I work for a fairly large company. As part of my benefits, I can chose to contribute to a 401k retirement plan, but the company does not do any sort of guarenteed matching, and only contributes to it occasionally.
They DO have a pension plan, which the company pays for. If I chose to leave the company before retirement, I’ve been told that the pension plan is portable.
So…
What is the benefit to my employer to go with a pension plan, instead of contributing to a 401k?
Your employer could have several benefits from the decision to maintain a pension plan and only contribute occasionally to a 401(k) plan (presumably as a discretionary match or profit-sharing contribution):
It is possible that the employer has legal agreements with other parties that require the employer to maintain the pension plan. If the employer has to maintain the pension plan for some people, then anti-discrimination rules may require a large portion of the employees to participant. Also, even if the anti-discrimination rules don’t apply, the administrative costs may be less.
While you didn’t describe the pension plan, I assume it is either a traditional defined benefit plan, a money purchase plan or a cash balance plan. Either way, it is possible that as a result of crazy good investment return over the years that the plan is way over-funded. AS a result, while your balance continually increases, the employer’s obligation remains (and is expected to remain) at zero for the foreseeable future. Under a defined contribution plan (like a 401(k)), in order for your employer to guarantee that your balance is going up–it would need to make continued contributions and guarantee the returns (and even then there is no real guarantee).
Even if the first 2 possibilities are not the case, the employer could have made a business decision that despite the increased costs and funding obligation inherent in a pension plan, that it was important for them to have employees who had more financial security in retirement. Employers who have made such a decision will often stick with more traditional pension plan despite the decreased costs associated with defined contribution plans.
Obviously, unless I were your employer, there is no “factual” answer for this question. This post just sets out a few hypothetical answers that may apply.
Either that or your employer is gambling that it can just screw you out of your pension plan if it gets too expensive like some of the big boys are trying to do now.
I don’t know.
I’m uncertain as to whether or not this is pertinent, but my employer does both. I have a pension and a 401K with employer matching (weak matching, but it’s there.)
The money you contribute to the 401k is vested immediately. You said the pension was portable, but when are you vested? It’s possible that you’ll lose your pension if you leave too early.
Dewey, employer contributions may not be “portable” due to long vesting requirements. As a result, this is not a “benefit” to the employer for having a pension plan over a 401(k) plan.
Your employer may have simply had the pension plan for a long time then added the 401(k) plan in the past 25 years. Since the company is not regularly contributing to the 401(k), it really doesn’t cost them much. Potential employees have become acustomed to being offered a 401(k) plan as a part of the standard benefits package. The pension plan could just be a hold over from another time. If it is overfunded, no reason to terminate. If it is underfunded, too expensive to terminate.
There’s probably no benefit to them - the company - of one vs. the other.
As for YOU, though, iIf you can participate in both (and I don’t see why you can’t, as long as you don’t go over the IRS limits), then do both. Put your own money in the 401K and let the company contribute to the pension plan. That plan might give you immediate vesting (great, if they do that) or you may have to work anywhere from 1-5 years to gain 100% vesting. This is assuming their plan is some kind of defined contribution plan. This means they define a certain amount or percentage they will contribute in each year (although they probably will not guarantee it; they don’t have to always make the contribution).
It’s most likely that the plan is not a Defined Benefit plan, as they are expensive and complicated to maintain. Plus, DB plans are not portable and if your co. said their plan is, it can’t be a DB plan. So when you leave, you would take their pension plan with you at the rate of your vested percentage. It can usually be rolled over into another 401K or IRA.
If you can participate in both plans your , do so. It’s more tax-deferred money to grow magically through compound interest.
Does your company have a significant workforce that doesn’t have high salaries, but that the company wants to minimize turnover for? Maybe delivery people who get to know their customers and maintain good service? Or maybe they want to encourage these people to retire around 65 or so, rather than hang on forever?
The pension (which does sound like defined contribution, rather than defined benefit, if it’s portable) does not require the employees to contribute to get the benefit. This makes sure that the folks who are barely making ends meet and don’t have extra to save still get some benefit and are prepared to retire when the time comes.
To me that seems like the main strategy that would motivate an employer to use a DC pension in place of a 401k match.
More thoughts:
My previous employer had a 401K (no match provided) and a qualified profit-sharing plan. They did both plans because although they normally, for many years, had contributed 12% of salary to the profit-sharing plan, they didn’t HAVE to. They could decline to make a contribution for any year. With a 401K, the amount of match is written into the Plan Document. An employer can’t change it every year depending on how their cash flow is doing. They would have to amend the Plan Document in order to change or discontinue the match. The IRS and DOL frown severely upon doing this (unless it’s to increase the match).
There is actually a possible benefit to the company for having a plan with an employer contribution: there are rules stating that a plan cannot overly benefit the Highly Compensated Key Employees as compared to the Non-Highly Compensated Non-Key Employees. There are also rules that the overall employee deferral rate of the HCE/Key employees can’t be more than roughly double the percentage of the overall deferral rate of the Non-HCE/non-Key employees - whether they participate or not. So a company that has a great many of highly paid/Key employees who participate and/or who have high account balances, and not many non-HCE/non-Key employees who participate, will potentially have to make contributions to all the non-HCE/non-Key employees and may also have to refund deferrals and match to the Highlys/Keys.
Thus, companies usually want the lower-paid workers to participate in an employer-funded defined-contribution plan for the mere reason that if they don’t, the highly paid executives can’t either.
Thanks for all the possible scenarios. I was having trouble coming up with reasons that a company with no union, mostly white collar, college educated employees would chose to go with a pension rather then a 401k. You’ve all given me lots of possibilities to think on.
To get some idea of some extreme pitfalls (well, maybe not so extreme, but tone certainly is) of pensions, see this week’s Time magazine. I don’t know a whole lot of pension plans or 401(k)s. I don’t trust corporations to actually carry through with their pension plans, personally, so I hedge and start my own Roth IRA. I have a little more faith in my 401(k), since it is separately managed. I do have a pension plan, and while free money is good, it’s not that great. My only real critique of the Time article is that its criticism of 401(k) seems a little to be desired.
If in fact this is a DC pension plan, traditionally referred to as a Money Purchase Pension Plan (MPP), the employer’s motiviation in adopting it may have been the higher corporate deduction limit that it used to bring. This is an oversimplification, but in the olden days, a company could deduct on their corporate return, their contributions to a DC pension plan that weren’t in excess of 15% of their employees’ compensation. If the company chose to couple a MPP plan with a traditional 401(k)/profit sharing plan, that deduction could have gone as high as 25%.
The corporate deduction rules have since been changed, making MPPs largely obsolete. Many, many of them have been eliminated and mereged with their accompanying 401(k)/PS plan in the last five years.
That article was about defined benefit plans - not defined contrbution plans, which is what a 401K is. Defined benefit plans are fully employer-funded. The employee doesn’t contribute at all. They are completely different from a 401K plan. The companies discussed in that article were all holders of defined benefit plans.
It is almost impossible for a company to “take back” the money they have provided through a 401K plan except by outright embezzlement and fraudulent distributions. And even more unlikely they could ever get ahold of the employees’ deferrals. They cannot simply “ask” the trustee - the financial institution that actually holds the money - to just give it or lend it to them. Unless the trustee, the recordkeeper, and the corporation are all in the fraud together, the money cannot be taken out of the impound account. Plus, the tax returns would show any disbursements each year in the tax returns, the compliance testing, and the Summary Annual Report; and the mandatory outside audit if there are more than 100 employees, and it’s near zero that all the involved people could be in on a fraud together.
In short, there is no need to worry that your employer might steal your 401K from you. A defined benefit plan is a whole other story, thanks to our Congress.
After the answers here, I decided to go digging for more info on my employers plan.
They only ever call it a “Cash Balance Pensio Plan”. I was fully vested after 5 years service. If I leave the company, I can chose to have the balance of my pension paid out, lump sum, and reinvest it into my own private retirement plan.
The interesting point I see:
Employer will contribute a % of my earnings each years. The % increases with my age. At age 21, the contribution is 1%. If I stick around until age 60, the contribution is 12.48% of my salary (only the first $100k of your salary counts.) Years with the company do not modify the contribution %.
While I find it commendable that my employer wishes to ensure the financial health of their older employees, I have to wonder: could this be seen as a case of reverse age discrimination? (No, I’m not going to take them to court.) If I was 21 and getting paid the same salary as a 60 year old, the 60 year old would be getting any extra 11.48% in pay each year, just because of their age.