It seems to me that the employer will fund it either way. Maybe I’m misremembering stories of pensions being mismanaged and lost. I think the most important thing is that the employer actually does something to fund a retirement, in my way of thinking the 401k approach puts me in control of the money so I don’t rely on someone else to not fail.
Whether it’s promised bonuses, stocks, or retirement funds, my motto is always “show me the money”, and I’ll believe it when it’s in my hands.
I think you meant desire not desite
I’m personally with you. I prefer to manage my own money rather than hope my employer is solvent 40 years from now to pay a pension.
Some people don’t want to to think about investing in their own retirement, and they see the pension as a more stable and safe solution.
401ks have way too much fluctuation and uncertainty. I’ll take the stable pension any day. But IMO the stock market is unethical and should be destroyed.
I put a good chunk of my 401k in CDs.
Edit:
It’s less than an 8th of my fund, just because I don’t like where the market is sitting right now, I’m keeping something secure in case something bad happens to me while something bad happens to the world.
My point was to respond to someone who is morally opposed to stocks. There are other ways to go about it (irrespective of good advice).
That’s a terrible strategy. You are going to cost yourself years of retirement.
Unless you are retiring in the next decade, it is highly advisable to invest a 401k in the stock market. You get significantly higher returns over the long run. And any losses due to a recession are more than made up for by the significantly higher returns every other year.
When you are nearing retirement (5-10 years out), that is when you want to put the money into something safe and stable like bonds or CDs. That way if there is a recession as you retire, it won’t affect your fund.
Notwithstanding the possible typo in the title, I think the question is why USA employers would prefer to offer a pension over a 401k, or vice-versa.
For reference, a pension is also known as a defined benefit plan, since an individual has paid into the plan for the minimum amount will be entitled to some known amount of benefit, usually in the form of a fixed stipend for the remainder of their life, and sometimes also health insurance coverage. USA’s Social Security system is also sometimes called the public pension, because it does in-fact pay a stipend in old age and requires a certain amount of payments into the fund during one’s working years.
Whereas a 401k is uncreatively named after the tax code section which authorized its existence, initially being a deferred compensation mechanism – aka a way to spread one’s income over more time, to reduce the personal taxes owed in a given year – and then grew into the tax-advantaged defined contribution plan that it is today. That is, it is a vessel for saving money, encouraged by tax advantages and by employer contributions, if any.
The superficial view is that 401k plans overtook pensions because companies wouldn’t have to contribute much (or anything at all), shifting retirement costs entirely onto workers. But this is ahistorical since initial 401k plans offered extremely generous employer contribution rates, some approaching 15% matching. Of course, the reasoning then was that the tax savings for the company would exceed that, and so it was a way to increase compensation for top talent. In the 80s and 90s was when the 401k was only just taking hold as a fringe benefit, so you had to have a fairly cushy job to have access to a 401k plan.
Another popular viewpoint is that workers prefer 401k plans because it’s more easily inspectable than a massive pension fund, and history has shown how pension funds can be mismanaged into non-existence. This is somewhat true, if US States’ teacher pension funds are any indication, although Ontario Teacher’s Pension Plan would be the counterpoint. Also, the 401k plan participants at Enron would have something to complain about, as most of the workers funds were invested in the company itself, delivering a double whammy: no job, and no retirement fund.
So to answer the question directly, it is my opinion that the explosion of 401k plans and participants in such plans – to the point that some US states are enacting automatic 401k plans for workers whose employers don’t offer one – is due to 1) momentum, since more and more employers keep offering them, 2) but more importantly, because brokers and exchanges love managing them.
This is the crux: only employers can legally operate a 401k plan for their employees to participate in. But unless the employer is already a stock trading platform, they are usually ill-equiped to set up an integrated platform that allows workers to choose from a menu of investments which meet the guidelines from the US DOL, plus all other manner of regulatory requirements. Instead, even the largest employers will partner with a financial services company who has expertise on offering a 401k plan, such as Vanguard, Fidelity, Merrill Edge, etc.
Naturally, they’ll take a cut on every trade or somehow get compensated, but because of the volume of 401k investments – most people auto-invest every paycheck – even small percentages add up quickly. And so, just like the explosion of retail investment where ordinary people could try their hand at day-trading, it’s no surprise that brokerages would want to extend their hand to the high volume business of operating 401k plans.
Whereas, how would they make money off a pension fund? Pension funds are multi-billion dollar funds, so they can afford their own brokers to directly buy a whole company in one-shot, with no repeat business.
Pension funds are multi-billion dollar funds, so they can afford their own brokers to directly buy a whole company in one-shot, with no repeat business.
They’re not usually run this way. Generally pension funds are the same as your 401k, but on a bigger scale. They also usually focus more attention n managing risk and expenses…… I used to work for a company that did exactly this for some insane number of hundreds of billions of dollars
You might invest part of your 401k in a public shared sp500 index fund, a pension plan might invest part of its money in a private sp500 index plan managed solely for them, usually with lower fees
