Pensions (defined-benefit plans), once the bedrock of retirement planning, have been largely replaced by defined contribution plans like 401(k)’s, 403(b)’s, IRA’s, and similar plans. This change came about in large part because pensions were becoming cost prohibitive to most businesses. They had been quite popular from the 1950’s through the 1980’s. Employers saw them as a way to tie their workers to the company. A pension was an incentive for employees to stay put for many years, and the prevailing management style at the time saw workforce stability as a key driver of success.
There were also decades in which the United States was one of the largest growth economies in the world. World War II had destroyed multiple economies, and those economies required rebuilding. The United States emerged as a leader in “postwar capability”. Fast-forward to the 1980’s, we saw globalization of economic growth, as companies from a variety of nations pushed for global market share.
U.S. companies found themselves taking care of an army of retired employees. The pension plans were an enormous expense, and the companies bore all the responsibility of a severe market downturn. During economic pullbacks, when corporate earnings declined, the companies had to increase their contributions to the defined-benefit plans at the worst possible time. Meanwhile, foreign companies that did not provide such benefits were able to offer their products and services at a much lower cost. The old-style pension plan began to be an expensive endeavor that hurt the competitive edge of large U.S. corporations.
With the birth of 401(k) plans in the late 1970’s and early 1980’s, the onus of retirement savings switched largely to the employees. They could set aside a portion of their salary, sometimes matched by the employer, into an investment account that would allow growth to accrue, tax-deferred, until retirement. The employer had the option of offering profit sharing at their discretion.
Companies soon realized that the arrangement gave them tremendous flexibility. They could reduce or eliminate their profit-sharing contributions during a recession. And once the employee left the company, there was no legacy cost. In other words, the company did not have to pay a lifelong pension to former employee; some of whom might have left a decade or two previously. In a globally competitive world, the expense of defined-benefit pension plans became restrictive.
The trend continued through the 1980’s and into the 1990’s as many companies shut down their pension plans during down years. Some employees saw the 401(k) as giving them a new freedom to advance in their careers and move without financial penalty to a new company. No longer did they feel attached by an imaginary umbilical cord to the company that would ultimately feed them their pension.
In todays world, the 401(k) is portable. As you change employers, you can transfer the account to a new custodian and consolidate it with the 401(k) of your new employer. You can roll the money over easily and without penalty if it is done directly. In other words, the tax deferral continues. In fact, it is paramount that you do consolidate your accounts as it is difficult to manage multiple accounts housed at different employers or Broker/Dealers. By rolling multiple 401(k)’s into a single account, control and effective management of the account is more easily attained. And in changing times, when you (and not the company) have become increasingly responsible for managing your financial well-being during retirement, control is of maximum importance.
*Excerpt From “Financial Stability For Life”, by Daniel E. Butler, CFP®
**Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.
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