Is a 401(k) better or worse than a pension plan?
ension plans used to be more common. They’ve since been replaced by 401(k)s as the gold standard for retirement plans. 401(k)s offer flexibility for employees and are more affordable for employers. Pension plans ensure a baseline payout in case the investments fail.
Risky Business vs. Safety Net
401(k)s allow you more control of investment options and have higher potential payouts. In exchange, you assume more risk. The profit ceiling is higher, but the floor is lower, much lower. If your portfolio flops, so does your retirement plan. Pension plans are lower risk.
Your employer ensures you a baseline income stream even if the investment portfolio flops. If the company you work for goes bankrupt or they decide to terminate the pension plan, your payouts will be reduced and may disappear completely. If you’re confident in the success and trustworthiness of your company, a pension plan may be a more secure option.
Pension Plans Are Harder to Come By
Pension plans are a dying breed. They used to be more common, but most companies have ditched them in favor of 401(k) plans. Pension plans are more expensive for companies to buy into.
401(k)s are more affordable and offer employees higher potential returns. With matching 401(k)s, the company agrees to match any funds you contribute up to a certain amount. Employers typically match between two to four percent of your salary.
401(k)s Have More Investment Options
401(k) plans allow you to opt for high or low-risk investment portfolios. You get to choose between various stocks, bonds, mutual funds, and exchange-traded funds (ETFs), depending on the available options.