With all due respect to rosy Econ 101 views of the world, um, yeah right. :rolleyes:
Defined Benefit plans (pensions).
-Workers have no control over investment choices.
-Workers have no choice in the amount to contribute to the plan.
-Payments from pensions are set at a limited amount that is not variable by the worker.
-Pensions don’t transfer from one company to another.
-Workers depend on a promise to pay from the company. This promise can be broken.
-The employer can decide not to pay the pension.
-Death and survivor bennies from pensions are decided by the company, not the worker.
Defined Contribution plans (401ks):
-Workers get to make investment choices best for them.
-Workers can contribute an amount of their choosing.
-The workers can choose the amount they wish to withdraw and at what times on retiring.
-401(k)‘s can be transferred with the employee as they change jobs.
-Workers have their money in an account they control and own.
-Money in the workers’ account cannot be taken away except by illegal theft.
-Upon death the funds from the plan go to whomever the worker has specified.
We’re debating which is better. I’ve shown you that there are over a million people who’ve had their pensions completely vanish. Nobody has shown me a single cite yet for a single person who’s 401(k) has been taken away in a similar fashion.
The PBGC doesn’t pay the full amount of the pensions. They only try and take up some of the slack. Besides, if pensions weren’t risky and often worthless in the first place then why do we even need a huge government entity to bail all of them out. No such thing exists for 401(k)'s because it’s not needed.
Sorry, but I don’t agree that many of the things you have copied and pasted below are true advantages/disadvantages.
Defined Benefit Plans
This is because an investment professional is responsible for determining how the plan is going to meet it’s predetermined obligations. Do you really need a cite that demonstrates that professionals make better investment decisions than laymen?
Good job. You’ve hit on the nature of DB plans. The company promises a certain benefit at retirement and is responsible for figuring out how to meet that obligation. Why is this better or worse than a DC plan?
Defined Contribution plans (401ks):
These both assume that the emplyoees are sufficiently educated to plan for an amount needed at retirement and to know how to properly invest to achieve that goal. I am not convinced that this knowledge is widespread.
Totally dependent on plan language. This type of flexibility is very uncommon.
Woo hoo. You can have this one.
Many, not all, DC plans allow participants to direct the investement of their account balance. This is in no way required. As far as control and own…not really. Certainly all participants recieve a statement that has their name on it. That’s about it though. Almost all pension accounts are pooled investments. At the asset level, Participant A and Participant B’s shares are held in the same trust account. Many insurance company products group multiple plans into the same investment pool. Participants only have a right to receive their money when they meet one of the plan’s requirements for distributable events. It’s much different than money that sits in your checking account.
No, you’ve shown that there are a million people who have their penion benefits assumed by the PBGC. Those people are not getting nothing. Did you read your cites?
What kind of logic is this, exactly?
I have never plagarized myself on this board or anywhere else. Backup this accusation with some evidence or retract it at once.
Yeah, you’re right. I got carried away there. Sorry.
The bulk of your list is still without merit however.
A pension provides insurance against longevity risk that is simply not available when a retiree is paid a lump sum benefit from a defined contribution plan.
How are pension plans structured in the USA? Here the pension plan is an entirely separate entity from the employer’s business, with its own assets administered by trustees in line with the plan’s trust deed. If the plan is properly funded (and I accept that that can sometimes be a big if), the employees are not reliant on the employer paying their pensions.
And most laymen won’t be making their own investment decisions. Instead, they’ll be investing in mutual funds or other schemes which use the exact same investment professionals. The difference is, employees now have a choice about where they want to invest. Younger people might prefer high risk stocks whereas people closer to retirement might want bonds for security. Some people may prefer to invest in ethically or enviromentally sound companies.
Because, often those promises aren’t kept. This isn’t so much a flaw of DB as it is the current regulatory enviroment but it makes it incredibly attractive to do so. If your suffering a cash crisis and you have a fully stocked pension, you can choose to either a) declare bankruptcy and give everyone the full value of their pensions or b) play some accounting tricks to give you some extra spending money and not be able to fulfil the pensions if you do go bankrupt.
The way it works in Australia is that there are only a certain subset of of investment plans that qualify for DB which is government regulated. This means, while it’s certainly possible to do badly under a DB plan, it’s unlikely that you’ll do catastrophically.
Again, thats an implementation issue, not a inherent flaw. In Australia, the company isn’t allowed to touch the plan.
Because these pensions are being payed by the taxpayer so amount in the end to everyone getting nothing since the extra benifits are offset by higher taxes for everyone else.
From the PBGC web site.
PBGC is not funded by general tax revenues. PBGC collects insurance premiums from employers that sponsor insured pension plans, earns money from investments and receives funds from pension plans it takes over.
Sure, most people in DC plans invest in mutual funds. Planning for retirement is more than just turning your money over to a mutual fund manager though. A DC plan participant needs to be able to figure out how much they need to put in over a lifetime in oder to meet their retirement income needs. In addition to deciding how much to contribute, they also need to decide where to put that money.
Obviously, since DC plans have only been popular in the U.S. for about 20 years, there isn’t a vast amount of evidence as to how well the average participant will do over a lifetime of investing on their own. There is certainly some evidence though that many do not do a good job. Enron is just one example. Sure, those people didn’t deserve to be defrauded, but what were retirement age employees doing with their entire portfolio in one stock?
DB plans take the onus of investment risk off of the participant and put it on the plan sponsor. The funding of the plan is also born by the employer. This still leaves the individual free to save their own money for retirement if they wish. Lastly, in the event of collapse, the DB plan is insured by the government. If an unforturnate DC plan participant does a bad job of planning for retirement, they aren’t going to have much luck asking the government to bail them out.
Uh, just so we’re on the same page here, are you asking me for an example of mismanagement of a mutual fund and/or fraud committed by the fund’s manager or parent company? Examples of this are legion. In fact, quite recently, a major investigation was undertaken by the SEC into the illegal practice of “market timing,” (the too quick buying and selling of shares) and “late purchases” )stock buys after the market has closed for the day). Officers at Janus (and several other mutual fund providers) have since been indicted anc convicted with some severe fines levied.
http://money.cnn.com/2005/04/21/news/midcaps/janus.reut/index.htm
http://mutualfunds.about.com/od/mutualfundfraud/
http://mutualfunds.about.com/b/a/023397.htm
http://www.sec.gov/news/press/2005-39.htm
http://www.sec.gov/news/press/2005-40.htm
If you’re asking if a 401(k) retirement account (a more narrow category) has ever been mismanaged, looted, or has otherwise been the target of nefarious dealings by the fund manager then I would wonder why you’re making that distinction. Monies contributed to a 401(k) by an employee aren’t handled by the fund manager any differently than monies invested by individuals. The fund manager sees only a pool of cash with which he’s tasked to invest.
My mistake.
Well, the easiest way around that is to make a legislated minimum percentage of income a person has to invest. A sane minimum with generally safe investment strategies means that even in a reasonable downturn, people will still end up with enough to live in if not in the lap of comfort.
Unclebeer: Are you implying that DB schemes are immune from corrupt mutual fund managers? It was my understanding that no matter where you invest, it still went into the same managers and, thus, choosing DB over DC wouldn’t solve the problem of inadequate mutual fund regulation.
Nor does it solve the problem that over 98% of all managed funds underperform their target markets indices over the life of the fund. Cite
But that’s really another thread. Carry on! 
[QUOTE=UncleBeer]
Uh, just so we’re on the same page here, are you asking me for an example of mismanagement of a mutual fund and/or fraud committed by the fund’s manager or parent company?
No. I had posted:
“With a 401(k) or IRA plan the money belongs to the worker. It cannot be stolen by anyone. It cannot be looted or mis-managed by corporate interests beyond the workers control.”
To which you responded “Except by, ya know, the fund manager and his company.”
This seems to imply to me that you beleive a fund manager or his company could steal or loot it. Or mis-manage it without the workers control.
What’s that have to do with mis-management of mutual funds? Your examples of market timing and late purchases have nothing at all to do with the subject at hand.
I’ve shown evidence in this thread that over a million people have been defrauded by pensions. They paid in over their working lives and the money isn’t there for them. (Yes, the government does pay them something, but it’s not as much as they would have gotten in the first place, and the government wouldn’t need to bail people out if those plans weren’t drying up in the first place.)
I’m simply pointing out that this is not possible with a 401(k) or IRA fund. The money belongs to the worker and cannot be stolen. If you think that a fund manager can just take money out of a 401(k), then provide a cite of this happening! Nobody can show me a single example of this ever happening to a single person.
Exactly. Mutual fund managers are going to be a part of the equation no matter which way you invest. (Pension or 401k).
I also agree that the best way to avoid all of this nonsense altogether is simply to invest in index funds. The fees are lower (or nonexistant) and the performance is better. It’s a win, win.
Heh. Noooo way. My buddy manhattan would have my balls on his key chain if postulated something that transparently absurd. I knew after I’d posted, I should have probably have made my position clear. I believe contribution-type plans (such as the 401(k)) are far more preferable than the classic (and disappearing) pension (or distribution) plans. They are certainly less susceptible to being raided for fradulent personal (or corporate) gain if only because the monies pass through the hands of fewer people (although there are other reasons such as those given by Debaser, too). I was only taking exception to Debaser’s claim:
Right. I agree with this statement. A corrupt mutual fund manager/company doesn’t care (or necessarily know) where the money he’s tasked with investing comes from. And if fact, I’m not even sure that matters anyway. If he’s unprincipled enough to commit fraud, he’s gonna steal it all. Plus, the fund manager operating fradulently is probably manipulating the other end of the game—the buying & selling of specific market issues—anyway; he’s not generally siphoning off incoming capital.
OK. I now see what you meant. I still disagree with it, though.
I think that what you are saying is very indirect. I’m saying money can’t be stolen or mismanaged from a 401k or IRA. This is true. However, money in these types of accounts can be invested in a mutual fund, and these funds can be mis-managed. This is your point.
Well, you do have a point, but it is a bit of a stretch. Also did say that it can’t be mis-managed “by forces beyond the workers control”. The worker chooses to put his money into a fund. That’s his choice, and it’s up to him to put the money into a good reputable fund that won’t be looted from. If a worker doesn’t want to expose himself to that risk, he can buy an index fund or a bond fund or a t-bill fund, etc. But all of this is within the control of the worker, as I originally stated.
With a pension, nothing is in the workers control. If the people running the pension want to invest it all in a shady mutual fund with a corrupt, thieving manager then they can. The worker can’t choose what to do. It’s not in thier control.
The point I was hoping to make clear (and at which I’m apparently failing), is that contributors to a 401(k), and hence share owners in mutual funds, are just as susceptible to fradulent activities by the fund managers as private individual investors in any given fund. If a fund manager is running his fund in a way that maximizes his personal wealth through fradulent means as opposed to maximizing the overall fund value for his investors, then our hypothetical worker is the victim of theft. I submitted several citations indicating that some mutual fund providers, from time-to-time, use the assets in their trust in a manner which is more likley to maximize their own corporate benefit, at the expense of the investors. And surely the investor has no (short-term) control over the fund provider. And in some cases no long-term control either. (The 401(k) plan at my company right now offers funds from several mutual fund providers. Prior to Jan '05, though, all the funds in our plan came from a single fund provider. Kinda tough to just move your money elsewhere to avoid being defrauded in that situation.)
Heh. We’re kinda posting past each other here. Sorry about that.
Right. Exactly.
And yes, the raiding of a mutual fund, by whatever means, is a step removed from that which typically takes place in a designated benefit pension. But it still takes place. And there are circumstances (see my post just above) which prevent the worker from exercising complete control over the choices of where to put his retirement money.
I’d also like to state again, that I am very largely in agreement with you. A contribution-type plan is far more preferable than a distribution-type plan.
Again…you have not shown this at all. You’ve quoted a statistic that says the PBGC has current or future obligations to over a million people.
First off, these plans are paid for by the employers, not the employees. Secondly, money is there. The link to the PBGC cite is earlier in the thread, but here’s some more about how they do what they do.
An employer can voluntarily ask to close its single employer pension plan in either a standard or distress termination. In a standard termination, the plan must have enough money to pay all benefits, whether vested or not, before the plan can end. After workers receive promised benefits, in the form of a lump sum payment or an insurance company annuity, PBGC’ guarantee ends. In a distress termination, where the plan does not have enough money to pay all benefits, the employer must prove severe financial distress - for instance the likelihood that continuing the plan would force the company to shut down. PBGC will pay guaranteed benefits, usually covering a large part of total earned benefits, and make strong efforts to recover funds from the employer.
You somehow seem convinced that these million people have all been cheated by corrupt employers and they are left with nothing for their retirement. You have presented absolutely nothing to support this idea.
I think we’d better steer clear of that question in this thread. That notion veers in the direction of the current debate about Social Security in the U.S. That’s a whole other kettle of fish, and there are other threads on the SDMD devoted to it.
I have not said or implied that they have been left with nothing. Please stop with this straw man.