Pensions are often viewed as a comfortable way for Americans to simply retire, get a gold watch and sit back with guaranteed income for life. But pension plans are not always perfect.
A U.S. News & World Report analysis shows why the 401(k) self-contribution system may be a superior retirement option for some people.
For starters, a pension plan can reduce career mobility. That’s because many company pension plans reward workers more the longer they stay with the company.
The result? “What ends up happening is that many people may want to leave, but end up staying at their current position just because they can’t afford to lose the potential pension benefits,” U.S. News stated.
Another potential drawback is that pension benefits can change — reforms can mean the benefits will be reduced midway through an employee’s career.
In fact, pensions can be eliminated altogether if a company files for bankruptcy or at least reduced despite government guarantees.
Also, pension plans do not extend beyond an employee’s lifetime or spouse’s lifetime. What about the children? U.S. News noted that “if you have enough money to sustain your lifestyle to begin with, you might want to invest on your own in hopes of leaving a bigger payout for your children.”
Additionally, presuming the 401(k) is actively managed by the individual who owns it, it is possible to get better returns with a 401(k) than with a pension plan.
And while yearly pension benefits are inflexible, 401(k) plan withdrawals and Roth IRA withdrawals can be timed for maximum tax benefit.
Finally, U.S. News noted, many pension plans do not have inflation adjustments, while actively managed retirement accounts, such as 401(k)s, can include strategies to keep up with current living costs.
However, there are drawbacks in the current economy to both pensions and 401(k)s, according to The Motley Fool.
“Pensions are supposed to guarantee a level of income during retirement, but they make kicking the can down the road incredibly easy, creating underfunded obligations that have helped cripple companies like General Motors,” Motley Fool stated.
It added, “Defined contribution plans are much more transparent — what you see is what you get — but given low levels of median household income growth and meager savings rates, they leave most participants ill-prepared for retirement.”
A new Gallup survey shows a majority of Americans want the government to find ways to enhance the benefits of 401(k) accounts. Most of the non-retired respondents in the survey ranked 401(k)s ahead of pension plans as their expected major source of retirement income.
© 2013 Moneynews. All rights reserved.