I've been doing alot of research lately, about 401k plans (since hubby has one through his work place), and I am finding it very fascinating.....
For example, did you know that the 401k plan got it's name from a subsection (k) of the Internal Revenue Code? I always wondered where they came up with the name! In 1980, 401k plans were widely adopted as retirement plans for American workers. These plans were an alternative to the traditional retirement pensions, which were paid by employers. The 401k basically shifted the burden for retirement from the employer to the workers.
Whereas the Defined Benefit Plan (Pension) did not cost anything to the worker (The money was normally only provided by the employer), the 401k plan required contributions from both the worker and the employer. However, to make the traditional 401k plan more appealing to the public, they were designed to be funded with pre-tax dollars.
Defined Benefit Plan (Pension):
One advantage of a 401K is that there is greater portability with funds in the plan. These funds can easily be transferred into an IRA or another retirement account.
One disadvantage of a 401k is that your plan does not offer guaranteed money at retirement. Instead, it offers a greater risk because funds are not protected by the Pension Benefit Guaranty Corporation and the funds are largely dependent on the positive growth and performance of the stock market. In troubled times like the present, this means you can see drastic drops in the value of people's 401k plan
One advantage to a Defined Pension Plan is that you are guaranteed money at retirement. This is the single biggest advantage of these pension plans because this money is promised by the employer and is guaranteed by the Federal Government.
One disadvantage is the Limited Availability. It can be harder and harder to find traditional pension plans since more employers do not like having to promise to pay this guaranteed money.
This past tax year (2010), hubby's employer has elected to not offer a company match of 3% but, instead, to only contribute 1%. I'm not complaining; I am thankful that hub's still has a job, but this definitely is not helping with our retirement savings. And, after reading that the first batch of workers to widely adopt the 401k style of retirement plan is beginning to retire, and the plans now appear to generally be falling short, I am not sure that this particular plan is the best for us. it might be time to bail out before the plan fees eat us alive!
According to a Feb 19, 2011 article in the Wall Street Journal, "the median household headed by a person aged 60 to 62 with a 401(k) account has less than one-quarter of what is needed in that account to maintain its standard of living in retirement." This according to a study commisioned by the Journal, and conducted by the Center for Retirement Research at Boston College.
Hmmmm....time to maybe rethink the Traditional 401k option and look into this:Roth 401k
In general, the difference between a Roth 401(k) and a traditional 401(k) is that the Roth version is funded with after-tax dollars while the traditional 401(k) is funded with pre-tax dollars. After-tax dollars represent money for which taxes are paid in the current year, and pre-tax dollars are those that do not represent federal taxable income in the current year. Typically, the earnings on Roth contributions will be tax free as long as the distribution is made at least 5 years after the first Roth contribution and the attainment of age 59 and one half, unless an exception applies.
However, adoption of Roth 401(k) plans has been relatively slow, and reasons for this include the fact that they require additional administrative recordkeeping and payroll processing. However, some larger firms have now adopted Roth 401(k) plans, and this is expected to spur their adoption by other firms including smaller ones.
Saving for retirement is something that everyone should be thinking about, and planning for; unless you are already retired. That is a whole different "can of worms" and I'll tackle that another day! :)
Seeking more information on various Retirement Vehicles? The World Wide Web is CHOCK-FULL of information...some of it good and some of it extremely out-dated.
As a general rule, I'm not reading any financial advice from sources that are older than 2010. That's right...2010. The rules of the "Savings and Retirement Game" are a changin', my friends, and we have to change right along with them. Some of the old tried-and-true methods that might have worked for previous generations are no longer working. We must adapt, change, and move on.....and hold on. Things might get worse before they get better! :}
Talk to me....how are you saving for Retirement??
(Info for this article was found in 401kadvice.org, wikipedia.com, ezinearticles.com)