m 53 so I’m aware of how the 401k works and my long term benefits with the pension will workout much better.

    My question which I can’t seem to get a straight answer for is. When the “Retirement Plan” box is checked on my W2 by an employer that contributes to my Construction defined pension plan ( I’ve only had one employer check this box ever). Can I still contribute to a separate IRA I fund my self and deduct that from my taxes and pay taxes later when I retire. If so I need the IRS code to send in with my taxes so the IRS KNOWS IM DOING IT RIGHT

  • Bill L says:

    Tail gunner from the Baby Boom Here.. I began the major part of my Career in 1980… Just when Employers got hooked on using Nazi methods of fear of losing one’s job (AKA DOWNSIZING) in place of solid benefit packages, I hooked up with companies offering real pension plans Twice.. Sadly the first Company a Bank used it’s benefits to strangle employees with “Austerity” budgets where they chained the raise pool for hourly employees to between 1 & 3 percent. Funny how the Austerity evaporated the higher up the pay scale you went. My second Employer with a pension plan was very old school liquor company, not just a pension employees could look forward to “gifts” at all the major holidays as the Company passed bottles of product out to all employees. We also enjoyed some of the best Christmas Parties I can remember always Catered affairs at either Hotels or Bars, Not enough? Departments also had Company Picnics Also Catered with Families welcome and bounce Castles and other entertainment for the kids provided. Sadly they moved their operations west when I was in my 8th year there or I’d be there still working on year 32.. At any rate my partial pension kicks in when I hit 65..and while not the windfall your Father gets it is like his a secured benefit I know will be there..
    Point about 401K’s since your 401K buys Stocks/Bonds whatever as a group block when they lose value even if you wanted to you couldn’t “Hold On” to a stock as you could as an individual buyer.. when the statement says you lost 3% over a given period well you lost it.. now when your investment grows by say 3% it’s the amount you used to have growing 3% which is less of a growth than you’d have had before the loss.. so a bad month/quarter can’t be offset by a good month/quarter of the same amount.. pitfall of a 401K.. my Pension was based on a percentage of my salary and will be the same despite whatever the Company or the market does

  • Rod from Indy says:

    Pensions are great for those who stay long enough to be vested, and as long as it’s a stable company. But I’ve worked in local government for three states – six years in Denver, Colorado, eight in Wilmington, NC, and seven in Indianapolis. None of the pensions are transferable, so I have no pension buildup whatsoever. Unfortunately, for my best interests I am resigned to staying in Indiana for another thirteen years so I can get a full pension.

    Also, as I and others mentioned, it depends on the stability of the company. My father worked for a factory for 29 years and nine months in Muncie, Indiana. He showed up to work one day and the doors were closed, they filed bankruptcy, and the employees were shafted. Many years later, and hundreds of thousands of dollars in attorney fees later, a judge ruled that because one little office of the corporation was still open out in the middle of nowhere they could not claim to be closed, and the employees were entitled to something. So, after nearly thirty years, my father gets $146 per month. Better than nothing, I suppose…

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