401K plans, there not necessarily guaranteed right?

Question

Someone at my work told me that 401K is guaranteed money but I always thought that it really depended on how well your investements were doing that determined your pay out at retirement. I told him that you are not guaranteed anything and you could actually loose money with a 401k if the market does very bad. This is true right, I think the misconception people have is that 401k is guaranteed money. I am not against it and I invest as much as I possibly can in it, but I wanted to make I was telling him the right thing. to me, 401K are more like potential supplments for retirement. Any help would be appreciated regarding 401K. Thank You

Answer 1

It sounds like you and your coworker are getting principles of two different retirement accounts mixed up. The two of you are discussing 401(k)s, but using terminology more suited for pensions.

A pension is a retirement plan funded by your employer. They have been very popular, but with the aging of the American workforce are quickly losing favor. Pensions come in two types- defined contribution and defined benefit. A defined contribution plan involves the employer putting a pre-set (or defined) amount of money aside in your name. All contributions are lumped together and the employer invests them. Whatever money is earned on the investments is paid out as pension benefits. Since investment return varies, so do your benefits. A defined benefit plan is the opposite. Your employer states "You will get this much" and is responsible for making it happen, however they like. You should never get less than the defined benefit, but you will also never get more. A defined benefit plan is "guaranteed".

A 401(k) is nothing more than a brokerage account named after the section of the tax code that allows you to make contributions to the account with pre-tax money. Since it is a brokerage account, your benefits will be determined by what rate of return you earn and how quickly you start making withdrawals. In a nutshell, there is nothing "guaranteed" about a 401(k) since you could conceivably lose every dollar invested, but due to the tax advantages and conservative investments held, that's usually not an issue (just don't hold very much of your employer's stock.......).

Answer 2

This is a debated question and it depends on a number of factors. A pension would typically be better if their is no 401k match at the company because if your company did not offer a 401k then you could still start an IRA and have the best of both worlds. a pension and an investment plan. Now if there is a company match depending on the dollar amount of the pension a matching 401k for a young guy with decent funds available would have way more potential thus would be better than a pension. One nice thing about 401k's is you can retire at 59.5 and withdraw without penalty it also can be passed down to your kids upon death and not just to spouse like a pension. Also most pensions make you wait till 67 to collect the full benefit if you retire at 62 you will only receive 80% of the pension benefit. if you have a major expense or want to make a major purchase and rely on a pension only your monthly income is fixed with a 401k you could just withdraw the amount. So as you can see they both have benefits pensions are gauranteed monthly payouts in retirement. 401k's have more potential and more lenience. but in reality a pension and a individual retirement account in retirement would kick some major a s s Not to mention most people can afford to put away a few percent in a 401k that is all it takes.

Answer 3

Actually my 401K took a $10K drop when Bush got elected president. It took about 5 years before I finally got that back.

So, yes it really depends on the investments. There are mutual funds with different levels of risk. Of course, the higher the risk, the better the potential returns.

But a 401k is a long term investment and there are bound to be some ups and downs. Hopefully in the long run, there will be a good return on the investment.

Answer 4

If the plan matches your contribution dollar for dollar up to a certain percent then you have effectively doubled your money simply by contributing. If you wanted to keep your risk very very low, then put your money in the money market or stable value fund. The problem with this strategy is that you will get a low return over the long run and probably not be able to retire unless you are contributing a hefty amount of your paycheck toward retirement.

Answer 5

You are right, he is wrong.