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Dear all,
here's a disturbing link to bad news about 401(k)s and how low and middle income people are better off with defined-benefit pension plans. The bottom line seems to be that unless you're very rich now, you're more poor today than you were 15 years ago:

http://www.thestreet.com/funds/belowradar/10016126.html

http://www.thestreet.com/funds/belowradar/10017460.html

Comments, discussions?
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The bottom line seems to be that unless you're very rich now, you're more poor today than you were 15 years ago

That is not what I take away from it. My bottom line reads more like, "If you don't know enough about finances to manage your 401(k) properly, and don't have enough sense to get help, you may be in trouble." But if you are in that position, then you are probably going to have financial difficulties no matter what options are available to you.

Thanks!
Joe

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My bottom line reads more like, "If you don't know enough about finances to manage your 401(k) properly, and don't have enough sense to get help, you may be in trouble." But if you are in that position, then you are probably going to have financial difficulties no matter what options are available to you.

Tell that to the people who lost their DC value from Enron/Lucent/Global Crossing/etc. Are you actually saying that if you are in a position at age 65 where you have inadequate savings that, regardless if whether a defined benefit plan was available, you would have financial difficulties anyway??

I'm glad you aren't my company's employee benefit consultant. Sink your teeth into this: http://www.soa.org/sections/rrs_report.pdf

Most employees severely underestimate their retirement needs. They don't know how long they will live, and they truly can not be trusted to invest their retirement money. I'm all for the Fool approach of financial independence and empowerment, however, I'll take my employer's GUARANTEE over my GAMBLE any day of the week. Part of being smart about your money is not falling for fools gold when you see it.

Wait and see what happens when the first generation of DC only employees hits retirement.
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Are you actually saying that if you are in a position at age 65 where you have inadequate savings that, regardless if whether a defined benefit plan was available, you would have financial difficulties anyway??

Yes, that is what I am actually saying. If you made bad decisions in regards to saving for retirement, then chances are very good that you will also make poor decisions in regards to spending, budgeting, etc., etc.

I'm all for the Fool approach of financial independence and empowerment, however, I'll take my employer's GUARANTEE over my GAMBLE any day of the week.

If you are gambling, than you are doing it wrong. :-)

Thanks!
Joe
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One thing it tells me is that "we" are not doing our best at educating people regarding financial matters. I think a high school course or 2 dealing in financial matters (savings, SS, pensions, 401k, etc) would do a lot more for our citizens than a lot of what currently goes on in the schools. Colleges should also have a course or two as part of the required curiculum on this subject.
Perhaps employers, at least the major corporations, could also do a better job of informing its employees the impact of decisions.
I think that most people will make reasonable decisions if they are presented with the right facts to base the decision upon.
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I look at it this way. This means you actually have to become actively involved in your finances when it comes to your retirement money. You can't depend on "Daddy" to spoon-feed you any more.
In the "good 'ol days" employees spent their entire working life in one place. How many do that now? How many stay at a place long enough to qualify for the pension plan? Think about your own life. How many companies have you worked for? If you change jobs, whether through choice or through other circumstances, you lose the pension.
But your 401(k) can follow you, or you can roll it to an IRA.
What a concept: employees being asked to take some responsibility for their life. Those evil, conniving conglomerates!
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Here is a radical concept. Just because you are a subscriber to the Motley Fool and may even know something or to about analyzing companies, does not mean that you can take care of your own retirement. Sorry to be the bearer of bad news.

My personal opinion is that most people are full of wind about their abilities, and only a few actually can beat an after tax return of 8% (which virtually every pension program guarantees). If you are beating that, good for you but you should save your rhetoric for the millions who just can't do it. Most people know absolute JACK and YOU are going to likely pony up a portion of your money (that you earned with your superior investing expertise) to subsidize their welfare.

Don't kill the messenger. Your employers have drastically reduced your benefits and told you how much better it is for you and you all have fallen for it hook, line and sinker. Its OK, so has the rest of America. I hope I turn out to be wrong, but do any of your companies provide advice about how to invest your 401(k)? What is in place to ensure that retirement needs are met?

Who knows whether or not they will outlive their savings? It would be a real b1tch if you run out of money at age 95 and can't pay the rent. As a retiree, how much should you annuitize? What if there is one or two bad years in the market? Is anybody being counseled by their employers about how to deal with these risks that they are now borne with?

The people who get counseling are the rich who don't need it as much as the rank and file. Unfortunately, if the rich have problems managing their money, it won't drain the economy as much as if the rank and file have a problem. It will affect us sooner or later.
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>>>>The bottom line seems to be that unless you're very rich now, you're more poor today than you were 15 years ago<<

That is not what I take away from it. My bottom line reads more like, "If you don't know enough about finances to manage your 401(k) properly, and don't have enough sense to get help, you may be in trouble." But if you are in that position, then you are probably going to have financial difficulties no matter what options are available to you.<<

And yet they want to let America manage their own social security funds in the market. Oy Vey.

Seriously, 15 years ago I was a junior in college. I am definately not as poor now as I was then. If you are planning to retire this year, then for sure the recent downturn (not to mention world events) has probably sobered your globe trotting plans. But if, like me, you still have 15-30 years more before putting in for a gold watch, chances are you won't even remember the distress.

If those nearing retirement have not altered their allocations to something more conservative, then you are right, they have not managed their accounts Foolishly. At the same time, if I became scared of the risk and moved my money into something safer, I would not likely have enough to see the world when I do finally retire.

David
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>>I think that most people will make reasonable decisions if they are presented with the right facts to base the decision upon.<<

Most people just want to be told what to do. There are some companys out there now that work with retirement plan members to help them better manage their money. Many companies also hold seminars for employees, but at my company, only a fraction show up. I am pretty confident but I still go in case I learn something new. Too many believe just making the contributions will be enough. Even so, it is still up to the individual to take charge of their future today rather then wait until it arrives.

David
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During the 80's there were several major pension funds that went bankrupt due to poor investment. The federal government had to set up a pension security system. Now the gov't has to fund fixed plans whent he companies go belly up.

If you are not actively taking part in your life and have choosen to let someone else lead it for you the gaurenteed pension plans are great. I would rather succede or fail on my own. give me the tools and I will do as much for myself as I can.
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My feeling is that financial education is best done at home, by parents.

Thanks!
Joe
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do any of your companies provide advice about how to invest your 401(k)? What is in place to ensure that retirement needs are met?

It is not their job to ensure that my retirement needs are met; it is mine. Plain and simple. I am grateful that they are providing me with benefits to help.

By the way, my employer offers a 401(k) (with company match) AND a pension plan. :-)

Thanks!
Joe

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Answer, I think you missed my main point. Pension plans are useless if you are not at the company long enough to qualify for it. In these times, most employees are NOT in one place long enough to get the pension, so the 401(k) can follow them, and grow, whereever they go.

And yes, I do believe that you are responsible for your own financial well-being, not your employer. Your employer gives you the opportunity to do it, but it is up to the employee to take advantage of it.

I don't believe I said I was any kind of financial expert. But I am smart enough, and motivated enough, to get help when I need it.
I'm pretty sure that is the purpose of this forum.
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Answer,, I think you missed my main point. Pension plans are useless if you are not at the company long enough to qualify for it.

I didn't address this point. (I was actually responding to someone else who added nothing simply by touting his own expertise) You are correct, though. The trend of the mobile workforce has weakened the effectiveness of the Pension plan. The problem is that it is an unaddresable issue as long as employers are reluctant to offer such a plan anymore to begin with.

If the workforce appreciated the true value of a defined benefit plan and could see through the DC for what it really is, then something could be done about the short service situations. There are many different ways to design a Plan around these issues. As long as the workforce sees defined contribution as better, it is a moot point.

Like it or not, it is a social problem. It doesn't matter how anybody thinks it "should be". The bottom line is there is only so much moolah in the account, and taxpayers are going to foot the bill.
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Most people just want to be told what to do

And I think that that is a huge part of the problem to the approach of letting people "manage" things. I dont even know if it is smarts, it is just that the vast majority of people find it easier to be led than to lead. Even when something so important as their retirement is as stake.
Call it personal human inertia if you want to. Unfortunately the people who are Foolish are in the minority. Even Fools dont necessarily know everything(as was pointed out before). Multiply the horrible financial disasters that most peoples retirements MIGHT become by millions. And the social cost to our economic and social systems becomes scary. Extrapolate the opportunity cost. Govt funding has to be diverted from growing the economy(and thus indirectly investment worth)to bailing out these millions of people. It is always easier and cheaper having a well thought out and integrated disaster plan in place than to try to come in later and clean up the mess.



Magique "IMHO" Darkayne
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It seems to me the differences here are pretty obvious. With a defined benefit plan your employer takes the risk. If interest rates rise, his plans are overfunded and he can bring the excess funds to the bottom line as profits. If interest rates go down, his plans are under funded, so he has to cough up extra bucks.

Employers do not like this responsibility. So what do they do? They point out that they must invest this money in conservative bonds. They wait until stocks do well and then tell everyone how much better off they would be if they had their own plan--like a 401K or a defined contribution plan--so they can benefit from those marvelous stock gains. Then of course many wind up hiring financial advisers to help them work out the complex details. Everybody makes money, but the individual gets screwed.

This is not unlike current discussion on investing social security funds in stocks. It sounds good, but we all know the financial services community is going to be the main beneficiary; the individual may lose his meager benefits. At least these funds should be professionally managed (i.e., mutual funds), and I would think Congress should impose some common sense limits on approved funds to make sure they do not put all funds into the internet bubble or the likes of Enron. Stocks yes, but lots of blue chips with only a portion in risky "growth" stuff.
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Having been involved on these message boards for more than 2 years I think this is one of the more interesting topics brought to discussion. There seems to be alot of passion on both sides of the issue. Deservedly so, There are many benefits DB plans have over DC and vice versa. The DBs offer the guarantee and gives the individual security in knowing it will be there. The DC gives the employee freedom to change jobs and advance in a career through mobility without sacrificing their retirement.
Some main points worth remembering, The tools are out there for individuals to have an effective DC plan. If most DC plans target an annual growth rate of 6-7%, then this should be attainable for most individuals provided they are provided with an effective plan and execute it properly. The problem is neither the individual worker or the Plan Sponsor fails to implement them. There is a regulation in ERISA called 404c. It is supposed to ensure the employees have a wide range of investment options and have the means to make informed decisions about their investments. The problem is, it is a voluntary regulation, there is no penalty for failing to comply. It just adds a measure of protection should an employee lose money in a DC plan, the employer can take cover under 404c.
The burden should not be on the employer to provide for their worker's retirement, in order to attract and retain high quality employees, the employer should offer a means to achieve that end. It is important to remember that offering a retirement plan to the employees is not a requriement. It has always been and will always be up to the individual to prepare for retirement on their own.
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401(k)s also offered portable benefits, letting workers take their retirement funds with them if they changed jobs.

Centex and Answer touched on it briefly a couple of posts above this. But in that whole article there was only one sentence about the biggest advantage of 401(k)'s. Before the bull market of the '90s that was the major selling point of the 401(k) and it still should be.

The article's author was going for sensationalism, obvious by the completely unecessary portrayal of a rich vs. poor issue. The point (undereducation, reduced benefits, whatever) was made without the affluence-bashing.

- Tom
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Its funny, these types of conversations nver took place while the NASDAQ was over 5,000. I guess the the irrational exuberance has been replaced with sober reality. I think that in the long run, thats a healthy thing.
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Its funny, these types of conversations nver took place while the NASDAQ was over 5,000. I guess the the irrational exuberance has been replaced with sober reality. I think that in the long run, thats a healthy thing.

I suspect that sober reality is ALWAYS a good thing when one plans retirement.(grin)
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The article's author was going for sensationalism, obvious by the completely unecessary portrayal of a rich vs. poor issue. The point (undereducation, reduced benefits, whatever) was made without the affluence-bashing.

- Tom

This was my first reaction after reading both articles. The articles also only mentioned half of the situation (the plight of the lower income and how higher-income employees take unfair advantage of these plans). It failed to mention that many "highly compensated" employees have their 401(k) contributions limited due to annual discrimination testing so that a given 401(k) plan may remain "qualified."

Life, in general, is hard work. Planning is key. Things that begin with choas, confusion, and poor planning often finish worse. Ok, enough philosophy for me -- back to lunch....

Regards,
LooseChange

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Any statement "The rich this, and the poor that" is going to be inaccurate/misleading. Trying to lump everyone into two groups is the tool of demagogues.
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Actually, I find myself kind of galloping down a slightly different path.

There has also been a fairly big change in the job market itself. Companies are showing less and less loyalty to their workers, and are finding less and less loyalty being returned (duh, guys). We're making our job skills more and more portable, always keeping an eye on the job market, willing to jump from ship to ship if we think we'll get a better cruise over there. The blood bath when all this started was appalling, workers being let go (right sized) out of jobs and contractors being brought in as a kind of "disposable" work force. For a while, a lot of qualified people were hurt by the so-called "new" economy. Frantic for "real" jobs, they accepted bigger and bigger paycuts, fewer and fewer benefits, longer hours, fewer vacation days. No pension. It was very, very ugly for those who were not near enough retirement to simply walk away from the whole deal in disgust, yet old enough to find themselves outmanuevered by the kids entering the marketplace with kid-energy and kid-resiliance.

What I'm wondering is, are we going to start seeing these 401k things working out a little bit better as time goes on? There's always at least one generation that is hurt, sometimes badly, by such a drastic change. The learning curve is steep. I remember people being shocked when they were fired from Pacific Bell some years ago; they were surprised to learn that, in general, one does not get paid to stand around and shuffle papers from one desk to another. That a secretary with no typing skills was going to be hard pressed to find a job, no matter how many years she had in the business. That a marketing director who could not show a single product he had ever promoted was not going to be instantly snapped up by a willing employer.

People are shocked right now that the 401k bit them. We're all going along, heads down, slogging through our Monday to Friday routine and somehow expecting that somebody else, somewhere, is taking care of our retirement money. It's a tremendous shock to the system to realize that, gee, that might not be so. You expect that the mutual funds you're investing in are managed by someone who knows that the heck they're doing, and it hurts to discover they don't.

But people learn. They adapt. Sure, there are a lot of people who, right now, are hurt and don't have the time and/or inclination to save themselves. Their retirement plans are in shattered ruins, and there's not much to be done but to pity them in the extreme - and to learn from it. Those of us young enough to avoid those rocks should do it - NOW. I have a great deal of pity for those who were hurt in this recent downturn, but I'll have a lot less for those in my particular cohort who are. For heavens' sake, you'd have to have your head pretty far in the sand not to have heard about all this!

Going forward, I don't think that 401k are "against" any particular class of people. I don't believe that pension plans are going to come back in force, especially not while we've got a situation where the average Joe spends, what, only a few years at any given company? What happens to the pension benefits then, when you aren't there long enough to even begin to vest? I do believe that what we need most is to talk about these things. Talk about Enron, talk about people who have done well, talk about people who have suffered a total loss of their retirement funds. Tell the stories to our kids, discuss it amongst ourselves. Those of us who do think about these things, share the stories with those who don't.

Anyway, that's enough miscellaneous ranting for the day.

Onward!
Tamarian
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Dear all,

The discussion by everyone about this has been great -- however, I'm still not quite convinced by the pro-401K arguments.

One of these arguments seems to orbit around increased labor mobility, e.g., "We're making our job skills more and more portable, always keeping an eye on the job market, willing to jump from ship to ship if we think we'll get a better cruise over there." (see TamarianG's post: http://boards.fool.com/Message.asp?mid=17103637).

However, the following article suggests that this, rather than a benefit, is an additive negative factor contributing to the potentially problematic 401K culture and mindset -- see "Job hopping can fritter away Retirement Savings" by Eric Gillin:

http://www.thestreet.com/markets/ericgillin/10009403.html

more thoughts, discussion, comments?

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I didn't read the article, but I see the current trend toward shorter employment tenure as trading current benefits (e.g. higher pay, better working conditions) for deferred benefits (e.g. guaranteed retirement income).

Since our society has become more "now" oriented than our grandparents' generation, the trend toward shorter stays at a job (and toward current consumption enabled by easy credit card debt) are simply a reflection of changed attitudes.

--Peter
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here's a disturbing link to bad news about 401(k)s and how low and middle income people are better off with defined-benefit pension plans. The bottom line seems to be that unless you're very rich now, you're more poor today than you were 15 years ago

http://www.thestreet.com/funds/belowradar/10016126.html

http://www.thestreet.com/funds/belowradar/10017460.html


Though the author of these articles conflates the two (in a typical "the rich are screwing the poor" vein), deferred executive compensation plans don't have anything to do with 401(k)'s. Deferred comp plans are really just legal tax avoidance vehicles for high bracket taxpayers; realize that these folks generally have plenty of retirement money, this isn't really some covert 401(k) only for the rich, as the author suggests, but a tax advantaged form of compensation for highly valuable employees.

Similarly, the problem with deferred compensation plans isn't really a rich/poor issue. 401(k)s are "underfunded" solely because most individuals choose not to contribute -- whereas under defined benefit plans, they're forced to. It becomes an income issue only in that lower income employees are less likely to contribute, which is due to both: (1) lower incomes making it harder to save, with equal consumption levels, and (2) on average, lower education (as higher educated workers on average earn more).

But this fact isn't really an indictment of defined contribution plans per se. Unfortunately, many workers make bad decisions about how much to invest, and (as your more recent post points out), they tend to undervalue benefits vs. cash salary. While it's hard to correct these problems (we can't have the government mandating when people can change jobs, and we shouldn't mandate that workers save money outside the social security system), we can at least try to improve transparency to facilitate decision-making, and perhaps develop mechanisms to encourage better (unconflicted) guidance for employees.


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401(k)s are "underfunded" solely because most individuals choose not to contribute -- whereas under defined benefit plans, they're forced to.

More choices than just those two.

In a 401(k), it is the individual's responsibility to contribute to the compensation plan. Such contributions reduce the amount of take-home pay you get below what your salary would otherwise indicate.

In a "profit-sharing plan"/"money purchase plan", it is the corporation's responsibility to contribute, an amount based on the plan documents, the company's operating profits, and the employee's salary. But these contributions don't reduce the employee's salary.

A defined benefit plan (traditional pension) does require some contribution by the employee.

If you have a choice between otherwise equivalent jobs A, B, and C each paying around $40,000 per year, and the interviewer will not tell you which type of retirement plan the company has, which one do you pick? You can't be certain that the job offering you the lower salary also offers a better retirement plan. So you pick the company with the higher salary.
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A defined benefit plan (traditional pension) does require some contribution by the employee.

Your statement is in error, and knowing your prior posts it's probably a simple typo on your part. A defined benefit plan might require a contribution by an employEE, but most do not. Most are funded solely by the employER.

Regards..Pixy
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Thanks. I wasn't certain when I made the post, but every DB plan I'd seen was a mixture of contributions...evidently I'm not well-read enough
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TheAnswer3:
you write in part: any of your companies provide advice about how to invest your 401(k)? What is in place to ensure that retirement needs are met?


Comment: at this time, companies are not allowed to counsel their employees on what vehicles to choose for retirement. The reason is that it creates a liability to the company or plan administrator if a suggeted choice turns out not to do well. Congress has some posssible legislation that will hopefully change that.


good points,
Jenn
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Joe,
I agree that financial education should begin at home.

But the problem is that we have many, many cash people out there living paycheck to paycheck who don't have a savings account, a checking account etc. They don't have them because there is no need for these accounts in their world. The offspring of these folks could benefit from a short public school education in personal finance.

Jenn
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