How 401(k) Plans Work And Why They Killed Pensions

[NurseJackie]

Since 1980, pensions plans have been phased out in favor of 401(k) plans. They now represent nearly one-fifth of the U.S. retirement market. So how did 401(k) plans become such a popular form of retirement savings and how should they be used? Watch the video to find out.

[ret5hd]

1. Another facet: how tax rates killed pensions...

Note: this is how I remember things from a labor law class I took a LONG time ago. My memory may be faulty!

1) tax rates for the “uppers” were high

2) “uppers” wanted a way to move their income to a later date, when their income was lower (retired) so...instead of direct pay, they decided to be “paid” with a pension

3) federal law requires (required?) that if executives are offered a pension, so must the worker bees.

4) worker bees got pensions because it benefited executives

5) tax rates are lowered...NOBODY thinks their tax rate will ever be lower...especially high paid executives. If anything, high paid people KNOW that in all likelihood their tax rates will go up.

6) executives no longer have an incentive to delay their income...why not pay a historically low tax rate NOW, rather than a probable higher tax rate later?

7) executive pensions no longer needed...hence workers pensions no longer needed.

8) and now opinion (rather than what was taught):
We (married, joint filing)make less than $80,000. Our income would have to drop to less than $20,000 for our tax rate to drop. REALLY...what benefit is a 401k to us???

[MichMan]

2. People don't work for the same employer for 30 years anymore

I am retiring in a couple months and have a 401k

Half of my working life was in jobs of 5 years or less duration. At least with a 401k I could take my retirement funds with me as I changed jobs.

[zipplewrath]

3. It's not the same

401k's are not the same as a pension. A pension is a shared risk plan. You "pay in" for a career, and then you get paid until death. Some will get paid for a year, some for 30 years. Some will die before they get a check. But because of the shared risk, you get a higher payout than you can saving individually. Worse, if you lose a job in tough economic times, you may basically have to spend that 401k savings to get by. There is no such feature for pensions.

Workers were foolish to accept the loss of pensions. They may not have been able to stop it, but the younger generation let them go way too easily.

But I will say, to your point, we probably need to re-imagine pensions. Insurance companies probably need to create some sort of independent pensions structure, where you employer pays into it while you work for them, and when you move on to another company, they start paying in. Then, when you retire, you get a defined benefit for the duration of your life. Some legislation might be required to create such a structure.

[MichMan]

4. Like annuities?

[zipplewrath]

6. Not exactly

Those tend to have a death benefit associated with them.

[MichMan]

5. If you are working towards a pension, but have a long ways before retirement...

...what happens when you lose your job? How do you get by then?

[zipplewrath]

7. savings

That money you are putting in a 401k can be put into all manner of investments for a "rainy day fund".

[PoindexterOglethorpe]

8. There's a myth out there that most people had pensions.

That was never true. Plus, you usually had to work a very long time with one employer to finally collect that pension. And you couldn't take the pension with you. Then there's the fact that a LOT of companies have simply shoved their pension obligations off to the federal government. My small pension is less than a third what it should be for that reason.

At least my 401k was safe.