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SanDisk's Name is Now Mud
(petapixel.com)
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this post was submitted on 18 Aug 2023
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"401k" is an American term of art. It's like a pension fund except you're directly investing into the stock market and not pooling risk with anyone else. Money contributed to a 401k isn't taxed until you retire, but in exchange you can only contribute direct earnings from the job sponsoring your account.
As part of a benefits package, some employers also offer contribution "matching". It's very similar to the concept of employers matching charitable donations -- for every personal dollar you put in, they chip in as well. How much they contribute will also vary. Some places will do dollar-for-dollar matching up to a maximum salary percentage (e.g.: If I earn $50k and get 5% matching, the employer will match the first $2500 I contribute). Other companies will instead contribute pennies on the dollar at a fixed percentage rate (e.g.: If I save the annual maximum of $22,500 and get 5% matching, the employer will contribute $1,125). And yes -- it's never a pleasant surprise when you're expecting the good matching and instead get the shitty matching.
In any case, because 401k matching is technically only a job benefit, there aren't many rules against employers reneging on it. It's one of the first corners that tend to get cut in workplaces where the boss doesn't have to look their underlings in the eye on a regular basis.
Surely actual pension contributions would be better than having your employer partially fund what is essentially a big financial gamble?
Or... Is that the idea? Another way for US employers to screw their fellow citizens over and give them as little as possible in return for their lives of labour?
The world just makes me sadder and sadder. There's just no real good news any more, only bad :-(
FWIW: pensions do carry similar risk factors. Most pensions are only financially sustainable because they're invested into the public market and it's entirely possible for a pension fund to go belly-up due to mismanagement as a result.
You are essentially correct in identifying that 401ks are much riskier, however. Most working adults would probably rather have the security of a pension instead of being given a rope to potentially hang themselves by.
In a sense? I doubt most employers actively scheme to do evil to their employees, but the outcome is fairly sinister nonetheless. Pensions used to be much more common in the U.S. until getting largely replaced by the 401k during the 70s. These days, the only jobs that tend to offer pensions are government/unioned... which I think says all that needs to be said about which option is more pro-worker.
The one place where 401ks really shine is (legal) tax evasion and high-spend retirement. If you make six figures, you can max out your 401k contributions and thereby avoid paying $1000s in income taxes each year. People who are able to contribute that much also tend to get way more money back in retirement compared to a pension because -- when properly funded -- a 401k is technically more efficient in the long-term for those who already have the requisite resources to weather a medium-term financial hardship.
Well, if it's any consolation... this particular bad idea has been around long enough that it's no longer newsworthy
One big place where 401ks are better for the modern workforce is portability, because the investments in the 401k are vested property of the worker, so the worker gets to bring that retirement with them even when changing jobs. Under the traditional pension programs, people who left the employer for another job would often be leaving behind a lot of pension benefits, and be behind at the new employer's pension plan.
That's a fine point, but I also think there's a case to be made for attributing this difference in policy to the practical reality that traditional American pensions were popular decades in the past while 401k policies are popular today. Viewed through that lens, it seems fairly obvious that a modern 401k policy would be more accomodating of modern work sensibilities than a traditional pension plan originally penned 60 years ago!
With that being said, I think it's a little self-defeating to limit our discussion to such things. Our non-American friend who originally asked the question would almost certainly be more familiar with the more modern and less all-or-nothing pension varieties. Indeed, depending on where they live, it may even be possible to transfer accumulated pension benefits between plans when changing jobs.
I mean even a lot of pension funds are kept in investments rather than some scrooge mcduck money tower. Unless you're just entirely opposed to managed investments as a whole, a 401k is no less risky than a pension in terms of potential for loss, but it does come with the added benefit of being able to personally direct how it's invested rather than just sitting back and praying that someone else doesn't mismanage it. Your 401k is yours, and yours alone.