3 Reasons Pensions Need Less Funding per Worker Than 401(k)'s

To "Yeah but": Fundamental differences exist

Dan, you are absolutely correct in regard to your commment on the use of 401(k) plans for estate planning. This is because 401(k) accounts were designed to be SAVINGS vehicles for wealth accumulation, not pension plans, which are designed to provide retirement INCOME.

This article does not malign the use of 401(k) accounts for the originally intended purpose, which includes tax-advantaged wealth accumulation, and yes, estate planning. However, these savings vehicles are not suitable to provide lifetime retirement income benefits.

Most companies who maintain traditional pension plans also maintain defined contribution plans to encourage supplementary personal saving. For companies who wish to promote stable income throughout retirement however, a DC plan cannot operate in that manner as efficiently as a traditional DB plan.

MB of NY @ Aug 25, 2008 15:53:58 PM

To Yeah but

What will your heirs think when you live too long and run out of money? I'll bet they would rather have you remain financially secure throughout your life after retirement rather than face the prospect of subsidizing you financially and/or have you move in with them.

Ask your heirs for their thoughts on what they want for you in retirement.

If they bet on getting some of your money rather than wanting you to have a financially secure retirement, then take them out of your will and don't count on them subsidizing you financially or taking you in if you run out of money!

John Jensen of NE @ Aug 24, 2008 08:34:05 AM

Yeah but

No oversaving: Doesn't this mean that 401(k)s are better for heirs? If I die with $100,000 left over in my 401(k), my heirs get $100,000. If I die with a pension plan, my heirs get nothing.

Allocation stays constant: 401(k) participants have to invest more conservatively when they are near retirement, but shouldn't they have been investing more aggressively when they were younger? And shouldn't their investments have been outperforming pension funds back then?

Higher investment returns: I wonder how much better the pension funds do when compared to 401(k) participants who invest in low-cost index funds, rather than to the average 401(k) participants.

Dan of NC @ Aug 20, 2008 07:59:30 AM