Thank Goodness for Contribution Plans

If your company offers a 401k or some other defined contribution pension plan, you should thank your lucky stars for it even if your investments have suffered.

Many employees aren’t so lucky as you to have an account set aside specifically for you. Their employers have what you think of as regular pension plans (defined benefit pension plans*, which are typical of older, unionized companies), and they are bound to be suffering right now.

With 401k plans, companies don’t get dragged down if the investments decrease in value because employees bear the risk for their own accounts. Companies with pension plans as described above, however, bear the investment risk, and even when their investments (pension assets) tank, like they most likely did in 2008 for just about all of them, they still have to pay the pension payments (pension liabilities) due to their retired workers.

But cash is in short supply because sales are down, banks aren’t lending a whole lot, and investors are either broke or waiting around to see what happens with the economy. I generally don’t like to dwell on negative situations, but unless the economy makes a pretty quick turnaround, we’re going to see a lot of companies bleed cash until they die.

So don’t despair if your 401k statements show that you lost upwards of 30% last year. Instead, be grateful that you do not work for a company that may not be able to pay out their pension liabilities at all.

*This assumes a funded plan. There are some unfunded defined benefit pension plans out there, most notably Social Security, which do not necessarily have any assets to offset their liabilities. They pay as they go, and are much more commonly sponsored by the government than by private companies.

Explore posts in the same categories: Miscellaneous/Other

One Comment on “Thank Goodness for Contribution Plans”

  1. If a company offers a matching 401k contribution, I think it’s important to take advantage of this “free” money. Many companies are cutting this benefit or reducing it, so it’s wonderful if you can take advantage of it now.

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