Skip to main content
No. of Recommendations: 3
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.


Print the post  

Announcements

The Retirement Investing Board
This is the board for all discussions related to Investing for and during retirement. To keep the board relevant and Foolish to everyone, please avoid making any posts pertaining to political partisanship. Fool on and Retire on!
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.