The Premise
In prior generations, employees tended to stay at a single company for much of their working lifetimes. Upon retirement, employees would receive periodic payments from the company’s pension plan, sometimes referred to as a defined-benefit plan, or pension, plan. The actual management of pension plan assets, including all trading research, projections and operational functions was left to investment professionals. Employees did not have to assume responsibility for making any investment decisions themselves.
The Rise of 401(k) and 403(b) Plans
However, in recent decades, many employers have made calculated decisions to shift away from pension plans to 401(k), 403(b) or 457(b) plans – sometimes referred to as defined contribution plans. By transitioning from pension plans to defined contribution plans, benefits, investment risks and responsibilities shift from the company/organization to the participating employees.
Drawbacks and Mistakes in Many Plans
Many defined-contribution plans suffer from fundamental drawbacks, resulting in common mistakes. Some of the drawbacks include:
- A lack of information that is useful in the decision-making process
- Generic, one-size-fits-all investment recommendations; no knowledge of outside employee-owned assets
- No understanding of the employee’s attitudes towards and ability to accept investment risk
These drawbacks lead to unfortunate investing mistakes, such as avoiding investing altogether, reactive investing, or a general lack of understanding risk and return tradeoffs.
Takeaway Points for Plan Participants
From a plan participant perspective, it is important to acknowledge the following:
- Defined contribution plans are most likely here to stay; therefore, it is important for employees to take responsibility of their financial future
- By default, defined contribution plans require the employee to make important financial decisions regarding their retirement money
- If they don’t understand the decisions they face or don’t have the proper time to dedicate then it is incumbent upon them to seek professional advice
- The price is too high just to ignore their retirement assets
- Employees should also take advantage of all employer sponsored education regarding their retirement plan
For a complete discussion, download the whitepaper “Evolution of Employer-Sponsored Retirement Plans: NEW Challenges for Participants.“
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