Your company is constantly re-evaluating its benefits package to see if there are ways to better compete for top talent. There are times when you find yourself thinking you wish you could afford a traditional pension plan instead of the 401(k) you now offer. Still, pensions are not everything they are cracked up to be.
Pensions are not as popular as they used to be. In fact, data from the Pension Rights Center suggests that just 12% of U.S. private sector employees had a pension in 2019. On the other hand, 52% had either a 401(k) or other retirement plan.
It used to be that pensions were the only way to save for retirement. But when the IRA and 401(k) were introduced, things changed, and pensions are now a dying breed. According to BenefitMall, a Dallas general agency representing more than 100 carriers, pensions are difficult to sustain. Above and beyond that, 401(k) plans offer some incredibly attractive benefits to employees.
In a standard pension scenario, your employees have no control over their contributions. Contributions are determined by the plan itself. This creates potentially two negative scenarios. First, a poorly conceived and managed plan could end up being underfunded after not taking enough contributions from employees. Second, employees could be left with less disposable income than they want because their contributions are so high.
Employees contributing to 401(k) plans have total control over their contributions. They decide how much to have deducted from their paychecks. They can increase or decrease that amount as necessary. The only thing they cannot do is exceed annual contribution limits as set forth by the government.
Contributions Are Protected
An employee’s contributions to their 401(k) are protected in the sense that they are not held by the company. Contributions go directly into accounts that are held and managed by plan administrators. So even if the employer goes out of business or has to downsize, retirement accounts are unaffected.
The same is not true with pensions. Contributions are held by the employer. If the employer fails, the pension plan is likely to fail as well. If an employer is not doing well financially and doesn’t continue to prop up its pension, the plan itself might not earn enough to pay the promised benefits.
Next up, employees contributing to a 401(k) have some say in their investments. Most plans offer a number of options, ranging from mutual funds to specific stocks. Each employee can determine their own level of risk and spread out contributions accordingly. You cannot do that with pensions. With the typical pension, employees get what they get.
Finally, there is always the possibility that some of your staff will leave your employ and go elsewhere. As you know, their 401(k) accounts are portable. Upon leaving the company, a staff member can either leave their existing 401(k) alone or transfer their balance into a new plan with their new employer.
Furthermore, all of the employee’s contributions are fully vested. Company contributions may or may not be, but at least the employee does not lose what they have already contributed. This could be the most important benefit of the 401(k) plan, given how frequently people change jobs these days.
It is tempting to think that the traditional pension is a better retirement plan. It might be under certain circumstances, but it might not be. As an employer, be thankful you are able to offer your employees something. A good 401(k) plan is a fine option for helping your employees secure their retirement finances.