What a week. The Lehman Brothers bankruptcy, Merrill Lynch’s sale to Bank of America, and the government rescue of AIG were just the latest upheavals in this churning Subprime Summer. I’ve been getting calls every day from reporters, wanting to interview people who are concerned about their 401(k) accounts.
People are right to be concerned. For many American workers, a 401(k) account will be their only source of retirement income besides Social Security. While one should expect market fluctuations to affect their account balances, no one likes to see their 401(k) take a nosedive.
All of this shows the importance of guaranteed pensions. While not perfect, traditional defined benefit (DB) pensions have many virtues that seem more and more appealing in today’s economic climate. Traditional pensions are better insulated against the volatility of the stock market than 401(k)s, because they hold more money, and that money is invested collectively over long periods of time. And they are professionally managed and diversified, according to prudent investment standards (including limiting investments in employer stock, as Joellen pointed out yesterday).
Most importantly, private pension plans are insured by the PBGC, so if your company goes belly-up and it can’t meet its pension obligations, most workers will still get their full pension.
Now I’m not saying we should get rid of 401(k)s, but we must recognize that do-it-yourself savings plans are not providing enough retirement income for most people. As more companies freeze their traditional pension plans, we need to look at the features of DB plans that work well and figure out ways to keep those features in our retirement system. To find out more about the differences between DB plans and 401(k)-type plans, check out the Defined Benefit vs. Defined Contribution Plans reports in the Reports section of our web site.