There was once a time where if you worked for 30 years at a solid company you knew your retirement would be comfortable- similar to your current lifestyle in all likelihood. This was all thanks to something called a pension plan. These plans fall under the category of what’s known as a defined benefit plan. When a portion of your paycheck went to your employer’s retirement account, you were guaranteed a certain benefit per year upon retirement. The employer bore all the investment risk, as employee assets were pooled together and invested. If the company and stock market did well, the company did well and had plenty of funds to pay employees. If not, the company would still be on the hook to pay employees the same amount. Today, pension plans are few and far between, with fire and police departments being some of the only organizations offering these defined benefit plans.
Now, defined contribution plans are the norm, and they come in many shapes and sizes. The most common is the 401(k). This plan allows an employee to make a defined contribution from their paycheck (see where they got the name?), and there is often an employer match. However, the investment risk falls on the employee, and how much is available in retirement depends on how well the investments perform.
The switch to defined contribution plans gets companies off the hook for a lot of administration costs and investment risk, which shifts to the employee. However, with greater risk also comes a greater possibility for reward, as a well invested employee with a little luck could have a nice nest egg waiting for them at retirement. Employees can also rollover their 401(k) plans to their own personal IRA if they leave a job, and make their own investment choices. Defined contribution plans are also conducive to the current trend of employees changing jobs more frequently, as 401(k)s lend the employee a few options when separating from the employer.
In short, employees today have more freedom than ever before, but also more responsibility and risk. No longer can most people just put their head down and work and have their company tell them exactly what their paycheck will be in retirement. Educate yourself, ask questions, and seek help if needed. You must decide what % of pay to contribute to your retirement plan, determine when you are able to retire, and take overall responsibility for your financial well-being. It can be daunting, but there are tons of resources available to help you come up with a plan to take win this new retirement savings game that most of us will be playing.
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