Are 401ks Better than Pensions

Posted on by Forest in Investing, Saving Money & Finances

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Are 401ks Better than Pensions – Pensions and 401ks both serve as vehicles to put cash away for those golden years of retirement. So what is better, is it a 401k? The current favoured model is a 401k with only 20% of private companies offering pensions these days.

Are 401ks Better than Pensions?

Pensions are harder to come by so in many cases a 401k is your only real choice. From my research it looks like they may, in general, not quite be performing as well.

Are 401ks Better than Pensions

CBS said in a 2010 article:

“from 1995 through 2007 pension returns bested 401(k) returns by an average of one percentage point per year, on an asset-weighted basis. The old-fashioned defined benefit plan surveyed delivered an annualized 10.13 percent return over that cycle, while 401(k)s posted an annualized 9.06 percent gain. While 2008 was a down year all around, pension plans still outperformed by the same one percentage point differential.”

Source: CBS.
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20 Something Finance talks about the security of a pension and how you don’t get this with a 401k. That article talks about what a pension actually is and says:

“A defined benefit plan is what most of us commonly refer to as a ‘pension’. These plans offer guaranteed automatic payouts in retirement based on a formula that usually takes into account your salary and years of service. The longer you work and the more you make, the higher your automatic payouts. Most employers offered defined benefit plans at one point. Social Security is a type of defined benefit plan.”

Source: 20 Something Finance.

And although it is old, in 2006 The Fool said:

“A recent study by the Center for Retirement Research at Boston College examined whether employees with defined contribution plans fared better than their counterparts with defined benefit plans. Unfortunately, the results suggest that 401(k) plan participants aren’t doing as well as employees who have access to traditional defined benefit plans.”

Source: The Fool.

A 401k tends to save a company a small amount of cash and offers the employee full control over their investments. Of course this kind of adds an element of fun but you could mess things up. Learn what you are doing though and work hard at managing the thing and it is possible that you could bring back returns better than a traditional pension. The problem is the managing could become an obsession and almost like a 2nd job!

Do you think a 401k is better or a traditional pension? How well do you manage yours?

Thanks for reading.

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