• Home
    • What is a 401k?
  • Blog
  • Saving
    • Basic Rules
    • Contribution Limits
    • Employer Match
    • Income Limits
    • Investment Options
    • Self Employed
    • Trends
    • Vesting
  • Strategies
    • Benefits
    • Planning
    • Tax Advantages
    • Which Is Better
  • Withdrawals
    • Beneficiaries
    • Distribution Rules
    • Rollovers
    • Withdrawal Rules
  • Best Books
  • About
    • Advertise
    • Contact
    • Affiliate Disclaimer
    • Privacy Policy

IRA vs 401k Central

Save More for Retirement

  • Email
  • RSS

Comparing a Pension vs 401k – What Are the Differences?

June 2, 2016 by Justin 19 Comments

pension vs 401kOne of the biggest changes to hit retirement planning in the last 30 years has been the shift of defined benefit pension plans to 401k employer sponsored plans. Basically the difference between the pension vs 401k was that it shifted the responsibility of saving and planning for retirement from the employer to the employee.

This transition started around the 1980’s after 401k plans were created and started gaining more popularity.  As you can guess, this was a huge cost save for employers because they no longer had to administer and maintain the plans of their employees and retirees.

Despite whether you think one is better than the other, this shift in plans has been met with a great deal of criticism from everyone ranging from the media to politicians.

In case you’re not aware of what the benefits and pitfalls are to each plan, here is a brief summary of each:

Pension vs 401k – Pension Advantages:

  • Guaranteed income – As long as the pension plan remains intact, you should receive income for life.  Basically you will never run out of money.
  • Little to no maintenance.  You don’t have to do anything with this plan except participate.   Someone else (a professional presumably) picks the funds, administers the accounts, and maintains them throughout your life.
  • Semi-guaranteed employer participation.  With a pension, it is almost always assumed that the employer will make contributions to the retirement pool to disperse to the pension owners.  However, the details as to the minimum amounts are unclear.
  • Mandatory participation by you.  Participation from you is usually mandatory.  You have to contribute whatever the employer pre-set amount is.  Nothing higher or lower.

401k Plan Advantages:

  • Your money is always legally yours.  Whatever money you contribute is yours (at market value).   You can log in to your account and check on it at any time.  This is not always the case with a pension.  There is usually an ambiguous calculation to determine what your “cut” of the pension is before you reach your full benefit.
  • You can change jobs.  Because your 401k account is always yours, you no longer have to spend 30 years with one employer to enjoy a full pension retirement.  For example, when my sister moved to Massachusetts after her husband found a better job offer, they didn’t have to sacrifice any of their established retirement savings with the previous employer because all of that money remained under their control.
  • You have full management over your money.  Similar to the comparison of an IRA vs 401k, with a 401k, you make the decisions about the money management of your funds, not someone else.  Just imagine if you worked your whole life and then found out the money was mismanaged.  Unfortunately pension failure is a reality that can sometimes happen.
  • Voluntary participation.  If you ever needed to (but I don’t recommend it), you can suspend your contributions to the 401k plan.  This would not be possible with a pension.
  • You can pick how much you want to contribute.  As we mentioned above, pension plans had a pre-determined amount.  With a 401k, you can pick how much or little you want to put into the plan each time.
  • You can pick which investments you want to have.  Do you want to invest conservatively or aggressively?  You decide.  With a pension, you did not have this flexibility.
  • You can borrow against it.  If you need a loan because you plan to buy a house, are having hardships, have educational expenses, etc, you can borrow certain amounts against your 401k plan.  This was not possible with a pension plan.
  • You might be able to redeem it sooner.  You are legally able to access your 401k plan money by age 59-1/2 (or even age 55 under certain considerations).  When you compare a pension vs 401k plan, the 401k can be a big advantage if you are not eligible for a full pension benefit until after age 59-1/2.  However, the reverse could also be true where you reach your full term with the pension before age 59-1/2, making that the more favorable plan.
  • You can roll it into an IRA if you wish.  If you switch jobs and decide not to keep your money in your old 401k, you have the option to convert it into an IRA.
  • Employer contributions may help out tremendously.  401k contributions from employers are allowed to be very generous.  If you have an employer that takes advantage of this, it can work out to quite a bit of money for you.
  • You decide how much to withdraw.  When you retire with a pension, you were only going to receive a certain amount each month.  With a 401k, you get to decide how much you want to take out each month.  That amount can fluctuate as much as you need.  However, you will also need to use caution not to take too much out for fear of running out of money.

Image courtesy of FreeDigitalPhotos.net

Related posts:

  1. Will 401k or IRA Contributions Make One Million Dollars First?
  2. Traditional vs Roth 401k – Which One Is Better?
  3. The 401k vs IRA – A Battle of the Best Retirement Plans
  4. 401k Advantages and Disadvantages – The Most Important Things You Need to Know

Filed Under: Which Is Better Tagged With: pension vs 401k

Comments

  1. Jacob@CashCowCouple says

    April 9, 2013 at 12:27 am

    This is a good look at the differences. Keep up the great content!

    Reply
  2. Justin says

    April 9, 2013 at 10:16 pm

    I think either can be great. With a 401(k) you gain more control.
    In my eyes the main problem is they didn’t educate people enough. Generations grew up with pensions and didn’t have to grow up planning for retirement. Then they change things and my parent’s generation had to figure out/ or not figure out/ what to do without much guidance.

    Reply
  3. Roger @ The Chicago Financial Planner says

    July 30, 2013 at 10:22 pm

    Good post and nice list for each. In my opinion there are no downsides to a pension. However as we will likely see with the Detroit situation retirement savers should not assume that their pension will always be there and they should save in addition to any pension benefit they might accrue.

    Reply

Trackbacks

  1. Yakezie Carnival April 7, 2013 Edition | Family Money Values says:
    April 7, 2013 at 3:07 am

    […] @ IRA vs 401k Central writes Comparing a Pension vs 401k – What Are the Differences? – When you compare a pension vs 401k, there are lots of benefits and pitfalls to consider […]

    Reply
  2. Carnival of Money Pros | Master the Art of Saving says:
    April 7, 2013 at 5:03 am

    […] @ IRA vs 401k Central writes Comparing a Pension vs 401k – What Are the Differences? – When you compare a pension vs 401k, there are lots of benefits and pitfalls to consider […]

    Reply
  3. Lifestyle Carnival – 49th Edition says:
    April 7, 2013 at 6:59 am

    […] @ IRA vs 401k Central writes Comparing a Pension vs 401k – What Are the Differences? – When you compare a pension vs 401k, there are lots of benefits and pitfalls to consider […]

    Reply
  4. Financial Carnival for Young Adults | Hurricanes, Panties and Dollars | Hurricanes, Panties and Dollars says:
    April 7, 2013 at 1:47 pm

    […] @ IRA vs 401k Central writes Comparing a Pension vs 401k – What Are the Differences? – When you compare a pension vs 401k, there are lots of benefits and pitfalls to consider […]

    Reply
  5. Pension vs 401k | The 401k Did Not Kill Retirement says:
    April 29, 2013 at 6:01 am

    […] the savvy among you will recognize that in many ways a 401k can have some superior benefits over the pension.  Like any tool, you just have to know how to use it correctly if you want the maximum benefit […]

    Reply
  6. Carnival of financial independence 5 says:
    June 28, 2013 at 2:13 pm

    […] money like a large company CFO on My Money Design. Starting with retirement, he teaches you the difference between a pension and a 401K on IRA vs 401K central. Lazy Man reminds you a 401k can cost you a lot of money in fees on Lazy Man […]

    Reply
  7. Carnival of Financial Independence, 21st edition says:
    July 27, 2013 at 2:07 am

    […] MMD @ IRA vs 401k Central compares the Pension vs 401k – What Are the Differences? […]

    Reply
  8. What Mommy DoesYakezie Carnival - Living Positively Edition! » What Mommy Does says:
    July 28, 2013 at 1:17 am

    […] @ IRA vs 401k Central writes Comparing a Pension vs 401k – What Are the Differences? – When you compare a pension vs 401k, there are lots of benefits and pitfalls to consider […]

    Reply
  9. Lifestyle Carnival #64 - Frugal Rules says:
    July 28, 2013 at 6:02 am

    […] @ IRA vs 401k Central writes Comparing a Pension vs 401k – What Are the Differences? – When you compare a pension vs 401k, there are lots of benefits and pitfalls to consider […]

    Reply
  10. Lifestyle Carnival – 49th Edition | MoMoneyMoHouses says:
    August 27, 2013 at 5:18 pm

    […] @ IRA vs 401k Central writes Comparing a Pension vs 401k – What Are the Differences? – When you compare a pension vs 401k, there are lots of benefits and pitfalls to consider […]

    Reply
  11. Welcome to the Carnival of Retirement, Labor Day edition | Bite the Bullet InvestingBite the Bullet Investing says:
    September 1, 2013 at 11:11 am

    […] @ IRA vs 401k Central writes Comparing a Pension vs 401k – What Are the Differences? – When you compare a pension vs 401k, there are lots of benefits and pitfalls to consider […]

    Reply
  12. The Satisfying Lifestyle Carnival | Money Soldiers says:
    September 2, 2013 at 7:01 am

    […] @ IRA vs 401k Central writes Comparing a Pension vs 401k – What Are the Differences? – When you compare a pension vs 401k, there are lots of benefits and pitfalls to consider […]

    Reply
  13. Carnival of Financial Independence, 26th edition says:
    September 19, 2013 at 8:42 pm

    […] MMD @ IRA vs 401k Central Compares a Pension vs 401k – What Are the Differences? […]

    Reply
  14. Financial Carnival for Young Adults - Labor Day Edition - Mom and Dad Money says:
    September 21, 2013 at 8:36 pm

    […] @ IRA vs 401k Central writes Comparing a Pension vs 401k – What Are the Differences? – When you compare a pension vs 401k, there are lots of benefits and pitfalls to consider […]

    Reply
  15. The Carnival Of Retirement 07.29.13 Edition — Faithful With A Few says:
    November 8, 2013 at 8:15 pm

    […] @ IRA vs 401k Central writes Comparing a Pension vs 401k – What Are the Differences? – When you compare a pension vs 401k, there are lots of benefits and pitfalls to consider […]

    Reply
  16. Yakezie Carnival - Labor Day Edition - Frugal Rules says:
    December 16, 2013 at 6:05 pm

    […] @ IRA vs 401k Central writes Comparing a Pension vs 401k – What Are the Differences? – When you compare a pension vs 401k, there are lots of benefits and pitfalls to consider […]

    Reply

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Recent Posts

Retirement Face-off: IRA vs 401k

What is the Truth about IRAs vs 401k Plans?

Will I Have Enough to Retire?

How to Free Up Extra Money to Put Towards Retirement Savings

Learning About Consumers

What are the Differences Between a 401k vs. IRA?

How to Reduce Expenses to Increase Retirement Contributions

Money Moves to Make to Improve Retirement Savings

How You Can Catch Up on Retirement Savings

What You Need to Know About Contributing a 401(k) in 2018

Boost Your Credit Score to Free Up Extra Money

Start Off 2018 Contributing More Towards Retirement

IRA vs 401k Central is for entertainment and reference purposes only. The information presented is the opinion of the author only and should not be interpreted as specific advice or recommendations towards your financial situation. Always consult with a true professional before making any financial decisions.

Per FTC guidelines, IRA vs 401k Central would like to disclose that we may be compensated for our personal opinions, views, and affiliate relationships with some of the featured products and services. Google Adsense and Amazon Associates are examples of such relationships. Such content, advertising space or posts may not always be identified as paid or sponsored content. All offers or claims are subject to change without notice and should be verified with the manufacturer, provider or party in question.

© Copyright 2012-2016 IRAvs401kCentral.com · All Rights Reserved · Powered by WordPress