The comparison will make things clear but before that, you should know that a pension plan is funded by the employer, while a 401(k) is funded by the employee. In the battle of a pension vs 401k, due to the much higher burden on employers pensions are becoming less popular.
Everybody wishes to have a financially secure retirement but they forget savings, it’s wise to create a long term plan early in life — or right now if you haven’t any. Today is your lucky day to make a retirement plan.
Your employer would most probably offer a 401(k) plan rather than a pension plan in its benefits package. Why is it so? This brings us to the basic difference between the two plans. Pension is a defined-benefit plan while 401k is a defined-contribution plan. The first plan is employer-sponsored whereas employees contribute in the later.
Why a 401k Is Better?
Virtually all retirement plans offer a tax advantage either at the time of savings or during withdrawal. These are the major reasons why you should choose a 401k retirement plan.
You set the contribution schedule
With a 401(k), you can contribute as much of your salary as you’d like but not to exceed the annual contribution limit for 401(k)s — in 2020, the limit is set to 19500$ and a catch-up contribution limit $6500 for age 50 and older.
With a pension, you’re leaving all the contribution choices to your organization. Think of not getting a pension due to underfunding!
You make the investment decisions
A few bad investment decisions can make you suffer your whole life. And the records suggest that you should not assume the person controlling your pension will choose its investments wisely.
One solid reason that pension plans have lagged behind the curve is that many pension managers are dependent on alternative investments, especially hedge funds. Unfortunately, these investments have not been performing well in the stock market for a decade now.
That’s being said, your 401(k) account would probably not give you a hedge fund investment choice to minimize risk.
Your retirement money is portable
Your pension plan benefits are based on your paycheck and how long you stay with the organization. Unfortunately, staying at one job or an organization isn’t the norm these days, and very few employees stay with the same employer for more than three years — let alone the seven years to get 100% vested through graded vesting.
The investment you put into your 401(k) plans is always 100% vested; does not matter if you quit your job, that money is yours. But this rule doesn’t apply to your employer’s matching contributions that are just like the pension.
If the company fails, your money is safe
The 401 (k) investments are protected in the event of company failure (they are not company assets). However, if you are certain that the company will cease operations, you should stop worrying about the 401 (k) plan and find yourself a new job.
The 401k plan gives workers charge over their own retirement plan and savings. What makes it special is that an employee ascertains how much money will be in his savings accounts, upon retirement. The job-hopping possibility is yet another factor that matters for many people. from the pension vs 401k, our choice is obvious but what suits you is to be decided by you yourself.
In theory, pension plans are the ultimate retirement savings tool. In practice, they have many pitfalls. There is an awful risk already discussed—pensions regularly fail due to underfunding.
” Know the three-legged stool of retirement—the pension, Social Security, and retirement savings—includes 401(k) plans and traditional pension plans.” — Investopedia
What are your thoughts? Let us know what is your take on the pension vs 401k debate.