by ML Dahl
May 11, 2005
However, this is a false security. The news today that United Airlines has defaulted on its own defined benefit pension plan illustrates this point exactly. There is, in fact, no security if you have to rely on someone else to provide for you, whether it is while you are working or after you retire.
Defined benefit plans are totally dependent on the employer being profitable (if corporate) or fiscally healthy (if government). When the employer is not financially healthy, this so-called secure retirement is no longer so rock-solid secure.
In addition, in a defined benefit plan, contributions to the plan belong to the employer, not the employee, because it is the employer who will be required to make the payments and write the checks to the employees when they retire. All that the employee owns is a promise, an IOU from his or her employer, not a retirement account with real money and real investments accumulating in it.
For this very reason, a defined contribution plan is more secure for employees. In a defined contribution plan, real money is contributed to a plan and set aside for the employee in an account that the employee owns 100%. It is not a promise made for a future payment that may or may not be kept. The employee owns real assets, not an IOU that may or may not be honored.
Of course, some people warn that a defined contribution plan is risky, because it requires investment in the stock and bond market. That's absurd; worrying about how to invest this money in a defined contribution plan is like standing in a modern grocery store with $500 in hand, worrying about what to eat for dinner. Most 401-K plans offer between 5-10 excellent investment choices, from money market funds to aggressive growth stock funds and everything in between, so that even the most conservative investor can pick investments that are suitable for him or her and be adequately diversified, avoiding the mistake of putting too many eggs in any single basket. High quality publicly- traded mutual funds from well-known and historically well-managed fund companies have been delivering solid returns and suitable investment choices to 401-K-type plans for many years and can be relied on to continue doing so.
Personally, I would much rather see my money set aside for retirement in an account that I own and control, in investments that I select, than rely on some future promise by an employer that continually struggles to balance its own budget. I feel much more secure knowing that real money is invested in real assets that can produce real income when I retire, and I get this security in a defined contribution plan, not a defined benefit plan.
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