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Pension vs. 401(k)

March 15, 2019

Given a choice, which would you choose: a guaranteed fixed income for the rest of your life, or a lump sum that you could invest? As it turns out, lots of people prefer a sure thing.

This is what a recent survey showed about public sector employees posed with the option to select a defined benefit pension plan or a 401(k)-type defined contribution individual account. In fact, even when the defined contribution plan was the default option and workers had to proactively choose the defined benefit pension plan, they made the effort. In the eight states studied that offered a choice between the two options, all had employees choosing pensions at rates of 75 percent or higher in 2015.1

If there’s one thing this survey can tell us, it’s that people are paying attention. Most people don’t have unrealistic expectations about stock market outperformance, “getting rich” and retiring early. Many people remember what the recession was like and want to be better prepared should it happen again – particularly during retirement.

A MetLife survey recently revealed that 21 percent of retirement plan participants who opted to receive their pension or 401(k) assets as a lump sum depleted that money, on average, in less than six years. Among those given only the option of a 401(k), who took a lump sum, their money ran out in an average of four years.2

Employer-sponsored pensions aren’t that common anymore, but you don’t necessarily need one. It’s possible to reposition a portion of the assets from a retirement plan and create your own guaranteed income stream with an annuity; the guarantee is backed by the financial strength of the issuing insurance company. We can help you determine if an annuity is right for you. Please contact us to schedule a consultation.

Even employees who have a pension plan may not get the retirement income promised because many pensions are now underfunded. This is particularly true of private, multi-employer pension funds. These are funds typically created by labor unions and cover industries where people often work for multiple employers in a year, such as trucking or construction.3

Many of these funds have had difficulty recovering losses since the recession because the employees also work in declining industries such as manufacturing. When pension plans don’t have enough money to pay out the income they’ve promised, sometimes they go bankrupt or pay reduced amounts. To give you an idea of how many private multi-employer pension plans are currently underfunded, according to one report, it would take $76 billion to shore up the ones on the brink of insolvency.4

Single-employer pension plans appear to be in better shape. Their maximum pension guarantee from the government’s Pension Benefit Guaranty Corporation, should their plan fail, is $65,045 a year versus a multi-employer plan guarantee of $12,870 a year for union plan workers with 30 years of service.5

Though many employees may still prefer a pension over a self-directed 401(k) investment plan, today’s pensions are not as generous as they were in the past. Many involve higher retirement and benefit-vesting ages, longer work periods to qualify, lower payout percentages and smaller inflation adjustments once payouts begin.6

Content prepared by Kara Stefan Communications.

1 National Institute on Retirement Security. Aug. 23, 2017. “Public Employees Choose Pensions.” Accessed Sept. 27, 2018.

2 Richard Eisenberg. Forbes. April 11, 2017. “The Retirement Choice Causing Some To Run Out Of Money.” Accessed Sept. 27, 2018.

3 Katie Lobosco. CNN. May 7, 2018. “What happens when your pension fund runs out of money.” Accessed Sept. 27, 2018.

4 Ibid.

5 Ted Knutson. Forbes. May 17, 2018. “Some Union Retirees Could See Pension Benefits Cut 90%, PBGC Chief Warns.” Accessed Sept. 27, 2018.

6 Dan Caplinger. USA Today. July 3, 2018. “Pension cuts getting steeper for state and local governments.” Accessed Sept. 27, 2018.

Annuities are insurance products that may be subject to fees, surrender charges and holding periods which vary by company. Annuities are not a deposit of nor are they insured by any bank, the FDIC, NCUA, or by any federal government agency. Annuities are designed for retirement or other long-term needs.