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Just curious, why do you say they're supposedly cheaper than pensions? I don't have a lot of knowledge about how they're managed, but I can't imagine that much disparity in administrative fees. And on the larger view, pensions represent a liability (I promise to pay Joe Sixpack 40% of his salary after ten years of service, some of which he will contribute to), while 401(k)s represent no liability at all. Work for the company 40 years and your 401(k) won't cover your retirement? Too bad. Should have contributed more or invested better; the company doesn't owe you anything. Or, for another example, if Joe lives to be 100 and he only planned for 76, that's a major problem with a 401(k), but a pension would still have to pay out, and it would be on the company's dime. In addition, at least in my experience, company contributions to 401(k)s tend to be small and decreasing (for example, my company contributes a maximum of 3%, paid once a year) over time, and you have the additional complexity that vesting introduces, where (at least as I understand it), they can take it back if you quit roll your 401(k) over somewhere else. So I'm not sure under what circumstances a 401(k) could ever not be cheaper. Are there some? |
Random change of subject, but did you ever wonder why some companies match 401(k) contributions? Or automatically give you a small contribution regardless if you decided to contribute yourself?
It's because 401(k) contributions for highly compensated employees (HCEs) are at risk of not getting the tax deferral unless the 401(k) plan meets a bunch of metrics including participation, etc.[1]
And you thought they were doing it out of the goodness of their hearts! ;)
[1] https://blog.personalcapital.com/retirement-planning/seeking...