Pensions vs 401(k)s

While reading an article about states switching to the 401k model instead of the pension system (a good thing for both employees and taxpayers), I came across nasty comments at the bottom about how the world has fallen apart and all hell will break lose. Some people will attempt to resist forward change at all crossings.

“I imagine that anyone who went through the recession with a 401(k) and saw the stock market nosedive wished they had a pension plan instead of a 401(k)”

I bet those who had pension plans during the 1981-1999 great bull run wished they had 401ks too. There are ups and downs and pros and cons. The difference is that with a 401k plan, YOU get to chose 1) how much to save 2) how aggressive you want your investments to be. And you get to take the money with you; it's not some future promise that will have to be renegotiated. Those with 401k plans can easily mimic the returns of a pension plan by investing in treasury bond funds like their pension plans do. The difference is that it is not a one-size-fits all situation. Choice is good - choice is valuable.

“Many workers don’t know how to invest, many don’t contribute enough to their 401(k)s, and many cash out much of what’s in their 401(k) long before they retire....”

First there are target date retirement funds which take the guesswork out of what to do. Second, if they are so dumb that they will cash out their retirement fund, that is their own problem. Pensions are a one size fits all approach that don't work because one size doesn't fit all. And they require future unfunded liabilities which could cause the system to collapse in the future. 401ks allow workers to take control of their own finances and gives them choice: Bob might want safety and invest in bonds because he is close to retirement, but Jill wants to go all into stocks because she is just starting work. And 401ks are funded with cash now, not future promises. That is the biggest difference - you are in control of the money! 401ks and personal retirement accounts are the optimal solution.

It is just an unfortunate part of life that some people will go to great lengths to hate any idea that does not involve government hand holding and intervention, even if that attitude removes choices for other people.