401k plan:
The plan was introduced in 1978 and the private sector welcomed it with open arms. It was presented as a substitute but soon replace the pension.The 401k is a defined-contribution plan that allows the employees to save their retirement funds as the pre-tax amount is deducted from their paycheck to contribute to the plan. It also frees the employers of their financial obligation. Although an employer can make a limited matching contribution of 50 percent of the contribution made by the employee. But do not provide a full retirement fund.
Contribution:
There is also a limit to the contribution made by the employee each year. As per the 2022 criteria, the employee can contribute up to $19,500. The workers, close to their retirement, can contribute $6,500 more, the catch-up contribution.
Types of 401k plans:
There are two types of the 401k plan:
Traditional 401k plan Roth 401k plan
Traditional 401k plan:
It means that you won’t have to pay the tax on the contributed amount that year. But upon withdrawal, you will be taxed.
Roth 401k plan:
It involves the after-tax dollars contribution to the plan. Upon withdrawal, on retirement, it will be tax-free.
Both options are open for you to choose from. Do consider that the employer can only make the matching contribution in a traditional 401k. You can have both plans simultaneously and can switch to the one that benefits you more. Keeping in mind, the currents economic status of the country, there are high chances of increased taxation in the future. So, Roth 401k seems to be an ideal option, to go for.
Drawbacks:
There are several drawbacks as it put the investment risk on the employee’s shoulders and guarantees no minimum or maximum benefit. It expects the average individual to be an investment and saving expert. Is it applicable to all? Upon withdrawal of the money before retirement, the employee has to bear penalty charges too.
Pension plan:
A pension on its death bed is a defined-benefit plan that makes the employer responsible, to pay the retirement fund entirely, to its employee. The pension can be a monthly wage or a lump sum at retirement although the latter is uncommon. The employer devises the pension plan that depends upon employee years of service and earnings.
It is less common nowadays as it involves no contribution on the employee’s end. The employee doesn’t face any financial instability in case the market drops.The retiree can enjoy it his whole life. After his death, the spouse can appreciate it if you are open to a spouse survivorship plan.
Which is better: Pension or 401k?
The pension plan is for those individuals that are more comfortable with the fixed monthly payments. Whereas the 401k plan better suits the investors that enjoy greater control over their retirement funds.
with the pension plan as the retiree can enjoy the fixed amount each month without any contribution, it does seem good . However, it reduces if the company declares bankruptcy. Insuring pension from Pension Benefit Guaranty Corporation can avoid it. If you look at the different sides of the story, 401k plans better suit the employer as he/she will have to contribute only a portion of funds.
Conclusion:
Pension is dead, if not, it is drawing its last breath. 401k plan has replaced it completely. The worker must have enough retirement funds to live a comfortable life after retirement. As pension is less appreciated, a 401k plan is all that the retiree can benefit from.
Why is a 401k plan more acceptable than a pension?
It relieves the employer of their financial burden as the employee contribute to the retirement funds by themselves.
Does the employer contribute to 401k plans?
An employer can contribute up to 50 cents per 1 dollar contribution the employee made. About 50% but is not responsible for providing the entire retirement fund.
