As far as pension plans go, you have 401ks and traditional pension plans. Which is better? Difficult to answer as both have pros and cons.
As for retirement, there are several employee compensation programs there. But many employees don’t know about them. Well, the most common ones are 401ks and traditional pension plans. We are referring to a defined contribution plan and defined benefit plan respectively here. These two are not the same. Therefore, they come with their own advantages and disadvantages. Let’s take a look at them below. If you want to learn more about the Pension System In The US, Take A Look At The Articles Presented Here.
Advantages of 401ks
There are several advantages attached to 401ks. Let’s Take A Look Below.
- Here employees have more control over the investment plans offered to them. They can decide on the assets to invest on while choosing this plan.
- You can expect better portability when it comes to the funds. You can easily transfer these funds to another retirement account or IRA.
- Employees have the flexibility to make additional contribution to the plan from their salary. This can result in greater funds.
- The good thing is that most of the plans allow you to borrow funds early or make early withdrawals. When it comes to defined benefit plans, this is not allowed. In fact, defined benefit plans won’t allow you to touch the money until your retirement age. That means you can’t access the funds even if you retire early.
Disadvantages of 401ks
Well, now let’s take a look at the disadvantages of 401ks.
- You have to deal with reduced investing options. If we take a closer look we can see that more companies are reducing the investing options. This will affect your investment possibilities and the ability to diversify funding.
- Employers can change the plans anytime they wish. For example, the employers can reduce the percentage of their contribution. That means you have less amount of the funds.
- There is no guarantee that you will get money at retirement. It can be a risky scenario for you. First and foremost, your funds are not protected. The positive growth of your assets in the stock market is going to decide the fate of your return in the end. As we know, the economy is still recovering from a recession. So, one cannot expect things to be pretty so soon.
Advantages of traditional pension plans
- You will walk away with guaranteed money at the retirement. This is the biggest advantage of traditional pension plans, we can think of. The Federal Government makes sure that you get the money promised by the employer.
- You don’t have to worry about making wrong investment options. Here you don’t have to worry about the high reward/risk scenario of the stocks you invest in, in the case of 401k plans. You don’t need to spend time to review these things at all.
- You don’t have to invest a single penny from your salary towards the plan. In most cases, the employer provides the contribution to your pension plan.
Disadvantages of pension plans
- You have less opportunity to score big. Since you are not dealing with investment options, you might lose a higher pension amount.
- You are not allowed to access the funds until you retire. Even in the case of an emergency, they won’t allow you to access the pension money.
- Limited availability is another big problem. Traditional pension plans are hard to come by.