Retirement Plans: The Great Debate

Written by John Hanigan, CPA, CFP

A recent article in the Washington Post cited some disturbing trends in retirement savings, stating that one in four 401(k) participants raid their retirement savings for current expenditures and non-retirement needs. It also discussed the effect of the trend to move away from employer funded benefit plans to employee funded 401(k) plans.

A defined benefit plan guarantees a specific payout amount upon retirement for a specified period of time (normally for life). The most common types of defined benefit plans are pensions and cash-balance plans. The payout upon retirement is based upon salary and years of service.

A defined contribution plan, the most common of which is a 401(k) plan, is a form of tax deferred retirement savings. These plans are funded by the employee with potential matching and discretionary funding from the employer. The balance available upon retirement is dependent on investment results and discipline during the years of buildup.

The debate over whether public policy should encourage either defined benefit plans or defined contribution plans is an argument with no simple answer. We hope to be able to present both sides in future articles. However, what we do know is that most of us rely on 401(k) plans today. It is important, therefore, that we understand the funding needs at an early age and the associated risks. The responsibility for this understanding rests with all parties involved. From the employer standpoint, a fiduciary responsibility exists in the choice of the plan provider. This includes access to proper education, controlling costs, and providing proper investment options. The employee is then responsible to make use of the tools provided, determine proper goals, ensure constant review, and maintain discipline. Personal funding levels need to be appropriate for each individual based on current family situations. Again, we hope to cover each of these issues in future articles.

Many times, we find that individuals who are eligible to participate in an employer-sponsored 401(k) plan don’t take advantage of the resources available for planning a successful retirement investment strategy. We can help. Our team of trusted advisors can connect you with a Financial Advisor with the knowledge and experience needed to ensure you are making the most of your investments. For more information, please contact our office at (402) 423-4343.

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