8 ms·

"We saw in the 1980s a shift from pensions to 401(k)s; that was a raw deal for workers. These retirement plans were marketed as an instrument of financial freed

"We saw in the 1980s a shift from pensions to 401(k)s; that was a raw deal for workers. These retirement plans were marketed as an instrument of financial freedom, but they were really transferring risk from the shoulder of the employers to the backs of the workers." This is misleading. 401k's are considerably lower risk since they allow you to be diversified instead of putting all your eggs into one basket (ie a company retirement pension). The problem is the amount of money going into a standard 401k is nowhere near the amount that went into a pension. You had pensions paying out amounts that would require a 401k account with $1MM+ in it. The standard company 401k match these days isn't even peanuts compared to that, and that's if the company even matches at all.

andrewvc 9y ago
The other problem is that 401ks let you do dumb stuff pensions don't. Dumb stuff like pulling most of your funds in the 2008 crisis and holding it in cash to miss out on the rebound. Or investing in borderline scam products like variable annuities. 401ks are great if you're savvy. They are massively inefficient for society in that they require all the people who use them to understand investing. This is really bad policy at a society level. People need real, unbiased investing guidance.
- jdavis703 9y ago
  At what point does personal responsibility kick in? Every 401(k) I've been on has given the option of investing in funds that ramp down risk exposure as the fund's target retirement date comes closer. Literally all you need to do is put your $1400/month in to a retirement account and not touch it. If you're upper middle class this is not hard to do (again I'm not talking about poor people here, but those with money who aren't saving). Whenever our 401(k) report comes out at work I can tell that most people are not putting nearly the amount of money they should be into savings -- and this is a tech company so most everyone aside from interns are being generously compensated.
  - deleted 9y ago
    [deleted]
  - throwawaybbqed 9y ago
    I think education is an important factor. I'm nearing 40, make a lot of money, but have no idea how to optimize my 401k. When I ask co-workers, they are more ignorant than me. I changed companies a few times and have tranches of cash in each of their 401ks.
    - jdavis703 9y ago
      Well if you don't mind me asking, what kind of annual returns are you generating? If you're in the 7-8% range you're probably about as "optimized" as you can be, assuming your 401(k) is only giving access to large index funds. Another trick you can use is switch to a Roth 401(k). It means you'll be taxed on your savings today, but when you retire they'll be tax free. Now this is total speculation here, but I'm kind of assuming taxes will be pretty high in the coming decades as we try to keep social security going and pay down deficit spending, not too mention dealing with climate change fallout. Also good for you on keeping all your money in the 401(k) accounts, some people cash them out when they change jobs which triggers penalities and taxes. If you can however, I would roll all your accounts in to one giant 401(k) so you can better keep track of what's going on.
      - brewdad 9y ago
        I have no doubt that if the capping of 401k deductions goes through, Roth IRAs will be next. There is nothing stopping the government from deciding to tax Roth withdrawals down the road. They'll probably do it at a lower rate, like capital gains, but I fully expect it to happen.
      - throwawaybbqed 9y ago
        I have like 20K in a 401K when I worked at Microsoft a long time ago. This is around the 2008 fiasco. I just converted everything to cash. I didn't do a rollover when I changed employers (I think there is some time limit which I have likely exceeded). I've been trying to figure out if I can make use of that cash. The confusion is that the plan I was in was for Microsoft employees. Can I still use their plan's investment options?? I also don't want to incur any tax implication ... literally the cash has been sitting there for years because I am too stupid to figure out all the details. It is just sad :(
- lotsofpulp 9y ago
  Considering the extremely poor state of private defined benefit pension funds, as well as taxpayer funded ones, I don't see how one can make the claim that 401k has too much freedom to do dumb things compared to defined benefit pensions. Agency risk is always there when you hand over responsibility of something to someone, and it's especially acute with big pots of money. The best investment for retirement is to raise children who will raise grandchildren who all look after each other.
  - Spooky23 9y ago
    The secret to pensions is making contributions. Places like New York that legally require full contributions are doing fine (although that is not cheap to do). Places like Illinois who skip the bill or most companies post 1980 who steal the money are a different story.
    - pcardh0 9y ago
      https://www.mercatus.org/statefiscalrankings https://www.mercatus.org/statefiscalrankings According to this New York is ranked 39th of 50. Unfunded pension obligations, on a guaranteed-to-be-paid basis, are $321.07 billion, or 28 percent of personal income.
  - act_right 9y ago
    > Considering the extremely poor state of private defined benefit pension funds The poorly funded ones make the news, but there are many healthy ones that don't. It isn't agency risk that causes problems, it's a combination of increased longevity and low interest rates. A big problem with 401Ks is predatory investment advice. "Advisors" channel money into high-fee funds and commissionable investments and often "churn" money to generate additional commissions. The Obama administration cracked down by instituting a "Fiduciary" standard for retirement funds, but Trump has delayed implementation of the rule twice.
    - lotsofpulp 9y ago
      Almost every state and local government agency is underfunded, many in the billions of dollars. The reasoning is that they can always just raise future taxes, which allows for huge agency risk of politicians buying union votes. The politician gets elected, the current union members get paid, and the future taxpayers and union members who aren't voting get shafted. 401ks aren't perfect, but it's better than the above system. There's a reason no one sells annuities even close to what the government offers in it's pension benefits. It's ridiculously costly without using funny numbers.
- bko 9y ago
  Sure individuals can make dumb decisions with their money, like try to time the market. But so can companies when it comes to managing pension funds. This includes not funding future liabilities, since you likely won't be the one responsible when the payments become due.
- WalterBright 9y ago
  We already have a forcible retirement system that makes all the decisions for you - social security.
  - mikestew 9y ago
    Note the lack of the word “retirement” in “social security”. It’s a safety net, not a retirement account. Says so right on the tin. EDIT: and before anyone else gets an itchy downvote finger, go look it up. Here, I’ll quote from the SSA’s own page: “Based on social insurance principles, the program provides monthly benefits designed to replace, in part, the loss of income due to retirement, disability, or death.” (emphasis mine). It’s so the old and disabled don’t starve in the streets, not a retirement plan.
    - mooreds 9y ago
      Absolutely! Social security was designed to help the elderly avoid being desperately poor. And has succeeded at that to a large extent. But a full fledged retirement program it is not. The average monthly payment as of Jan 2017 is ~$1400/month: https://faq.ssa.gov/link/portal/34011/34019/Article/3736/What-is-the-average-monthly-benefit-for-a-retired-worker https://faq.ssa.gov/link/portal/34011/34019/Article/3736/Wha... Depending on your cost of living that may help (maybe a little, maybe a lot) but it's not typically going to be a replacement for your own savings.
      - hiram112 9y ago
        $1400 a month is the average. I can start collecting that amount at 67, and will statistically die at 78. So 11 years of benefits is $185k. Meanwhile, if I make an average of $100k for just 12 years, then I will have paid that much into the system (15% contribution). And that's not even counting the massive amount of compounding that will have occurred as I've been contributing since I was 14 years old. I know it's quite popular for the HN crowd to talk about raising taxes for things like universal health care, social programs, etc. But when I actually do the numbers and look at how I'm already paying about 1/3 of my income to taxes, I'm beginning to see why many conservatives don't trust the government to be fair stewards of our money.
- act_right 9y ago
  > Or investing in borderline scam products like variable annuities. It's interesting that you say this, because many VAs have embedded put options that were very valuable post-crisis. The "scam" happens when someone invests 100% of their modest life-savings in a VA. Ben Bernanke invests the majority of his retirement savings in annuities, it's really just like buying into a pension.
- ixacto 9y ago
  Pensions, 401(k)s, and most saving for retirement are not necessary. Just Roth IRA and compound interest. All one needs to do is save an extra $450/mo after tax starting at age 22, put that into Vanguard VFIAX or similar for the next 40 years. That will give you a few million at retirement...tax free assuming the market continues to act how it has acted for the last 50 years. Combine it with social security and retirement will be manageable for most. Spend the rest of your salary on hookers/blow or iPhone game microtransactions, it doesn't matter. The problem is the lack of financial education and ethic in the population.
  - Broken_Hippo 9y ago
    Or some of the problem could be the $450 per month. At 22. In indiana, that's a rent payment. A car payment. You might not even be done with school let alone getting a decent enough job to be able to afford this on top of your rent, transportation, and student loan debt. You are worse off if you didn't go to school or if you are working on a masters (or higher). All the financial education in the world won't make these ends meet for most folks.
    - loco5niner 9y ago
      > A car payment. > $450 per month. At 22. Well, there's your problem
- vinhboy 9y ago
  > They are massively inefficient for society in that they require all the people who use them to understand investing. This is really bad policy at a society level. I am so happy to meet someone who understands the concept of "society level". Too often on the internet, I debate with people who's only concern is what benefits them or their cohort. I find very few people think about "society" when talking policy.
- castratikron 9y ago
  Society allowed me to graduate with degrees in science and engineering without knowing the difference between a stock and a bond, and yet the same society gives me complete control over my retirement investments. Luckily, investing is not very difficult to figure out on your own. I read the book "Investing for Dummies" and I thought it did a great job at teaching basic ideas, and basic ideas are enough for the majority of people. If society expects us to manage our own investments, then it should also equip us with the tools to do it effectively. It should be a required topic at the high school level.
PakG1 9y ago
Pensions are inherently unsustainable because they guarantee returns. What investor in the world is ever able to guarantee returns, especially at the volume of clients that get served by pensions? It is likelier that the pension: - gets rid of the obligation by selling it to someone else: https://www.forbes.com/sites/joannmuller/2012/06/01/gm-unloads-26-billion-in-white-collar-pensions-could-union-workers-be-next/ https://www.forbes.com/sites/joannmuller/2012/06/01/gm-unloa... - raises more capital or debt to fund the pension (or in the case of government pensions, raise taxes) and kick the can down the road: https://www.wsj.com/articles/gm-to-take-on-3-billion-in-debt-to-fund-pensions-moved-to-peugeot-1488832404 https://www.wsj.com/articles/gm-to-take-on-3-billion-in-debt... - just lets bankruptcy kill the obligation: https://mobile.nytimes.com/2006/10/24/business/retirement/24pension.html https://mobile.nytimes.com/2006/10/24/business/retirement/24...
- mooreds 9y ago
  Life insurance guarantees returns (essentially) through the magic of actuary science. It's expensive and you need scale, but it can be done.
  - gozur88 9y ago
    The cash payout part of a pension is, as you point out, just math. The problem is health care. If you retired in, say, 1980 with a pension that included health care, the company ended up paying out (on average) far, far more than they expected.
    - mooreds 9y ago
      That is a fair point. I don't know how to handle healthcare because it is a good with almost infinite demand (who doesn't want to live longer or be healthier), and a finite supply (of doctors, nurses and other folks who can provide services to help us live longer healthier lives). What happens when you have demand with limited supply? Prices go up.
- dpark 9y ago
  They aren’t inherently unsustainable except when they’re underfunded. A solvent pension is essentially just an annuity.
walshemj 9y ago
Err are not USA company pension fund run by outside professionals whose first duty is the members of the scheme?
closeparen 9y ago
I am the sole signer on my 401k. Activist investors, short-term-thinking CEOs, state Republican parties, etc. can and routinely do choose to run pension funds into default. Heck, I trust my employer but I don’t trust it to be solvent in 40 years.
- lamarpye 9y ago
  Really? Which pension funds have been driven into default by state Republican parties? Should be easy to answer because it happens routinely.
trophycase 9y ago
401ks allow for more flexibility. I don't have to stay at the same job to ensure my 401k contribution is maxed.
Feniks 9y ago
Pension funds are pretty safe if they are sector based instead of just individual companies. Oh and obviously the government needs to guarantee them as a last resort. That way if a company doesn't hold up its end of the bargain it is not citizens that have to try to collect but the big bad Treasury wolf. But government is considered evil in the US I know.
- JBlue42 9y ago
  I have a question about their safety. There is always people that bring up worries over some of the public sector pension schemes in the US and how it will affect a municipality. One example, IIRC, is in Chicago. Another typically revolves around policeman/fireman pensions in other cities and the cities not being able to actually pay them. Is this a fault or mismanagement or the pension structure not working or both? And if the cities have to guarantee the pensions, what does that mean for taxpayers in those cities?
georgeecollins 9y ago
I don't think you understand pensions. Pensions are assets that a company has to maintain that are invested professionally (ie diversified investments). Yes pensions have disappeared or been reduced due to fraud or gross mismanagement, but the chances of that happening to a pension are a lot lower than your chances that the average person is adequately maintaining a 401k.
JBlue42 9y ago
Another issue with 401ks is if you're like a lot of folks that have had the wonderful luck to work at smaller companies that don't have 401ks or hand out benefits of any sort. An individual IRA maxes out at $5,500/yr so if end up in an industry or at a job that doesn't offer a 401k, you can miss out on years of putting away that money in some sort of tax-deferred account.

andrewvc 9y ago

The other problem is that 401ks let you do dumb stuff pensions don't. Dumb stuff like pulling most of your funds in the 2008 crisis and holding it in cash to miss out on the rebound. Or investing in borderline scam products like variable annuities. 401ks are great if you're savvy. They are massively inefficient for society in that they require all the people who use them to understand investing. This is really bad policy at a society level. People need real, unbiased investing guidance.

jdavis703 9y ago
At what point does personal responsibility kick in? Every 401(k) I've been on has given the option of investing in funds that ramp down risk exposure as the fund's target retirement date comes closer. Literally all you need to do is put your $1400/month in to a retirement account and not touch it. If you're upper middle class this is not hard to do (again I'm not talking about poor people here, but those with money who aren't saving). Whenever our 401(k) report comes out at work I can tell that most people are not putting nearly the amount of money they should be into savings -- and this is a tech company so most everyone aside from interns are being generously compensated.
- deleted 9y ago
  [deleted]
- throwawaybbqed 9y ago
  I think education is an important factor. I'm nearing 40, make a lot of money, but have no idea how to optimize my 401k. When I ask co-workers, they are more ignorant than me. I changed companies a few times and have tranches of cash in each of their 401ks.
  - jdavis703 9y ago
    Well if you don't mind me asking, what kind of annual returns are you generating? If you're in the 7-8% range you're probably about as "optimized" as you can be, assuming your 401(k) is only giving access to large index funds. Another trick you can use is switch to a Roth 401(k). It means you'll be taxed on your savings today, but when you retire they'll be tax free. Now this is total speculation here, but I'm kind of assuming taxes will be pretty high in the coming decades as we try to keep social security going and pay down deficit spending, not too mention dealing with climate change fallout. Also good for you on keeping all your money in the 401(k) accounts, some people cash them out when they change jobs which triggers penalities and taxes. If you can however, I would roll all your accounts in to one giant 401(k) so you can better keep track of what's going on.
    - brewdad 9y ago
      I have no doubt that if the capping of 401k deductions goes through, Roth IRAs will be next. There is nothing stopping the government from deciding to tax Roth withdrawals down the road. They'll probably do it at a lower rate, like capital gains, but I fully expect it to happen.
    - throwawaybbqed 9y ago
      I have like 20K in a 401K when I worked at Microsoft a long time ago. This is around the 2008 fiasco. I just converted everything to cash. I didn't do a rollover when I changed employers (I think there is some time limit which I have likely exceeded). I've been trying to figure out if I can make use of that cash. The confusion is that the plan I was in was for Microsoft employees. Can I still use their plan's investment options?? I also don't want to incur any tax implication ... literally the cash has been sitting there for years because I am too stupid to figure out all the details. It is just sad :(
lotsofpulp 9y ago
Considering the extremely poor state of private defined benefit pension funds, as well as taxpayer funded ones, I don't see how one can make the claim that 401k has too much freedom to do dumb things compared to defined benefit pensions. Agency risk is always there when you hand over responsibility of something to someone, and it's especially acute with big pots of money. The best investment for retirement is to raise children who will raise grandchildren who all look after each other.
- Spooky23 9y ago
  The secret to pensions is making contributions. Places like New York that legally require full contributions are doing fine (although that is not cheap to do). Places like Illinois who skip the bill or most companies post 1980 who steal the money are a different story.
  - pcardh0 9y ago
    https://www.mercatus.org/statefiscalrankings https://www.mercatus.org/statefiscalrankings According to this New York is ranked 39th of 50. Unfunded pension obligations, on a guaranteed-to-be-paid basis, are $321.07 billion, or 28 percent of personal income.
- act_right 9y ago
  > Considering the extremely poor state of private defined benefit pension funds The poorly funded ones make the news, but there are many healthy ones that don't. It isn't agency risk that causes problems, it's a combination of increased longevity and low interest rates. A big problem with 401Ks is predatory investment advice. "Advisors" channel money into high-fee funds and commissionable investments and often "churn" money to generate additional commissions. The Obama administration cracked down by instituting a "Fiduciary" standard for retirement funds, but Trump has delayed implementation of the rule twice.
  - lotsofpulp 9y ago
    Almost every state and local government agency is underfunded, many in the billions of dollars. The reasoning is that they can always just raise future taxes, which allows for huge agency risk of politicians buying union votes. The politician gets elected, the current union members get paid, and the future taxpayers and union members who aren't voting get shafted. 401ks aren't perfect, but it's better than the above system. There's a reason no one sells annuities even close to what the government offers in it's pension benefits. It's ridiculously costly without using funny numbers.
bko 9y ago
Sure individuals can make dumb decisions with their money, like try to time the market. But so can companies when it comes to managing pension funds. This includes not funding future liabilities, since you likely won't be the one responsible when the payments become due.
WalterBright 9y ago
We already have a forcible retirement system that makes all the decisions for you - social security.
- mikestew 9y ago
  Note the lack of the word “retirement” in “social security”. It’s a safety net, not a retirement account. Says so right on the tin. EDIT: and before anyone else gets an itchy downvote finger, go look it up. Here, I’ll quote from the SSA’s own page: “Based on social insurance principles, the program provides monthly benefits designed to replace, in part, the loss of income due to retirement, disability, or death.” (emphasis mine). It’s so the old and disabled don’t starve in the streets, not a retirement plan.
  - mooreds 9y ago
    Absolutely! Social security was designed to help the elderly avoid being desperately poor. And has succeeded at that to a large extent. But a full fledged retirement program it is not. The average monthly payment as of Jan 2017 is ~$1400/month: https://faq.ssa.gov/link/portal/34011/34019/Article/3736/What-is-the-average-monthly-benefit-for-a-retired-worker https://faq.ssa.gov/link/portal/34011/34019/Article/3736/Wha... Depending on your cost of living that may help (maybe a little, maybe a lot) but it's not typically going to be a replacement for your own savings.
    - hiram112 9y ago
      $1400 a month is the average. I can start collecting that amount at 67, and will statistically die at 78. So 11 years of benefits is $185k. Meanwhile, if I make an average of $100k for just 12 years, then I will have paid that much into the system (15% contribution). And that's not even counting the massive amount of compounding that will have occurred as I've been contributing since I was 14 years old. I know it's quite popular for the HN crowd to talk about raising taxes for things like universal health care, social programs, etc. But when I actually do the numbers and look at how I'm already paying about 1/3 of my income to taxes, I'm beginning to see why many conservatives don't trust the government to be fair stewards of our money.
act_right 9y ago
> Or investing in borderline scam products like variable annuities. It's interesting that you say this, because many VAs have embedded put options that were very valuable post-crisis. The "scam" happens when someone invests 100% of their modest life-savings in a VA. Ben Bernanke invests the majority of his retirement savings in annuities, it's really just like buying into a pension.
ixacto 9y ago
Pensions, 401(k)s, and most saving for retirement are not necessary. Just Roth IRA and compound interest. All one needs to do is save an extra $450/mo after tax starting at age 22, put that into Vanguard VFIAX or similar for the next 40 years. That will give you a few million at retirement...tax free assuming the market continues to act how it has acted for the last 50 years. Combine it with social security and retirement will be manageable for most. Spend the rest of your salary on hookers/blow or iPhone game microtransactions, it doesn't matter. The problem is the lack of financial education and ethic in the population.
- Broken_Hippo 9y ago
  Or some of the problem could be the $450 per month. At 22. In indiana, that's a rent payment. A car payment. You might not even be done with school let alone getting a decent enough job to be able to afford this on top of your rent, transportation, and student loan debt. You are worse off if you didn't go to school or if you are working on a masters (or higher). All the financial education in the world won't make these ends meet for most folks.
  - loco5niner 9y ago
    > A car payment. > $450 per month. At 22. Well, there's your problem
vinhboy 9y ago
> They are massively inefficient for society in that they require all the people who use them to understand investing. This is really bad policy at a society level. I am so happy to meet someone who understands the concept of "society level". Too often on the internet, I debate with people who's only concern is what benefits them or their cohort. I find very few people think about "society" when talking policy.
castratikron 9y ago
Society allowed me to graduate with degrees in science and engineering without knowing the difference between a stock and a bond, and yet the same society gives me complete control over my retirement investments. Luckily, investing is not very difficult to figure out on your own. I read the book "Investing for Dummies" and I thought it did a great job at teaching basic ideas, and basic ideas are enough for the majority of people. If society expects us to manage our own investments, then it should also equip us with the tools to do it effectively. It should be a required topic at the high school level.

PakG1 9y ago

Pensions are inherently unsustainable because they guarantee returns. What investor in the world is ever able to guarantee returns, especially at the volume of clients that get served by pensions? It is likelier that the pension: - gets rid of the obligation by selling it to someone else: https://www.forbes.com/sites/joannmuller/2012/06/01/gm-unloads-26-billion-in-white-collar-pensions-could-union-workers-be-next/ https://www.forbes.com/sites/joannmuller/2012/06/01/gm-unloa... - raises more capital or debt to fund the pension (or in the case of government pensions, raise taxes) and kick the can down the road: https://www.wsj.com/articles/gm-to-take-on-3-billion-in-debt-to-fund-pensions-moved-to-peugeot-1488832404 https://www.wsj.com/articles/gm-to-take-on-3-billion-in-debt... - just lets bankruptcy kill the obligation: https://mobile.nytimes.com/2006/10/24/business/retirement/24pension.html https://mobile.nytimes.com/2006/10/24/business/retirement/24...

mooreds 9y ago
Life insurance guarantees returns (essentially) through the magic of actuary science. It's expensive and you need scale, but it can be done.
- gozur88 9y ago
  The cash payout part of a pension is, as you point out, just math. The problem is health care. If you retired in, say, 1980 with a pension that included health care, the company ended up paying out (on average) far, far more than they expected.
  - mooreds 9y ago
    That is a fair point. I don't know how to handle healthcare because it is a good with almost infinite demand (who doesn't want to live longer or be healthier), and a finite supply (of doctors, nurses and other folks who can provide services to help us live longer healthier lives). What happens when you have demand with limited supply? Prices go up.
dpark 9y ago
They aren’t inherently unsustainable except when they’re underfunded. A solvent pension is essentially just an annuity.

walshemj 9y ago

Err are not USA company pension fund run by outside professionals whose first duty is the members of the scheme?

closeparen 9y ago

I am the sole signer on my 401k. Activist investors, short-term-thinking CEOs, state Republican parties, etc. can and routinely do choose to run pension funds into default. Heck, I trust my employer but I don’t trust it to be solvent in 40 years.

lamarpye 9y ago
Really? Which pension funds have been driven into default by state Republican parties? Should be easy to answer because it happens routinely.

trophycase 9y ago

401ks allow for more flexibility. I don't have to stay at the same job to ensure my 401k contribution is maxed.

Feniks 9y ago

Pension funds are pretty safe if they are sector based instead of just individual companies. Oh and obviously the government needs to guarantee them as a last resort. That way if a company doesn't hold up its end of the bargain it is not citizens that have to try to collect but the big bad Treasury wolf. But government is considered evil in the US I know.

JBlue42 9y ago
I have a question about their safety. There is always people that bring up worries over some of the public sector pension schemes in the US and how it will affect a municipality. One example, IIRC, is in Chicago. Another typically revolves around policeman/fireman pensions in other cities and the cities not being able to actually pay them. Is this a fault or mismanagement or the pension structure not working or both? And if the cities have to guarantee the pensions, what does that mean for taxpayers in those cities?

georgeecollins 9y ago

I don't think you understand pensions. Pensions are assets that a company has to maintain that are invested professionally (ie diversified investments). Yes pensions have disappeared or been reduced due to fraud or gross mismanagement, but the chances of that happening to a pension are a lot lower than your chances that the average person is adequately maintaining a 401k.

JBlue42 9y ago

Another issue with 401ks is if you're like a lot of folks that have had the wonderful luck to work at smaller companies that don't have 401ks or hand out benefits of any sort. An individual IRA maxes out at $5,500/yr so if end up in an industry or at a job that doesn't offer a 401k, you can miss out on years of putting away that money in some sort of tax-deferred account.