Are Pension Plans a “thing” anymore?

Employment & Income

Short Answer: Yes! Not as common as they used to be, but still offered by certain employers.

A pension plan, simply put, is a large account that is funded by an employer for the benefit of the employees. The account is strictly for employees to draw from after retirement. About 85% of public (government, etc) employees are invested in a retirement plan, and 15% of private employees.

The main difference between a pension and a 401(k) plans: A pension plan is almost exclusively contributed to by employers, whereas a 401(k) is primarily contributed to by the employee, with a monetary “match” by the employer.

There are two types of pension plans: Defined Benefit and Defined Contribution. Defined Benefit means that the employee is guaranteed a certain amount of money to be paid out at retirement. Defined Contribution means that the employer contributes a set amount on a regular basis, often times related to the employee’s contributions.

Pension plans date back to the 1870’s. Companies that provide a pension plan are often referred to as “plan sponsors.” Pension plans are governed by ERISA (Employee Retirement Income Security Act, founded in 1974 to protect the rights of pension plan beneficiaries, and ensure transparency from employers.)

Vesting: The amount of time an employee is required to work for a company in order to secure their rights to pension contributions.

Finn’s Fact: Pension plans, like other retirement accounts, are what is referred to as “qualified accounts.” This means that they meet certain IRS standards to receive tax advantage status, such as not being taxed at the time of withdrawls.

“I started a new job and my employer mentioned a 401(k) as part of my benefits. Do I need a 401(k)?”

Employment & Income, Spending & Saving

Short Answer: Yes, you need to start a 401(k) now.

There’s no “except” or “if” on this one, you should immediately start a 401(k) at any job that offers it. It’s free money. Yes, FREE MONEY. We can explain. In most instances, when you contribute to your 401(k), your employer also makes a contribution. If you’re thinking “I have plenty of time to save later.” Stop right there. You don’t.

Here’s the fancy math:

If you make $35,000 a year, and you get paid twice a month, before taxes, your paycheck is roughly $1,400 every other week. (401k contributions come out pre-tax, and also account for a tax deduction at the end of the year.)
3% of $2,800 is $84. That’s $84/month that you are investing in your future. After 5 years, that’s about $5,000 saved. And we haven’t even counted compounded investing either!

Let’s say you are cheap (we don’t judge!) and only want to put away 1%.
That’s still $29/month that you are investing in your future.

$29 = two Chik-Fil-A meals.
$84 = the cost of an unplanned Target trip. (IYKYK)

Can you afford it? Yes!
Do you need it? Absolutely.
It doesn’t matter how much you can invest, what matters is that you get started. Once you start a new job, you should check your onboarding pamphlet or email about retirement plans, or, reach out to your HR representative and ask.

Oh and guess what? That part above about employers making contributions? Well, that $29 or $84 you’re squirreling away… your employer is putting away the same amount for you as well. Remember that $5,000 above that you’ll have after 5 years? Well, with an employer match, its actually $10,000. (See? Free money, we told you.)

Another fun fact about a retirement savings account: when purchasing a large item, such as a home, a retirement account is seen as an asset on your balance sheet (yes, you have a balance sheet now, you adult, you!) and can help boost your ability to qualify for a lower interest rate or higher loan amount!

Click here to see our “Finglish” definition of a 401k!

Finn’s Fact:  A 401(k) or 403(b) will go with you if you leave one job or company and move to another. It always belongs to you!