With so many observers pining about the good old days when everyone had a pension plan, and the anti-401(k) faction looking to turn the DC system into a government-sponsored DB plan, perhaps it’s time for a healthy dose of reality. There are many reasons why the current system of 401(k) plans supplemented by IRAs is better, as outlined in a U.S. News and World Report blog. These include:
• Before the introduction of 401(k)s, only about 40% of workers were covered by a DB plan. Today, most large employers offer 401(k)s and IRAs are widely available.
• Workers had to stay at their jobs for a very long time to vest in a DB plan.
• Retirees can better manage taxes by controlling their drawdowns.
• Though they’re not recommended, hardship loans and withdrawals are available to most 401(k) participants, while some DB pensioners are turning to factoring companies if they really need cash now.
• Heirs benefit more from a DC plan and IRA.
Not mentioned in the blog post is the fact that many workers in companies that went bankrupt to reduce their DB pension liabilities have been left in the lurch — the impetus behind the enactment of ERISA in 1974. While there are obvious benefits to DB plans, there are ways to improve the current system. But before we try to mirror the past, we should look at it in a sobering light.
