Often times, when politicians (in particular) want to paint a rosy picture of the economy, they will point to the stock market and talk about employee's "401(k) Pension Plans" increasing in value. Well call me a stickler for details, call me a cynic, and call me someone with many years working in the retirement plan business. Just don't feed me that particular line, as it's simply not true.
The untrue part: 401(k) Plans are not "Pension" plans. Technically, they are considered "cash or deferral arrangements" according to the Internal Revenue Code. This means that they do not provide any guarantee of benefits of any sort; employees basically just get out of it what they put in, plus any employer contributions (which are not mandated), plus any investment gains. Or minus any investment losses. These contributions and investment results, if positive, are tax deferred until a later date. Basically, the employee bears all of the risks.
The above means that if an employee doesn't voluntarily put away enough money, well, technically speaking, they are "screwed".
A true part: 401(k) Plans were never intended to be replacements for actual pension plans. By way of definition, a true pension plan is one where an employee would work for "X" years and get a lifetime monthly payment, for example, of "Y dollars", based on their pay and years of service. Basically, under a pension, the employer bears all of the risks.
The vast majority of companies in the United States no longer offer true pension plans. Most do offer 401(k) plans.
So how did we get into this pickle? Call it another victim of an ever-increasing desire to reduce corporate expenses. Basically, the tax code makes having a true pension plan unfavorable for all but a very small number of employers. The details of why that is the case are out of scope for a blog posting, but if you want to read more, click on THIS LINK from Investopedia.com for more information.
A bottom line of sorts: If you work for an employer with a true pension plan, well, that is terrific. If you don't, and the employer offers a 401(k) (or 403b or 457) plan, then by all means participate and contribute as much as you possibly can. Also, because these plans rely on you to make investment decisions, take advantage of any professional advice offered by your employer or your own financial advisor.
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