Why we should retire 401(k) plans for pensions

[eridani]

http://washingtonpolicywatch.org/2012/10/10/smart-to-retire-401k-plans-for-pensions/

Eight years ago, while thousands of corporations were shutting down their retirement plans, the United Methodist Church decided to go back to the future. The Methodists took a lesson from their faith. The Methodist Book of Discipline guides the church in employment practices, and states that the church is “to discharge our fiduciary duty solely in the interests of the participants and beneficiaries, using care, skill, prudence and discipline.” With this in mind, the Methodist established a defined benefit pension.

What is a defined benefit pension? It is a plan for retirement that covers all employees in a company. You earn this retirement as you work. You can rest assured that when you retire, you will get a certain amount of money each month for the rest of your life. It won’t get you rich, but it gives you both financial security and peace of mind. That dovetails well with the Methodists, and in fact, with all of us.

Almost all of us are in a defined benefit pension. It is called Social Security. And it’s the political and financial elite’s favorite punching bag in their assault on entitlements. Never mind that these entitlements are earned. Or that Social Security has been generating surpluses for three decades. Or that it is the most efficient and most effective program to insure retirement security. Or that, unlike almost all other pensions, you can be sure that your Social Security payments keep up with inflation

[Sherman A1]

1. Precisely

The 401k's were always designed to be a scam in my opinion. They at best could be a supplement to retirement, not a replacement for a pension plan. At their worst (which is where I think we generally happen to be) they are just another Wall Street money grab.

[HiPointDem]

19. +1. I remember when they came in, we had an information fair at work about all our great

new 'choices' for investing our pension dollars. i asked what the options were if i didn't want to put my money in the stock market and the guy asked me scornfully if i wanted to die broke.

[peacebird]

2. Exactly. There is still time for our son, sadly we are stuck with the 401k system.....

[badhair77]

3. I'm fortunate enough to be in a defined benefit system.

However it is being threatened by the state toying with the idea of switching to a defined contribution pension, which means my fund would not longer have feeder money coming in as time goes on. I am very scared for my son who has only a 401k plan.

[justgamma]

4. My daughter lost most of hers

when her dead beat ex got half of her 401K in the divorce settlement. That and when the market crashed, she was losing more than she put in. That wouldn't have happened if she had a pension plan.

[A HERETIC I AM]

5. It also wouldn't have happened if she had taken 2 minutes on the phone...

And switched her investment choices to cash or money market funds.


No one is locked into investing in the stock market in a 401(k) plan.


No one.

[dionysus]

6. yup, why so many people can't grasp that to this day astounds me... bonds people, bonds...

Last edited Thu Oct 11, 2012, 10:25 AM - Edit history (1)

[ieoeja]

12. Only if your 401(k) offers such a fund.

When Idiot took office in 2001, I immediately moved all of my 401(k) into the "Short Term Gov't Guaranteed Fund". It never made more than about one percent. But it never lost either.

I lost roughly 50% that year.

My employer went to a different fund manager after that debacle. I'm happy to say I weathered Idiot's 2nd recession just fine as my money spent the next 8 years in a truly safe fund.

[A HERETIC I AM]

15. A 401(k) that did not offer either a money market fund,

A "Stable Value" fund or a straight cash or "bank deposit" option would be a VERY rare bird indeed.

If you looked at either the prospectus or the annual report on your short term Gov't fund, I would bet the portfolio consists almost entirely of US Treasuries of one year or shorter maturities. That's why it paid squat but that's also why it didn't go backward.

[ieoeja]

16. Except that it DID go backward in 2001.

Which means it was not what it claimed to be.

I am not an expert in treasuries, stocks, etc. I have no business nor interest in being an investment manager. I didn't tell the contractor how to lay his tile, why would I tell an investment manager how to do his job?

I have spent almost three decades writing financial software, but not in that area. I did spend 3 years writing software for 401(k)s, but they just entered the gains & losses then the software made the allocations. How the gains & losses were achieved was outside my purview.

I did notice that when they did not like the results they sometimes changed the numbers which gave me the distinct impression that 401(k)s are a ponzi scheme. I know one other person in IT who worked on 401(k)s, and she has the same impression. Hopefully, we are wrong.

[A HERETIC I AM]

17. I would very much like the chance to look into that fund

Do you have the complete and proper name for it, such as "Franklin Templeton short term Government Fund" or perhaps the 5 letter ticker symbol? Open end Mutual Funds all have a 5 letter symbol that ends in "X".

I don't doubt you, please understand. But there has to be a reason for that performance and if I can look it up, I can tell you why it happened. Bond funds can and will go down in share price, but it is very rare that their total return figures are negative year to year.

[ieoeja]

22. We dumped the bank handling our 401(k) after that 2001 debacle.

And I wouldn't have saved any info on it. Sorry. I would really like to have shared it with you and gotten your explanation. Because I can tell you that I was one very ticked off individual that year.

Even though it was called "Guaranteed", I do recall them telling us it was not truly guaranteed (obviously not!). I figured that meant it could lose a little just as it only ever made a little. That 50% drop was shocking.

I would probably not be using 401(k). But there is that 50% employer match right off the top. Takes a lot of losses to kill that immediate gain.

Turned 50 this year and paid off my mortgage. I suppose I should redirect some of that money into something that earns me money. But my house is going to need a lot of work. So my intent at the moment is to pay-as-I-go repairing the place (I should be set for retirement anyway). Given that the very foundation has problems, I expect this is going to be very expensive.

[JoePhilly]

18. YUP ... my view as well.

I think for many, the pension ONLY model works because you don't have to think much about it. You don't need to know anything about investing.

A 401k is a responsibility. You get to control it. But if you treat it like a defined benefit pension, you'll get killed. Your investments won't match your risk tolerance.

I manage my 401k very closely. If the market jumps above its recent averages, I tend to move more to cash-like investments. When the market comes down, which it does, I shift more back into "the market".

Under Bush, the DOW jumped above 14k for almost no reason, after staying in a range of about 11k-12.5k. It made no sense. And so, if you simply moved some money to "cash" at say 13k, 13.5k, 14k ... you would have taken some gains are reduced you downside risk.

When the DOW fell, it fell fast ... so even if you rode it down to 9k, and then started to take those gains, and buy back in slowly, sure, you lost some on the way to 6500 ... but today, a share bought at 9k during the fall is worth about 4K more now.

And there is nothing that stops one from setting up a 401k that has very conservative investments so that you can basically ignore it.

A 401k is simply a mechanism to save. You get an immediate tax deferral, and if you pay attention to your own risk tolerance, you can set it up accordingly.

[Gormy Cuss]

21. The basic problem with the 401K-only approach is that everyone needs to train as an investor

or pay others to be investment advisers hoping that the choices made will work out in the long run for each as an individual. Either way, it's more work. Defined benefit pensions are no work and because they are pooled risk, much more likely to provide a predictable stream of income in retirement.

I'd love to see 401Ks go away and have IRA deductible contribution amounts increased to the 401K limits and strong motivations for employers to return to offering good defined benefit plans.

[n2doc]

20. Bonds earn you a few percent, at best

Not going to make enough that way to retire. Not unless you put a big percentage of your paycheck into the 401k, and not many can afford to do that.

People were sold 401k's and IRA's as ways to get in on the stock market bubble(s). People expected to earn 8-10% yearly. Bonds won't do that. Stocks haven't, over the mid term (since 2000) either.

[meaculpa2011]

7. I've been a free-lancer for past 33 years...

and have funded my own pension plan in every year except one (adoption/medical expenses).

My wife has handled all of our personal finances for the past 42 years and was scrupulous about setting aside money every month.

If I retired today my IRA income would be about five times my SS income.

Thankfully I can work until they nail the lid shut, but I'm very happy that my wife had the discipline to plan for our future.

BTW: If she didn't, I'd be destitute.

[spinbaby]

9. Good for you

My husband and I have been contributing the maximum amount possible to our 401ks since they became available to us a little over 20 years ago. We also have payouts from two defined-benefit pensions that my husband had that went belly up and gave us a cash payout in lieu of a pension. And you know what? We have a big pile of money, but we're still worried about having enough money when we retire--my husband retires next year. This is because, first of all, it's near impossible to get any kind of reasonable return on that money unless it's invested in stocks or something equally volatile. And there are so many ways that money can disappear--inflation, market crash, medicare being cut and leaving us with a pile of medical bills, you name it.

Having money is not security. Having a guaranteed monthly income indexed to inflation along with good medical coverage, that's security.

[meaculpa2011]

10. Agreed.

My point is that it should not be an either/or proposition.

Overspending when you're 25, 35, 45... expecting SS to cover your expenses in retirement is foolish. I've seen it in my friends and family.

Everyone defines security differently. If I was concerned about the classical definition of security I would never have walked away from a very promising Fortune 500 job to go out on my own. If I had stayed I would be facing mandatory retirement this year. That's my definition of insecurity. As luck would have it, my former employer has remained one of my clients and they don't have a mandatory retirement policy for contractors.

Wanna know how money disappears? I've got two teenagers.

[nc4bo]

8. So 401(k)s are fine if they are not your primary source of retirement income

but devastating when the Wall$treet bankers start jumping from the 50th floor or a Bain Capital takeover or major corporate merger is on the table?

In the meantime, (R)s dream of the day all of our retirement accounts go private.

[ProgressiveProfessor]

11. THe Federal Government LEAD in the creation of 401K style retirement systems

The older CSRS system was replaced by FERS and it was a lot longer than 8 years ago.

[Johonny]

13. I have both

I have a good union

[Sherman A1]

23. Same here

I am counting on SS, pension and the 401k to be three legs of the stool for my retirement. There will hopefully be some personal savings in the mix and a house that really isn't worth too much ( less desirable area), but I as will everyone else have to wait and see.

[raouldukelives]

14. Also if your not a fan of climate change or citizens united. nt

[ncav53]

24. 401ks were designed..

401k plans were designed to supplement a pension, not replace it.

[SmileyRose]

25. I have a special hate for defined pension plans.

Not that I'm all in with the "yer on yer own suckers" of the 401Kand IRA market but defined pension is gawd awful.

Die even one day before your official retirement day and your spouse ends up with nothing. Even if you survive to official retirement if you croak before the spouse they end up with a fraction of the benefit at best.

At least IRAs and 401Ks are inheritable.

Social Security has additional riders on it to make sure widows and widowers who depend on a spouses income or savings for survival in old age have something, however small, to rely on, even if the spouse with the work history dies long before retirement age. I'm not sure any but the largest employers will be financially able to cover surviving spouses in the same way under private defined benefit plans even if the worker dies long before retirement.

Edit to add the fact Employers and government can promise it and then change their mind and never delivery pretty much any time they want.