Social security by the numbers

[Drake4]

I've been fortunate because of my age as well, have contributed 20% for my whole career plus the 5% match.

But the problem is, for new employees that's incredibly difficult to do with the monster price increases in homes, vehicles, food, clothing, etc. etc. in the past 10 years. I couldn't afford to live in the house I do if I were forced to buy it today...I just don't make enough to afford an 850K home.

I'm in the same boat. No way I could afford my $1mil+ home on my current salary if I had to buy today. Feel very fortunate. Also feel very fortunate that I've been able to max out my 401k the last several years, but it definitely didn't start that way. Agree with your opinion, and when I started in this industry at $60k/year salary, I wasn't even close to be able to do that.

I think we have a good plan. 4% match at 100%, plus an additional mandatory company contribution based on age + years of service. I'm currently at an additional 6% with another increase coming in the next couple of years. So minimum, if I only put in 4%, my company puts in an additional 10%.

 

[npaden]

Just glancing through a few financial statements I would say that the administrative costs on the defined benefit plan I audit is pushing 8 times what the administrative costs are of a similar sized plan.

The expected rate of return on plan assets for the defined benefit plan based on the last actuary study went down from 6.25% to 5.75%.

Actual return on plan assets for the defined benefit plan was a 15.7% loss for 2022 and a 10.3% gain for 2023. Looking at a few of the 401k plans looks like they ran about a 20% loss in 2022 and a 18% gain in 2023 so not a lot of difference but the net of those 2 numbers is -5.4% for the defined benefit plan and -2% for the defined contribution plans. So a 3% worse overall performance in the tiny 2 year window I picked for the defined benefit plan. I could do a more formal analysis but not sure it is going to convince anyone.

For the people that think the more costly to administer and lower performing defined benefit plan is the right option for the good of the people, they have the same issues as 401k plans now. The plan I audit if you leave before you have worked there 5 years you get nothing. How do you think that is working for the people switching jobs every couple years? At least if they withdraw their 401k and buy a boat they get a boat, if they work 4 years and leave a company with a defined benefit plan they get nothing.

There is no doubt in my mind that the 401k plans are a more efficient and effective way to save for retirement. I'm not one to tell someone that because they make less than X amount of money that they can't plan for their retirement. I know people that make a ton of money that make stupid financial decisions and I know people that don't make much that make very good financial decisions. Punishing everyone by making them use a more costly and lower performing investment vehicle because you think that people are too stupid is not my idea of how to fix things.

 

[Wildabeest]

At least if they withdraw their 401k and buy a boat they get a boat

Bad analogy. That boat will end up costing them way more than the initial investment!

 

[406dn]

Another aspect of relying on a 401k plan for retirement, is that your hoped for and planned retirement date is very much at the whims of what the market is doing. I long planned to retire at age 60. That was the plan for many many years. That meant that I would have retired in 2011. Everything looked great until the fall of 2008. A significant part of my savings plan balance evaporated. It caused me to temper my plans and delay retirement, until 62.

Many people do not get to decide what there retirement date is. Either their health or their employment status, alters the date. If this happens during a market turndown, you are not being set up to have a good retirement. Some one with a 401k, hoping to retire in the next few months, is very likely not enjoying looking at their 401k balance.

The impetus towards 401k retirements, did not come from working people. It came from employers. This provides a solid backstop on what their retirement obligations are to their employees. Once a person leaves the company, they are totally done with any obligation.

 

[Nick87]

Another aspect of relying on a 401k plan for retirement, is that your hoped for and planned retirement date is very much at the whims of what the market is doing

I don't know enough about all this stuff to say which way is better. I would imagine budgeting on a 401k income would be a little more difficult also depending on the market? Then again, with a 401 you can leave some of that behind to your kids? Can't do that with a pension fund. At least not that I'm aware of.

 

[westbranch]

There's plenty of people who are terrible with their money regardless of income.

I have seen some crazy examples of this. Usually sales people across various industries. One guy making 400-800k for the last 8+ years and can't come up with $20k for a tax bill when his withholding was too low.

 

[westbranch]

I don't know enough about all this stuff to say which way is better. I would imagine budgeting on a 401k income would be a little more difficult also depending on the market? Then again, with a 401 you can leave some of that behind to your kids? Can't do that with a pension fund. At least not that I'm aware of.

There are guidelines like the 4% rule. And tons of articles why 4% is too high and too low.

Charles Schwab

 

[SAJ-99]

I don't know enough about all this stuff to say which way is better. I would imagine budgeting on a 401k income would be a little more difficult also depending on the market? Then again, with a 401 you can leave some of that behind to your kids? Can't do that with a pension fund. At least not that I'm aware of.

I don't think there is an answer to the question of best. In a lot of debate I have read over the last 3 pages, I see both sides being right to some extent. A pension is better because the return risk is on the employer. That is great until they go bankrupt and it gets transferred to the PGBC and the payment get cut. 401ks are good because the money is yours and isolated and can transfer to survivors. (note: some pensions have survivor benefits). Nothing will ever be perfect.

To Buzz's point, you have to make enough money to save. This is inarguable. It should be noted that the Dems brought up an argument that 401ks only benefitted "the wealthy" and wanted to remove some Tax benefits in the SECURE 2.0. (Yeah, I spent a lot time sending emails to Dems and arguing against that idea.) The bottom line is any retirement savings programs benefit the "wealthy" because they have more money. I don't see a way around that. But we need to keep SS around, even if it means I never see payment because of means/wealth testing.

401(k) Industry Walks Tightrope in Congress to Protect Tax Break

Industry advocates promoting legislation in 2025 allowing public school teachers and nonprofit workers to use low-cost collective investment trusts for retirement are taking pains to avoid losing 401(k) tax incentives for workers in the process.

news.bloomberglaw.com

 

[SAJ-99]

The expected rate of return on plan assets for the defined benefit plan based on the last actuary study went down from 6.25% to 5.75%.

That seems way low unless the plan is closed and it is all fixed income. Then they should just hire someone to liability match and call it done. I say that having argued with actuaries for years that the expected ROR was too high. Typically, at least in large plans, actuaries don't set the ROR (they don't want that risk). The investment board has to justify the ROR to the actuary. Hence how you get an entire consulting industry.

 

[Nick87]

There are guidelines like the 4% rule. And tons of articles why 4% is too high and too low.

Charles Schwab

Right, but that's 4% of a fluctuating number correct?

 

[brymoore]

A pension is better because the return risk is on the employer. That is great until they go bankrupt and it gets transferred to the PGBC and the payment get cut.

In my early life I had a GM pension. Based on the math, I could retire with full benefits at age 52 1/2.

In my early 30s I was an MBA geek for the executives in the Ren Cen. I could see the company was going down and would never pay my pension in 20 years. White collar pensions were essentially wiped out in the BK. I had jumped ship before the BK and lump summed my pension benefit. I still have it invested in an IRA.

There are pros and cons to pensions and 401ks. I have both but mainly plan to live in my early retirement by making my wife work until she’s 75.

 

[westbranch]

Right, but that's 4% of a fluctuating number correct?

Yes and its generally conservative based on past market performance. So if the market is down and 5% is needed it should not kill someone's plan. But definitely more risk.

 

[Nick87]

Yes and its generally conservative based on past market performance. So if the market is down and 5% is needed it should not kill someone's plan. But definitely more risk.

This is probably a dumb question but since I've never had a 401k I've never really had to think about it. 5% is what your taking annually?

 

[mevertsen]

I don't know enough about all this stuff to say which way is better. I would imagine budgeting on a 401k income would be a little more difficult also depending on the market? Then again, with a 401 you can leave some of that behind to your kids? Can't do that with a pension fund. At least not that I'm aware of.

My pension is set up so that my wife gets 100 percent of my current amount in the event I pass before her. We had to take a reduced amount to do this, but I wanted a higher amount for her if I passed before our kid turns 18 or so, so she can pay the bills and not have to work to take care of our daughter.

<<<currently on disability retirement pension through the state.

 

[Nick87]

My pension is set up so that my wife gets 100 percent of my current amount in the event I pass before her. We had to take a reduced amount to do this, but I wanted a higher amount for her if I passed before our kid turns 18 or so, so she can pay the bills and not have to work to take care of our daughter.

<<<currently on disability retirement pension through the state.

We have the option to do it that way as well.

 

[406dn]

I don't know enough about all this stuff to say which way is better. I would imagine budgeting on a 401k income would be a little more difficult also depending on the market? Then again, with a 401 you can leave some of that behind to your kids? Can't do that with a pension fund. At least not that I'm aware of.

Quite a few employers will let you take your pension as a one time lump sum payment. That is then rolled over into an IRA account. So, with some number of private employers, you can pass down your heirs, any left over money, from the pension.

The first few years after you pull the plug are pretty crucial to how nice your retirement will be, if you are managing your own retirement. If the market is down 20% and you have taken out 8%, over a couple of years... it will be hard to get back to where you'd like to be. If the market pops 20% over a couple of years, and you've taken out 8%...you have the wind at your back.

My experience is that if you are mostly into the market a 4% withdrawal will work in most cases. I've been retired a dozen years now. At first, I worried if we had enough. Now, I ponder how much we might be able to leave to our kids and grandkids.

I think if, I had retired, and the market slumped badly, I would have found some part time work, to spare drawing on the retirement fund.

 

[Bonasababy]

You absolutely are in denial.

The denial is that you wrongly assume people make enough to contribute, and that the average guy is smart enough to manage their own retirement.

You need to get out from behind the desk once in a while and mingle with common folk...

Agree to a point, I also think the idea that defined benefit plans cost more to manage is short of reality. Yes in some ways, but they also are a key employee recruitment benefit--and a hugely impactful employee retention benefit. There's a lot of value to the pension manager in those two things!

I know something about cost of management of both as we have an outfit in town that does both for thousands of employers across the country. Large pensions like governments can manage their own (and do an amazing job of it when managed properly as a true fiduciary should) but most businesses hire out the management of their plans and do the same if they offer a pension.

Which is another point against 401's by the way--there's competition amongst plan managers out there, there are kickbacks to employers for selecting plans in some cases, and its quite common for both--the employer and the plan manager to collude for personal benefit--leaving employees with poor choices to pick from in their plans and/or higher cost options to choose from than others that are out there.

There's a law firm in my state that has specialized in going after employers for this. They just did that against my wifes former employer. Large class action, the employer was forced into being a much better fiduciary than they were, the legal firm made out great, the employees in the large class action got pennies towards their dollars of losses.

As noted earlier pensions can be prone to management driven by greed and bad decisions too--those that wanted to eliminate pensions make a big deal of that but it sure doesn't have to be that way.

 

[npaden]

Agree to a point, I also think the idea that defined benefit plans cost more to manage is short of reality. Yes in some ways, but they also are a key employee recruitment benefit--and a hugely impactful employee retention benefit. There's a lot of value to the pension manager in those two things!

I know something about cost of management of both as we have an outfit in town that does both for thousands of employers across the country. Large pensions like governments can manage their own (and do an amazing job of it when managed properly as a true fiduciary should) but most businesses hire out the management of their plans and do the same if they offer a pension.

Which is another point against 401's by the way--there's competition amongst plan managers out there, there are kickbacks to employers for selecting plans in some cases, and its quite common for both--the employer and the plan manager to collude for personal benefit--leaving employees with poor choices to pick from in their plans and/or higher cost options to choose from than others that are out there.

There's a law firm in my state that has specialized in going after employers for this. They just did that against my wifes former employer. Large class action, the employer was forced into being a much better fiduciary than they were, the legal firm made out great, the employees in the large class action got pennies towards their dollars of losses.

As noted earlier pensions can be prone to management driven by greed and bad decisions too--those that wanted to eliminate pensions make a big deal of that but it sure doesn't have to be that way.

What you are describing as a negative against 401k's is illegal. And there has been significantly increased reporting requirements to fully disclose all plan expenses even investment fees. I'm sure there are employers out there doing things they shouldn't but I think they are very few and far between. Plans with over 100 employees have to have an audit (that's me) and we have to look at the fees and determine that they are reasonable. They are generally less than 15% of the costs of a similar sized defined benefit plan. Think $80,000 a year for a plan with about $20m in it for the defined benefit plan vs. less than $10,000 for the 401k plan.

I hate to bother you guys with facts when you obviously have your minds made up that defined benefit pension plans are some sort of miracle that will solve all the retirement woes but it just isn't true.

 

[Bonasababy]

What you are describing as a negative against 401k's is illegal. And there has been significantly increased reporting requirements to fully disclose all plan expenses even investment fees. I'm sure there are employers out there doing things they shouldn't but I think they are very few and far between. Plans with over 100 employees have to have an audit (that's me) and we have to look at the fees and determine that they are reasonable. They are generally less than 15% of the costs of a similar sized defined benefit plan. Think $80,000 a year for a plan with about $20m in it for the defined benefit plan vs. less than $10,000 for the 401k plan.

I hate to bother you guys with facts when you obviously have your minds made up that defined benefit pension plans are some sort of miracle that will solve all the retirement woes but it just isn't true.

I salute your ideals but I have lots of direct evidence of bad fiduciary management of 401's. Both for ourselves and while reviewing plans and their options for my 3 kids as they have moved from employer to employer before settling into something more stable and desiarable for them. We might not be thinking the same thing.

Take this real world scenario. An employer has two options for a retirement plan for their employees. One is full of American Funds options, the other run by a low cost mutual fund company like Fidelity or Vanguard. The employer has to consider cost to them, right? Do they have fiduciary duty to select the plan that has the lowest cost options for their employees--or the plan that has the lowest cost to them?

What I have seen is the latter is the norm. Audits are NOT recommending changes. So the employee gets stuck paying fees on their options that are two or three times higher than what the low cost companies offer, and the employee is happy when they choose the plan that costs them less. Employers have bargaining power on fees charged to their employees. They do not always exercise that power.

In the lawsuit against my wifes former employer part of their charge and accepted resolution was that the employer did not work to negotiate lower fees for the same exact funds. The legal team showed many examples of that ability, the judge agreed, the employer was forced to make changes in that regard.

Having said all that, its not like higher fee plans aren't usually better options than a personal IRA for employees--usually they are, sometimes far better. But their employer is not being a true fiduciary in the sense of finding the best option for their employees.

 

[Keep on]

What you are describing as a negative against 401k's is illegal. And there has been significantly increased reporting requirements to fully disclose all plan expenses even investment fees. I'm sure there are employers out there doing things they shouldn't but I think they are very few and far between. Plans with over 100 employees have to have an audit (that's me) and we have to look at the fees and determine that they are reasonable. They are generally less than 15% of the costs of a similar sized defined benefit plan. Think $80,000 a year for a plan with about $20m in it for the defined benefit plan vs. less than $10,000 for the 401k plan.

I hate to bother you guys with facts when you obviously have your minds made up that defined benefit pension plans are some sort of miracle that will solve all the retirement woes but it just isn't true.

Not a miracle, but they do offer a peace of mind, which i would call a benefit to employees. Even with downsides of pension plans, there is an upside that the employee has guaranteed income over their lifetime and that of their spouse. No worrying over market swings, and just as you keep saying many people can't be trusted to handle their 401k balances while working, there's a whole bunch who can't handle their balances intelligently once retired.
My retirement will be funded with a mix of SS, mine and wife's pensions and my 401k. I like the diversification, gives me some piece of mind. And let's face it, employers aren't going to 401ks simply out of the goodness of their hearts, it's cheaper for them, so there is that.