Financial crisis debate: Pensions vs. 401(k)s
For years now, many people have talked about 401(k)s as if they are the last word in saving for retirement.
The financial crisis, though, has pushed pensions back into the spotlight and sparked a debate over which is preferable -- the relative security of pensions or the risk-and-reward mentality that drives 401(k) investments.
“We are in uncharted territory," says Alan Glickstein, a senior retirement consultant at Watson Wyatt. "The 401(k) plan has been around for less than 30 years, and we’ve not yet had a generation of workers retire on all or mostly 401(k) assets. What happens when market volatility makes 401(k) investment returns and retirement income anything but predictable?”
We're about to find out. Thanks to recent market volatility, Glickstein believes employers who offer 401(k) plans will find it harder to predict when employees will retire. That uncertainty could hurt employee morale and productivity as well.
Those who offer pensions, meanwhile, must deal with new rules that require them to fund their pensions based on the value of plan assets relative to liabilities -- similar to the "mark-to-market" accounting that, rightly or wrongly, is under scrutinty for its alleged role in the current financial crisis. A slew of other proposed accounting changes for pensions are being met with skepticism by many employers.
So you're damned if you do and damned if you don't, right?
Sort of. The crisis has highlighted some of the weaknesses found in both strategies, but each has its strengths as well. Pensions offer security and stability -- hugely attractive traits during trying financial times. And assuming the market rebounds, 401(k)s should still pay off well in the long run.
Given the current financial environment, which savings strategy do you prefer? Which does your company offer?