SURVEY SAYS: Which Would You Prefer – DB or DC?
There was a particularly diverse response this week – perhaps not unexpectedly so, given our audience. Nearly half (45%) of this week’s respondents expressed a preference for a defined benefit program, forced to make a choice between that and a 401(k). What some might find surprising is that a nearly equal 37% opted for a 401(k) program.
Of course, given one of two choices to pick from, it is perhaps not surprising that nearly one-in-five wanted ANOTHER option. Nearly 13.5% refused to pick one or the other, opting to take BOTH, while the remaining 5% chose what I would term – “it depends” – generally depending on age and tenure levels.
Defining the Benefits
Most opting for defined benefit programs cited the
additional security of the programs, a more reliable income
stream, and the difficulty in trying to be your own
investment manager for your retirement account. As
one said, “I’d definitely prefer a DB plan. I don’t want to
be responsible for investing my retirement nest-egg,
especially when I’m 80. Can you imagine your grandparents
being responsible for their own investment decisions? The
best deal in town is the annuity from your employer.”
One DB supporter actually highlighted a potential issue
with the programs, “As an employee I would like a defined
benefit, but I have not stayed at any employer longer than
10 years so I would not have much of an accrued benefit.”
On the other hand, 401(k) supporters cited control, the
advantages of a benefit that is portable, and the
uncertainties of being able to collect on a pension promise
in a time when even having a job is an uncertain
prospect. As one noted, “It is more portable, I
exercise more control, and it does not have the risk of
being under funded or worse by potentially inept management
or tough company financial conditions. With a defined
contribution plan, once vested I can take my money with me,
and invest it how I would like to.”
Both Sides Now
Most acknowledged good points on BOTH sides of the issue. One reader noted “…employees shouldn’t have to choose between one or the other, employers should provide a DB plan whenever possible and the government should do what it can to give incentives for employers to do so. Instead, some politicians don’t seem to understand that many employers can’t afford to put a pension plan in place yet they balk against more cost effective alternatives like cash balance plans. A cash balance plan is better than no DB plan at all.”
One reader noted the differential in employee appreciation of the benefit, “…the 401(k) is in front of participants every quarter via a statement. You never hear about the pension. Our company is changing that with an annual statement that will show the pension benefit. I think that will increase awareness of the benefit.”
One of the “straddlers” said “I want a DC plan so I can get rich, and a DB plan so that when my plans for getting rich don’t work out, I won’t live in poverty.”
But this week’s Editor’s Choice summed up the heart of the dilemma: “As a 55 year old, with 24 years of service, I love a DB. If I was 25 year old, starting with a new company, I would love a DC. As a 55 year old plan administrator, I hate a DB plan.”
Thanks to everyone who participated in our survey! Trust me – this week’s VERBATIMS are even better than usual. You’ll want to check them out…
The question: As an employee, given a choice between having a pension plan OR having a 401(k) plan - which would YOU prefer? And, if you are so inclined, we'd love to know why.
READER VERBATIMS:
I'd probably still opt for the 401(k) plan--the main
reason being portability.
Defined benefit plans for several reasons.
1. You can't spend the benefit before retirement. Many people buy boats, cars, etc with 401(k) money that they get when they change jobs (even with the tax penalty deducted). If you change jobs with a DB plan, assuming you are vested, the benefit waits for your retirement. I've worked at 3 companies and I'll get a pension from 2 of them (my current employer doesn't offer a DB plan).
2. The benefit formulas generally recognize service and salary. The more you make, the longer you stay, the better your benefit. The 401(k) does accumulate dollars on your behalf but remember it's already your money. Many plans do not offer an ER match - or - if they do offer a match - it is not generally dollar-for-dollar. Sometimes the sponsor pays for the costs to administer the 401(k) plan, but there are plenty of plans out there where the costs are born by the participants in the plan. Despite tax incentives for the employer to deduct plan expenses, the typical costs of a 401(k) are less than a DB plan - so employees are losing out.
3. Social Security is biased towards the lower wage earner. There are caps on both contributions and benefits. DB plans can be set up with integrated formulas that allow benefits for the highly compensated to recognize the social security limits.
4. Older employees with short service can receive a better benefit under a DB plan at retirement. This could be a blessing if you are trying to hire some seasoned workers - offering them a small pension for their last years worked would be more meaningful than the 401(k) plan.
5. The plan's investment committee makes the
investment decisions. This takes a lot of pressure off
the plan sponsor to educate the participants in the plan on
all the facets of investments. As a member in the
401(k) plan, how often have I said "I woulda, coulda,
shoulda" made a change in my assets. Just like in the
grocery store where I'm always in the wrong line,
I never seem to have my assets where they should be. I
diversify, it just seems like I have a knack for being in the
wrong investments every time.
Ahhh, I long for the good old days when plan sponsors had
all the headaches. Most of them did an admirable job.
This is a tough one. As an employee, I guess I would have to say "401(k)", but as an employer, I see the true need for BOTH types of plans, to balance each other out. Also, it would depend upon the formulas under each - a really generous db plan could outweigh a 401(k) plan, especially a 401(k) where the employer match is stingy. However, if you're looking at average
plan designs, the tax-advantages of a 401(k), my confidence in my ability to invest soundly, and a good co. match would be reasons for favoring the 401(k). However, except for my first job out of college, I have never worked at a place that doesn't offer BOTH.
I vastly prefer my DB plan. Three years ago my 28 year-old daughter thought that I was an old fool, but now concedes that I am getting smarter every day.
Geez, that's a no-brainer. Give me back my defined benefit
plan!!
We are fortunate to have both - my former employer's 401k with profit sharing (a SEP for my consulting business) and my husband's 401k and db plan. His db plan is a modified cash balance with a required employee contribution.
The biggest problem with the db plans has been communications and plan design. With a 5 year cliff vest and typical US turnover, most employees initially pay little attention to their pension - an attitude that carries over in employees who remained past vesting. The benefit calculation structure is also often difficult to obtain and understand.
His company has made a huge effort in the past two years to address the communications problem. Detailed, but clear, explanations about the benefit structure and alternative benefit calculations (let's hear it for merger activity over the years) are provided at the employees home by snail mail. In addition, the benefits web site has calculators to project retirement benefits at any age with variables for pay increases, etc. The latest employee survey shows that the effort has paid off with the pension among the top rated benefits.
Then there is the flat comfort level for a lot of people
right now that when they retire there will be something in
addition to Social Security.
I would prefer to have a 401k plan as this vehicle is more flexible and allows for pretax contributions in addition to employer contributions. In addition, I have more control over my investment dollars.
I guess if I had my choice, I would have a combo of a defined benefit and 401k. The defined benefit would guarantee (assuming that my employer and PBGC didn't go under :). The 401k would allow me a choice in what I wanted to invest in and give me a chance to increase my benefits.
As an employee I would opt for a choice not presented, i.e. BOTH. We have both at our company. The company fully funds the DB while the employee fully funds the DC. This way the DB can almost be viewed as the "fixed" portion of a retirement portfolio, the risk of which is borne by someone other than the employee.
There is no question in my mind that I would rather have a 401(K) plan than a pension plan! My husband and I both work for the same company. We have a pension plan and a 401(K). We are long service employees. If members so elect, and they always do, our defined benefit plan will pay them a lump sum at termination (unlike many plans). Last year my company declared Chapter 11 Bankruptcy. A great percentage have terminated and elected to receive an immediate lump sum. The percentage of assets to liabilities is getting lower and lower. l feel almost certain that the PBGC will eventually take over the plan eliminating our option of receiving a lump sum in lieu of an annuity. I WANT A LUMP SUM but neither my husband or I care to quit our jobs to get it. So I'm praying for a financial turnaround. I've invested our 401(K) funds wisely and we are doing well, despite the current market conditions. I'm certain I could do the same if I had the defined benefit lump sum in my hands.
Lets keep working life simple and retirement life predictable by providing all workers a good old fashion non-contributory DB plan. With a 401(k) plan you have to be concerned about the integrity of the Enrons' who over-promote self-investment, employees who all to frequently borrow against their account balance and that small number of employees who are inefficient because they are distracted day-traders during volatile market periods.
As an employee that has had both for most of my working life, I can appreciate both. It is nice to have a potentially high-flying 401(k) (I assume the market will recover some day) and a safety-net pension as well. Employees don't appreciate the pension until they get within the retirement planning window with good reason. The pension benefit is much more exponential than the 401(k). So the benefit builds dramatically as years of service increase and the employee starts getting close to retirement age. That is when people really get focused on the pension. I think one big difference in benefit appreciation comes from the fact that the 401(k) is in front of participants every quarter via a statement. You never hear about the pension. Our company is changing that with an annual statement that will show the pension benefit. I think that will increase awareness of the benefit.
My dream retirement package is a traditional defined benefit plan with a benefit of 2% per year of service plus a non-matching 401(k) plan with all plan expenses paid by the employer.
Psychologically, I need the peace of mind that the DB plan provides. I'm just not a professional money manager and I don't have any faith that my 401(k) will provide enough for a comfortable retirement, but I also know that I'll need to supplement that pension with other savings and the 401(k) is a good vehicle for that.
After all of these years, I just think that a 401(k) should be a supplement to a pension plan instead of the sole funding vehicle of retirement.
I think the Ohio State Teachers Retirement System (STRS)
is an excellent example of what I'm talking about. STRS
launched a 401(a) plan over a year ago and they are very
disappointed in the level of participation. I find it
hard to believe that people would ever switch from a benefit
guaranteed by the state to a benefit with no guarantee at
all.
I would definitely choose the 401(k). Even in periods of stock market decline the 401(k) has provided more retirement income than traditional pension plans. And there is no comparison when there is a bull market. When you factor in the portability and features of 401(k) it is a clear favorite in my mind.
401k,I want to be able to direct my investments
The pension is a steady "known" annuity, but the pension formula favors higher earning employees. Given your choices, I would select the 401(k) plan because it gives me more control. I can make it my goal to max it out each year. I can do research and hope that I make sound investment allocation choices. And, then there's the pre-tax benefit and the discretionary match.
I'd prefer the 401(k) plan (with a bigger matching contribution). This is the retirement program where my wife works. The 401(k) gives people more flexibility, allows you to become vested quicker, is more easily integrated with financial planning tools and is supported with more investment/retirement education material.
That being said, employees shouldn't have to choose
between one or the other, employers should provide a DB plan
whenever possible and the government should do what it can to
give incentives for employers to do so. Instead, some
politicians don't seem to understand that many employers
can't afford to put a pension plan in place yet they balk
against more cost effective alternatives like cash balance
plans. A cash balance plan is better than no DB plan at
all.
My vote goes to 401(k) plans. I have been in the pension/employee benefits field for over 30 years, but have worked for numerous companies in that time. Were it not for 401(k) and IRAs, I would have nothing for retirement.
I like the structure the military has set in place - have a traditional DB plan and a 401(k) without any company match. This way we have a guaranteed amount for retirement and we also get the advantages of tax deferred savings.
But if I had to make a choice - I'd prefer having the DB
plan (no cash balance - FAP or CAP formula).
I think DB plans are great to offer employees, but as an employee and an investor, I would prefer a DC plan over DB plan, if I had to choose one or the other. While DB plans guarantee some sort of money for my future, a DC plan allows me to control my own future. I can contribute as much or as little as I want and direct it into the funds I choose. I can do the same with my employer's match (to some extent, since the match is determined by how much I contribute and is capped at a certain percentage). So, in essence, either way I'm getting free money from my employer, but I have more control over that money and can use my own money in a DC plan.
As an employee, given the choice between a DB plan and a
401k plan, and assuming that the company would contribute the
same dollar amount to either plan, I would opt for the
401k. A 401k is more portable, and is much less likely
to fail (i.e.: underfunded DB plans and company
bankruptcies). In addition, I believe that I can
generate a better return over time than a
conservative company investment committee, and feel more
comfortable being in control of my retirement money.
As an employer, given the same conditions, I would still
opt for a 401k plan. The difficulties of setting up and
running a 401k plan, as bad as they are, are nothing compared
to the burden and cost of operating a DB plan. The
money saved in administrative expenses can be used to lower
costs or improve benefit levels. Perhaps this is not as
big an issue in large companies that can generate economies
of scale, but in smaller companies this can be a substantial
issue. As a relatively small company ($150M), we terminated
our DB plan, which was an expensive and burdensome activity
in and of itself), and used the savings of approximately
$100k a year in outside admin expenses to improve the benefit
of our hourly workforce by about $250 per year. Why
give it to consultants, investment managers, actuaries, and
the PBGC?
My preference would be to have a pension plan. The greater certainty of retirement benefits is the primary reason.
Choosing the DB plan is a no-brainer! Why wouldn't you want your company to fit the bill for your retirement income? A ROTH IRA can be used to defer my own income in a vehicle offering a tax advantage. It's a low percentage of people that contribute over $3,000 to their 401(k) plan, so a
ROTH is a great option for most.
401(K) is so OVER-rated!!
Based on today's trends of frequent movement among different employers, a 401(k) seems like the better option. I would find it hard to believe that I could earn any sizable benefit from a DB since most DB formulas benefit long term employment with a firm.
I would much prefer a defined benefit pension plan. I have a 401(k) and defer as much as I can in hope of having a secure retirement. But 401(k) plans alone don't provide the income security Americans need. Defined benefit plans encourage long-term employees, a stable workforce and a financially secure retired population - the same consumers supporting corporate America.
If it's either/or, I'll take the 401(k). Had a what-if-you-won-the-lottery discussion yesterday around the water cooler - the consensus was take the discounted lump sum any time over the annuity - heaven only knows what the future holds for the annuity-paying institution. Likewise with DB - the most generous plan is useless when your firm goes into receivership.
I prefer having a pension plan because I am a 20-year-old employee whose benefit accruals are maximized at this point in my career. However, I am concerned about whether full benefit will actually be there due to expense and financial position of my employer.
Being an organization that currently offers both a defined benefit plan (and have more many years) and recently adding a 401(k) Plan, I agree that the defined benefit plan is mostly underappreciated. I think because it is not a plan that offers regular updated information, it is similar to the benefits of social security. Only recently have we begun to receive annual "projected" SS statements. My observation is that this information is also not easily understood. Without regular "political babble" about whether SS will be there when one retires, it is not something I think many folks think about, until they near retirement.
Since the "value" of a 401(k) is readily available, via
statements, phone, or the intranet, it is a more "personal"
retirement plan. It is clearly more dynamic, in that the
value changes daily, and more flexible, in that employees
make personal choices about investment options and
contribution levels. I think employees also appreciate the
value of the employer contributions, as they see that
information on their paychecks and their statements.
I would choose a defined benefit plan hands down. I want my employer to bear the risk and not myself. The employer is better equipped to get expert advice than I and the PBGC guarantee gives an individual some comfort that the foundation of ones retirement planning has some stability. As I remember the 401K, 403b, and 457 plans were all intended to give employees
an opportunity to save for retirement. I don't believe they were intended to replace the employers basic employee retirement plan. As a society, we have all jumped on the bandwagon and praised the 401k. This occurred especially when it seemed that it would cost the employer virtually nothing because of rising stock prices. The problem in our society is that we all go along with the conventional wisdom and really are not independent thinkers. In fact our society pooh poohs independent thinkers and thereby silences them. This is especially true when ideas may run contrary to the natural greed that is part of human nature.
This theme found its full fruition in the roaring 1990s
when PEs were so wildly above historical
records. I find this very funny in a society that
claims we accept anyone's thoughts in the form of free
speech. I also find it very sad because thousands of
peoples lives have been disrupted as the result of layoffs
and vanishing retirement savings. Our leadership,
specifically our business leadership, failed miserably.
We have the capacity to be great and we have not even reached
mediocre. I am hopeful in that some may have learned a
lesson. Lets hope those some are in positions of power,
both economically and politically.
Pension or 401(k)? I have Both! Now about employee
awareness. It seems to me employers should take the lead and
inform their employees about both the expense (and therefore
their willingness to provide this benefit) and the value of
this benefit for employees. Today, employees seem to take for
granted the fact their employer provides this benefit. Am I
trying to say employee education!
As a 'young' employee (over 30 years from retirement) I will probably be changing companies/careers more than my older counterparts. Building up much of a pension will probably be pretty difficult...and god knows I won't have any social security...so give me a 401(k).
As a 55 year old, with 24 years of service, I love a DB. If I was 25 year old, starting with a new company, I would love a DC. As a 55 year old plan administrator, I hate a DB plan.
A matching 401(k) plan please with an assortment of investment selections. I have been involved with pension plans for some time and probably ten years ago I would have said "pension plan". Today times are different. Too much can go wrong with pension plans. I'll take a 401(k) anytime.
That's an interesting question for the survey. An accurate answer would really depend on how much you were paid, how much pension benefit you could get, how much you could contribute to a 401k (not just plan limits but how much you could afford) and company match to a 401k. And it is all going to be biased right now by current market conditions which have led to at least one person I know (not me) deciding to contribute no more money to the 401k because she didn't want to see it lost too. ( I know that's faulty logic on the investing side and it certainly deprives her of the company match which by the way is a $ for $ now immediately up to 6%).
If I had to chose, hoIding all other things constant, I would rather have the guaranteed benefit which is the pension. It would be a known figure with the PBGC to back it up. I would still have the option of investing on my own for my retirement savings. It would just not grow as fast.
However, I do not want to choose. I much prefer to have both.
I have a question though. Even if a multitude of
companies switched from 401ks to pensions, thereby keeping a
retirement option going, wouldn't there be a devastating
effect on the market? Right now there is not only the
company money going in the market for 401ks but a lot of
employee money that would not be there otherwise. That
money goes in a regular basis, weekly, every other week,
twice a month and monthly. It must be invested
then. A lot of pensions only make one annual
contribution and it is not likely in total to be as
much. Also, without the 401ks a lot of people would not
save as much and a lot of what was saved would not go to
equity investments. It seems to me the 401ks are a
major factor in the valuation of equity investments.
But maybe I am attaching too much weight to them. I'd like to
see an economic study done on the impact they have had.
Pension Plan. Cheaper to the participant.
As an employee, I much prefer the defined contribution plan where I can track how much is contributed on my behalf, control how it is invested (OK, maybe that's not such a good thing anymore) , and always know where I stand. Defined benefit plans strike me the same way as annuities--you're never really sure how they work, what the hidden costs are, and you're sure
you could have done better on your own.
Regarding choice between pension and 401(k). That's a question I cannot answer in the abstract. In my case, it would all depend on the pension plan's formula, on the one hand, compared with the amount my employer was willing to commit to contribute to the 401(k), in addition to my own deferrals, and on the extent to which I am permitted to direct my 401(k) plan investments, on the other.
All else equal, I'd take the 401(k). I'm a control freak...I want to be in charge of my money/future, not my employer. Also, the tax advantage (for me) is a huge plus.
A defined benefit plan for me (and for my employees), please. Why, cause it's nice and stable; 25 years of retirement work and I'm absolutely convinced that most individuals (even financial types) don't have the knowledge and discipline to plan and save for retirement.
Luckily the organization provides a good db plan as well as two types of dc plan. Despite which I still see a few retirement disasters every year. The looming question is whether the org has the strategic foresight to manage its retired worker costs as it moves into the next decades.
Wednesday cynicism: probably not, as the organization takes its cues from a number of interested parties, but generally not from its retirement professionals. When attempting to discuss the issues with key decision makers, the decision makers have a tendency to look at their watches and roll their eyes.
Wednesday wistfulness: It would be a career achievement to adjust our current system, creating the foundation for a robust and sustainable cradle-to-grave benefits system.
I'd prefer a pension plan.
Why? As an employee, my benefit at retirement would have been a "fixed" amount based on a formula. Instead, my 401(k) plan has taken a big hit which I might not even be able to make up in the next 10-15 years, let alone "increase", in order to retire at 62-67 years of age. Combining a DB pension plan with the prevalence of other personal/individual [non-401(k)] tax deferred investment options, I might have been able do better retirement planning since I would have known what I needed to supplement, i.e., my projected pension plan and social security benefits.
BTW, I don't think that companies should look at it as one
or the other. How about providing both plans at nominal
levels based on the company's ability to fund?
K plans because they are portable. In an expanding global economy I want to know what I have is mine and not subject the judgement of a potential foreign company with a different set of priorities and values.
Your question is way to general. The answer has to be, "it depends".
If you are going to provide me with a relatively low, fixed rate pension completely employee funded versus a safe harbor 401(k) plan with a significant match and I am a young, upwardly mobile professional...then I'll take the DC plan.
However, if the choice is a 60% final 3 year average pay DB plan at 25 years of service (normal retirement age of 60) versus a 401(k) with no match and limited investment options, and I am 50 years old with 15 years already in the company (of course, you will recognize past service), I'd be a fool to assume the risk and take the lesser value of the DC plan.
There are too many variables in plan design, personal demographics, work expectations, etc. to personally choose one over the other...so we as employers resort to cost and ease of understanding by the population as the basic criteria for promoting one over the other without much thought about the best format to secure retirement benefits for our employees.
I'll take the DB and - utilizing the investment knowledge I've developed managing my 401(k) for years - lose my own money on the side with Roth IRAs and other investments.
I have to qualify this answer. If they were offered by most employers, I would prefer a pension plan over a 401(k) because of the secure lifetime income. If you can manage to work at a company long enough to retire and collect a full pension (final five), a pension would provide more security in retirement. However, in today's environment, employees change jobs frequently (sometimes involuntarily) and typically don't spend their entire career at one company, which makes collecting a reasonable pension too difficult. Since most companies don't offer pensions (and I wouldn't want to be stuck at one company just to collect my pension), a nice 401(k) or
hybrid plan might be preferable.
Pension Plan--because the burden of risk is shifted to the employer and removed from me. In addition, if it gets messed up, I have a legal recourse which is not available to 401(k) participants.
Given a choice, a defined benefit plan over a 401(k) plan. There is far more stability and a guaranteed monthly benefit with a DB plan. Despite what the financial services companies and other vested interests say, most Americans save too little for their own retirement. The reality is that despite this sense of preparedness for retirement, very few of us will truly be able to retire and an early retirement is a lovely fantasy dreamed up by investment companies. The money simply will not be there.
Pension plan.
Employer pays for it and don't have to worry about the stock market.
As someone who has worked with plan participants, all too
often, they react emotionally to the stock market and commit
financial suicide.
I prefer 401(k), but I'd rather have both.
The 401(k) allows a degree of selection, depending on the
plan provisions. The pension plan is usually does not give
many (any) choices.
If it's between a) 401k or b) pension plan, I'd take c) both. It's come down to where I wont consider a job offer unless they offer both options.
Both have there advantages, so why not both? I'd like the firm's money in a pension and my own savings in a 401(k). This is true diversification!
I want a DC plan so I can get rich, and a DB plan so that when my plans for getting rich don't work out, I won't live in poverty.
Although I know I should be taking more responsibility for
my retirement, the defined benefit plan appeals to my lazy
side. It's more comforting to see a net payment per
month that increases with my years of service than to review
the performance of my 401(k) selections each quarter and hope
for the best.
We have both, a DB plan and a DC plan with a 401(k) feature. From an employee's perspective, the DB plan is far harder to comprehend no matter what we try to communicate it, particularly to younger employees. It is sort of a black box. You can't "touch and feel" it like you can when you see the growth (or loss) in your DC plan. Also you can't "help" it like you can with your contributions to a 401(k). It is just there, expensive and under appreciated..
This is a hard one because I like having both!
Personally, I would have to say I would want a 401(k) plan over a DB because I can control its investments. With tools like Portfolio Planner at my access, I feel I will be able to grow my contributions at a greater level in the long run than what a DB plan would provide. According to Portfolio Planner I have a 95% probability of being able to retire with an annual income of 80% of what I am making now. I did not include personal or Roth money in this assumption, which makes me feel even better!
However, I can say that I am very glad that my Father is covered by a DB plan. Even with the market being down, he knew he could retire this year without any problems. His TIAA/CREF retirement plan is down 30%, but thankfully that was a very small portion of his overall retirement savings.
Much rather have a defined benefit rather than defined contribution plan. Markets are too risky these days.
I suspect that a many, maybe most, people have a deep-seated desire to be "taken care of," to not have to do it on their own. Also, the investing world is so complex that many people, even those well-invested in their 401k's, are not at all sure that they will have enough money to fund their retirements. A huge number of people seem totally incapable of managing their money and saving.
If the preceding three statements are "on target," of course people will long for the "good old days" of defined benefit plans when somebody else took care of "it" for you!
May I add that most people forget that pensions are a post
WWII phenomenon...and the world has changed dramatically
since then.
The ones we hear from in our group would like both so they have the protection or coverage from both philosophies. Our plant employee's do have a small DBP, they would like more contributed because currently it takes just under 30 years of service to earn $500 per month in retirement with the DBP. Our 401(k) does not have a match but we do allow up 60% in deferral so depending on an individuals situation most have the ability to max out on deferral. However just over half even participant because without a match they don't see any benefit in making contributions.
As far as employer contributions I think that mobility is more important than the instrument. The DBP doesn't require the employee to contribute any cash but this seems to keep overall savings rates down. The thing I like best about matching is that if they want the "free money" they have to set aside some of their own and I believe this gives them a better chance of retiring above poverty levels. The matching money usually has the ability to go with the employee in a short amount of time.
I would choose the pension plan because at least that part of one's retirement plan would have the employer bearing the market risk. If I had a pension plan, however, I would be praying for the financial health of my employer, so the plan would continue throughout my retirement. I would also continue to build personal savings for retirement and/or an inheritance for my children.
Always an interesting topic to discuss!
As an avid political fan, my head has never been in the financial world. Although I am the Legislative Analyst for a DB plan and I work across the hall from our Investment team, that's about as close to finances as I get. Since I haven't ever had a head for investing or been personally interested in it, I prefer for someone else to take care of my investments. In my own personal case, I think a DB plan is the safest bet, especially in these frightful days of the market. I much prefer to put the investment burden on the shoulders of people who are trained to do this, rather than count on my own abilities. If I actually took on that responsibility, it would be like giving a 3 year old a shovel and seeds and telling them to take care of their family with that.
Almost any employee who is under age 55 would be very
foolish to prefer a DB plan to a 401(k). There may be
investment risk involved with a 401(k), but because the value
of a DB plan is generally based on the present value of a
percentage of final pay payable at normal retirement age, the
actual value of a DB plan for a participant who separates
from service years before normal retirement age tends to be
minimal. Ignoring the question of vesting, a worker
covered by 4 different DB plans over a 40 year career is
likely to have only a fraction of the retirement income of a
worker with the same work history with 401(k)s at each
successive employer. Of course in the best of all
worlds, the worker would be covered by 401(k) plans at his or
her first three employers and then by a DB plan for the last
10 years prior to retirement when accruals to the DB would be
largest and inflation and the time value of money wouldn't
erode the value of the payouts.
I'd definitely prefer a DB plan. I don't want to be responsible for investing my retirement nest-egg, especially when I'm 80. Can you imagine your grandparents being responsible for their own investment decisions? The best deal in town is the annuity from your employer.
I'll take the 401(k) for the last 20 years and the pension for the next 20 years (I'm in the middle of my career). This has nothing to do with the past versus future investment climate. Pensions are unappreciated by young people because they aren't worth much to young people. The opposite holds for old people.
If it were one or the other, I'd prefer a 401K. My reasoning is quite unique though. I am in an enviable or unenviable situation of having both with my current employer. As the Benefits Manager, I recognize the benefit of both and am responsible for communicating that benefit. But explaining a plan that won't pay a benefit for at least another 33 years to a 22 year old laborer is impossible. It is just as impossible to put a positive spin on it for the young professional employees that only expect to be with the company for 5 - 10 years.
ME: "Yes when you go to collect your benefit at age 55 or 60 your benefit will be based on your earnings from age 25 - 35"
THEM: "Well, I guess I'll be able to afford a loaf of bread every month!"
OUCH!
401K's provide a quarterly picture that is easily
understandable. I'd be shocked if 50% of participants
understand their annual DB statement. My wife's
co-workers are amazed that the statements make sense to me
and wonder if something is wrong with me!
The way you present the question makes it simple. I would rather have my employer contribute money for a pension as opposed to provide me a vehicle that I can save money in and postpone taxation.
Now would I rather have 3% of my salary go to buy a guaranteed pension benefit or have that 3% placed in a self directed plan. Give me self directed.
In the end people want to have money for retirement as an
employer the only way to do that and be sure the money is
there is to provide a guaranteed pension. There are
exceptions, but the blue collar, Jerry Springer watching
public will spend it if you give it to them. The only
answer is to give it to them later.
Definitely a 401(k) plan. As a participant, I prefer the ability to control my own retirement destiny as much as that is possible. I can take advantage of company contributions through matching provisions while saving for retirement at my own pace. Also the portability and future control of the funds, after (if!) I leave the company, is important to me.
If I had a choice I would prefer a defined benefit pension plan, because then I would know exactly what promises my employee has committed to me. and I could adjust my future financial plan accordingly, which may or may not include social security benefits, etc. I could always open up a deferred retirement program either through an IRA or another offered deferred comp plan my employer may offer as an additional elective or strickly out on my own as a taxable investment portfolio or all of the above.
It takes some of the mystery out of my financial plans.
I would prefer to have a DB plan. It is FULLY funded by the employer with a GUARANTEE that there will be SOMETHING to retire on. I can still have my IRA, and face it, I'm not putting much more than $3,000 away into retirement each year.
With the 401(k) it's up to me. I may or may not get an employer contribution, and I have a knack to pick the sinking investments (maybe it's just the current economy).
In addition with a DB plan, those who "job hop" will
eventually pay for their lack of commitment/work ethic.
If I had to choose one (see below), it would be the 401k plan. There are advantages to both types of arrangements, but the deciding factors would be control - having the ability to direct the investments, being able to obtain the account balance on a given day, being able to save as much as I want, etc., plus the current tax advantages of a 401(k).
I should mention that I am very fortunate to be covered by BOTH types of plans. My perspective (and thus my answer) would probably be different if that weren't the case.
A pension plan. The main leg of the three legged stool is MIA, thanks to those wonderful folks in Congress, the IRS and the DOL.
Personally I'd rather have a pension plan. As an employee, it is a whole lot easier not to have to figure out what percentage to put where. As an "old-timer" in the business, I can still remember when retirement plans meant just that- money set aside for retirement. Even with the penalties involved, I know from personal experience that IRA's rarely make it to retirement- I had to cash in both 401k and pension IRA's just to survive this terrible recession. My current employer does not have any retirement plans. So I am wishing I never had the opportunity to get at the money.
As for me, I want it all! My ideal retirement program would have a DB plan providing a floor lifetime benefit and a DC plan that would allow me some discretion on how it's invested to provide my "fun" money in retirement.
Well at one time I would have jumped on the 401k wagon and road it hard. That was before the stock market dived and my 401k balance was much much higher. I wanted to control my on destiny so to speak, be rich and retire early with my great 401k plan. Since that time the winds have changed and a good ole fashion Pension Plan sounds so good now and the mention of 401k gets frowns everywhere. No one even wants to talk about them because they are so disappointed in their balances. So I think Pension's are number one again.
If the facts about your potential plan balance at retirement age were provided for both 401k and pension, I think the younger people would vote for 401k and older folks would vote pension. Additionally, my belief is people in general would mostly prefer to have a company paid pension vs. a 401k with match.
I prefer a defined benefit pension plan (which I actually have) to a 401(k) plan for a couple of reasons:
1. Once I retire (which is not that many years away) I will breathe a lot easier knowing I have a guaranteed income for life, vs. a pot of money that can run out either because I spend it too fast or due to poor investment returns.
2. I don't have enough investment expertise to be able to maximize my returns on a 401(k) plan (as I have discovered in my small supplemental 457 account). The stress of making crucial investment decisions would probably drive me to an early grave, though on the positive side, that way I wouldn't run out of money before I die.
I'm fortunate that I'm actually covered by a plan that is to some extent a hybrid; while it's primarily a defined benefit plan, individual account balances are maintained. If the account provides a higher benefit than the defined benefit formula would provide, we get the higher defined contribution benefit based on the account balance. After the exceptional investment returns in the 90's the defined contribution benefit was higher about 60% of the time, but that percentage has been dropping somewhat.
In response to your survey question, I, as a young
professional with plenty of time to ride the stock market
roller coaster, definitely prefer a 401(k) plan. The
pre-tax savings and portability are the best features.
I've always thought DB pension plans were such dinosaurs
(plus I've never worked anywhere that had one). 401(k)
plans remind us all that we are responsible for our financial
futures. And who can we blame but ourselves (and of
course the stock market) when we don't have enough money to
live on during retirement? Excuse me - - That's
probably the employer side coming out. Not that I wouldn't
mind having both available, but given the choice of one OR
the other, give me something where I have flexibility and
choice. I just don't see that in DB pensions.
I would like to have both. But if forced to choose I would select the 401k plan. This is based on my current ability to contribute the maximum allowed each year and the strong company much my company currently offers.
Absolutely, without a doubt, I'd rather have a defined benefit plan than a 401k. Why? Because at any point in time I know almost exactly what my annuity will be, and that it will last my lifetime, and then last the lifetime of my surviving beneficiary. And, the investment risk is on the Plan Sponsor. What could be better? After the Enron 401k stories, lots of our Members started contacting us with concerns. We had to provide some education about the difference between defined benefit and defined contribution plans. Our Members, both active and retired, report a high level of satisfaction with our defined benefit plan. I think they would put up quite a fuss if the employer ever thought about discontinuing it.
D C if employee plans to change employers several times during career. DB if employee plans to stay with same employer, particularly during last 10 to 20 years before retirement.
Survey response...I enjoy my 401K, but I depend on my pension...
Can't I have both? I do right now with a 401(k) and a cash balance plan. But if I really had to choose, I guess I would stick with my 401(K). Even though it's down (more of a 401-K-O ....), it's still a better investment vehicle for the long run.
As an employee, I prefer the opportunity of having both a DB and a 401(k) plan. I consider the DB benefit as a safety net in case the market tanks and my 401(k) becomes worthless.
O-O-O-O-H.......TODAY I GET TO BE AN EMPLOYEE? NOTHING IS MY FAULT?
401K, OF COURSE. I LIKE TO HAVE "CONTROL".
As a plan Administrator a Defined Benefit plan is a lot less work. Once a year you do an evaluation of wages and service and send it off to the Actuary to calculate what you should fund this year. There is very little day to day activity to deal with.
As an employee I would like a defined benefit, but I have
not stayed at any employer longer than 10 years so I would
not have much of an accrued benefit.
Although there are some variables to consider as to the benefits of each plan - it would seem better in almost every case to be guaranteed a retirement benefit and let the employer take the market risk - so the DB plan is preferable. That doesn't mean that the employer can afford a DB Plan just that it is preferable.
Even though I'm in the business, if I could only choose one, I would still prefer a DB over a 401k. Given all the research necessary to actively manage a (hopefully!) successful 401k, I say let the experts do their thing...and let the rest of us get on with our regular jobs and planning for those "golden years"!
Thanks for asking. I'll look forward to seeing the results.
I would vote hands-down for a pension plan. The certainty of a defined benefit, which is what my husband enjoys, combined with the freedom from having to make investment decisions that so many are ill-prepared to make, seems like nirvana. I can and do save outside of our 401(k) plan as well, but I'd much rather have a professional money manager doing the investing and my employer taking the risk. Call me wistful if you want, but knowing both alternatives, I'll opt for certainty every time.
Our employees greatly appreciate the company's retirement trust plan. The Co. has contributed about 13.5% of each employee's gross income into their retirement plan for the past 20 years. (No cost, no matching contribution required from the employee.) The fund has generated about 14% rate of return on investments over that past 20 years. Employees get an update on their retirement amount annually. Almost all realize that they could never have saved that much money on their own and invested as wisely in the same timeframe. To most employees this is more money than they have ever had or will have in their lives.
The specific answer is "it depends". Is it a 401(k) plan with no match that has high investment and administrative fees passed through to participants? Is it a pension plan with a financially strong company that pays me 5% of my highest annual income for each year that I have worked there and I have worked their 20 years?
With the same money being spent by the employer I much prefer a defined contribution plan. It is more portable, I exercise more control, and it does not have the risk of being under funded or worse by potentially inept management or tough company financial conditions. With a defined contribution plan, once vested I can take my money with me, and invest it how I would like to. There is not simply a promise to pay some amount when I reach a certain age.
The best retirement plan I ever heard of was a defined
contribution plan that the employer deposited 15% of your
earnings into a plan with an outstanding choice of high
performing, low fee mutual funds.
A 401(k) plan for sure! I like my job, but stay as along as it takes to get DB income?! Maybe. Maybe not.
I would be able to spend more time working and less time worrying about the market performance if I had a defined benefit plan.