How to Secure Your Retirement: The Case for Scrapping of Your 401(k)

Available for Interviews: Harry Abrahamsen

Harry J. Abrahamsen is Founder & CEO Abrahamsen Financial Group. His company offers customized wealth management solutions—creating plans and portfolios that protect, preserve, and grow client’s wealth. He was selected as one of the ten most dependable Wealth Managers in the Mid-Atlantic as published in Forbes magazine.

 

What Harry Abramhamsen can say in an interview on
A Pension Plan Versus a 401(k):

Knowing the differences between these two retirement plans can help you decide which one is best for your situation.

First, let’s talk about the differences between a pension and a 401(k):

TRADITIONAL PENSION PLAN

• • Employers are primarily responsible for funding these type of plans.
  • Pensions guarantee a certain amount of monthly income in retirement.
  • The money is invested is pre-tax dollars.
  • Your benefit is either defined by a set amount or by some kind of formula that takes into account your salary and the years of service at the company.
  • You know exactly how much money you will receive each month.
  • Pension funds are managed by your employer and you are guaranteed a set amount regardless of how well these investments perform.
  • If one does not have access to an employer-backed pension plan, a private one can be set up.

A 401(K) PLAN

• • Employees are responsible for funding these type of plans.
  • A 401(k) is a contribution plan. Its funding is dependent on your own contributions from your salary or bonus structure, and you define the amount of money that goes into the plan.
  • The money is invested by using pre-tax dollars.
  • The amount of monthly benefit you will receive is completely unpredictable.
  • The contribution limits are set by the government and change every year.
  • Your gains (or losses) are affected by the ebbs and flows of the stock market.

So, again, the benefits of a traditional pension plan are that the employer is responsible for the investments and typically the funding. In a private pension plan, you are putting money into a plan and you are defining the benefit or retirement income benefit to be paid out. The 401(k) is the exact opposite of pension plans. The only thing that is common is that the money invested is using pre-tax dollars. Back in the late 1970s, Johnson & Johnson was the first early adopters of having a 401(k) plan and pension plan. The main purpose of the 401(k) was for the high-income earners typically in very high-income tax brackets, that they would defer a portion of their earnings into the 401(k). The rank and file employees used to call the 401(k) plan a SALARY REDUCTION PLAN. They didn’t see the need to use their hard-earned income when they already had a pension plan being funded and provided by their employers. In turn, employers realized the 401(k) plan was way cheaper and had less risk and liability. They push all of the responsibility and risk onto the employees. The 401(k) plan eventually made the pension plans extinct as a dinosaur.

If someone can’t access a traditional pension plan, they can set up a private pension plan that they can fund. Using a qualified, reputable financial advisor is the smartest way to plan a secure retirement.