Monday, December 05, 2005

Village Voice Has Half the Story

Interesting take on 401(k) plans and pensions in the Village Voice. The article notes that people lost up to one third of their accounts in the Nasdaq crash. What it leaves out is that the stock market has regained most of its losses (Dow from 11k to 7.2k back to 10.8k today). People who continued to contribute to their plan probably have a gain because they bought more shares at lower prices than at the 11k level which the Dow only touched briefly.

The article also bemoans the loss of "guaranteed" monthly pension checks. Funny, but those arguing for DB plans and Social Security never seem to ask what the cost of that monthly check is. You know, if you are so disposed you can use your 401(k) balance to buy one or more annuities (those monthly guaranteed checks). No one is stopping you from doing so.

The problem with DB plans for many people is that they do not stay in one job long enough to vest in a significant benefit. At least with a 401(k) plan you can consistently build your retirement savings from job to job without having to start over.

Even Clinton-administration refugee like Alicia Munnell admits that the expected benefit under the two types of plans will, on average, be the same, though an individual's mileage may very (see her book). People who stay in one job for life will be better off in a DB plan, those who move around will benefit best from a 401(k).

Oh yes, you can also choose to take your DB plan balance as a lump sum if you so choose; that would be like, you know, a 401(k) plan.


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