Category Archives: 401K

401K Vs a Traditional Pension Plan – Which one will be the best for you?

Earlier most of the Americans used to think that they will work in some big company for 40 years, build up a big pension. Once they retire, they will enjoy their golden years on that pension. Sadly, this dream has changed a lot in the last twenty years. People still want to retire and live comfortably, the 401k plan has surpassed the pension plan as the retirement vehicle of choice.

Pension planPensions : Whenever people think about pensions, the first thing that comes in mind is of retirement platforms known as defined benefit plans. These plans have a guaranteed payout amount on retirement. The amount of money is determined by the number of years worked, amount contributed, salary and other factors that vary from plan to plan.

401k : This happens to be more modern retirement platform and is gaining a lot of popularity with many companies. These plans have been in existence since 1980s and they were not for the common people in the beginning years. Instead, they were usually meant for executives who can benefit from these plans. Nowadays, many companies are using it as retirement vehicles for their employees and executives alike. Its a kind of a contribution plan which means that employees can contribute up to a certain amount when they choose to do so. If the employers want, they can also contribute to the employees account.401K

Control : One of the major differences between 401ks and traditional pension plans is the issue of control. Who will control how the money is invested once it is in the plan? In case of traditional pension plan, control is given to trustee for the pension and tends to make very conservative investments in order to protect the pool of money. In a 401k, the employee has the full control over how much money will be invested. There may be limits on the type or number of investments pursued by him, but thats the only drawback to look at.

Which is the best plan ? If people were asked this question five years ago, then they would have preferred 401k for sure. But now, since the time of great recession hit and many people realizing that they were not good in picking stocks. The idea of having a stable, conservative investment like those found in pensions has started to seem a lot more attractive to such people than it did before the economic troubles came along.

Different people have different answer to this question. People who are comfortable with the investment world will find 401k to be more sensible. But if you have someone who will make investment decisions for you, a pension plan may be the way to go. Some people will prefer 401k plan for couple of reasons. They will have control on their investment. And they can contribute any amount each year. Whatever you decide, make sure that you maximize your retirement savings to ensure a comfortable time in your golden years.

  • Some important resources:

http://www.retirementplans.irs.gov/choose-a-plan/401k-and-profit-sharing-plans/safe-harbor-401k/

http://www.dh.gov.uk/health/category/policy-areas/nhs/resources-for-managers/nhspensions/