|
|
|
Many employers are electing to terminate their defined benefit (traditional) pension plans in favor of offering a 401(k) defined contribution plan as the retirement accumulation vehicle for their employees. Generally the 401(k) is a cheaper and less obligatory pension arrangement for the employer ... the employee may contribute a portion of their compensation to the plan, and the employer may or may not match a portion of those contributions. Most 401(k) plans are also self-directed, wherein the employee may chose the investment options that best meets his or her goals. At retirement the employee, either as an individual investor or with professional help is responsible for investing their plan dollars and managing their retirement income. In a traditional defined benefit plan, contributions are made by the employer, and based on a fairly complicated formula, the employer is obligated to provide a lifetime income to the employee at retirement. Many employers are also offering the option of a PORTABLE PENSION, where the employee may elect to take a lump sum distribution of their traditional pension and transfer their vested pension balance into an Individual IRA Account. |
|
|
|
There are PROS and CONS to both the TRADITIONAL PENSION or the PORTABLE PENSION. Once chosen, the decision is irrevocable, and so careful consideration and analysis should be given to determine which choice is in the best interest of the employee. |
|
|
|
At stake are some of the following issues: TRADITIONAL PENSION ? Guaranteed Fixed Income for Life ? No access to principal ? No inflation protection (fixed income) ? Cost to provide income benefit to spouse ? Investment risk assumed by employer ? Principal forfeited on death |
|
|
|
At stake are some of the following issues: PORTABLE PENSION ? Flexible Withdrawals ? Access to principal ? Potential inflation protection ? Investment risk assumed by employee ? Principal passes to estate on death, subject to income and estate taxes |
|
|
|
Knowing what is best for any specific situation is often difficult to measure. Depending on your age and number of years until retirement, one plan may be significantly more beneficial to you than the other. A proper Retirement Income Analysis to compare the pros and cons of either choice, and the impact of that choice on your overall retirement situation is critical to making a well educated decision, and one that you won't regret. |