Pensions v. 401(k) / by kevin murray

Successful corporations aren't run by stupid people and when a significant percentage of corporations either don't provide a pension fund or have replaced their pension fund with a defined contribution plan, 401(k), you should definitely wonder why.  The defined contribution plan was never meant to replace pension plans but it has morphed into that very thing over a period of years.  In 1978, Congress passed an add-on to the 401 tax code.  The 401(k) allowed employees to set aside a certain amount of their income into a special account, in which they would not be taxed, until such time as they made a withdrawal which would typically be done at a lower tax rate, because they would then be retired, and the timing would be at their discretion.  The main positive of the 401(k) was that the money would be invested with pretax dollars but what really brought it over the top to the general public was the matching percentage provided by the corporation itself.  This would appear to be free dollars, and in a certain sense, it is because that contribution is coming from the company itself, but like some benefits in life, there is a darker side.


401(k) plans were originally known as "salary reduction plans" and their intended purpose was to help tax defer the highest paid executives and employees.  However, in order for these highly compensated employees to get their big salary deferrals, there had to be a significant portion of the lower-paid or regular compensated employees participating in the 401(k) plan or the plan itself would not be in compliance with IRS code.  Deferring income for a highly paid executive is a preference; deferring income for a lower paying employee who is simply trying to make ends meet is much more problematic. Eventually, though, high level brain-storming sessions came up with a total win for the corporation, when it was discovered that by providing a matching percentage to employees, this would be enough of an incentive to get those reluctant lower-paid employees to sign up for the program, especially with colorful graphs and displays showing how much money these fortunate employees would have over a period of time, after assuming continued employment, steady pay increases, steady matching, and robust returns on their tax-deferred monies investment.


The one thing that the corporation left out or downplayed, however, was that the pension, if one was previously in existence would be phased out and therefore everyone would now opt in to the new 401(k) plan.  For companies that were newly coming into existence, the pension plan would never even be on the table.  Pensions for executives and highly compensated employees are not usually in their best interests, mainly because pensions and their long-term liabilities make it more problematic to merge or to be sold to other corporations for a favorable price.


According to the average 401(k) and 403(b) balance for someone aged 55-64 at the end of 2009 was $124,472.  An investment return of 6% would bring in an initial yearly return of $7,468 if the principal remained untouched.  USA TODAY and Asbury Park Press reviewed records covering 1.9 million federal civilian pensions and the average federal pension was found to be $32,824 annually. 


I wonder which one you would prefer.