If idiots are left in charge of them, then yes, they're a bad idea. But that sort of applies to everything.
I, for one, will deal with some idiocy to guarantee a safe and secure retirement. I have neither the time, energy, nor expertise to actively manage my retirement funds. So that's my trade-off.
Calling a 401(k) a replacement for pensions is disingenuous. They're ridiculously cheaper for employers and provide a much, much less valuable return for employees. Regardless of who is in charge, the switch has nothing to do with the people managing them and only to do with saving the company money.
I just started a job in government. I had two choices: 10% of my salary in a 401K, or 5% of my salary in a 401K and 5% in a pension. I selected the full 10% in a 401K and let me explain why:
- The 401K can follow me job to job. The pension is tied to this employer.
- If I quit this job or get fired before 65, I lose a good chunk of my pension, however my 401K remains safe.
- The pension is largely a "black box." Money goes in, and I have zero control over how it is invested or what their fees are.
- If I retire at 62 I lose 10%(!) of my pension, if I retire at 60 I lose 15%(!). 401K doesn't care when I retire, just when I withdraw the money (e.g. I could live on other savings from 62-65).
- If I die before retirement there are a complex set of rules deciding what percentage my spouse receives (summary: less than me, almost always).
- If I die on a 401K, my spouse receives 100% of the money as long as they cash it after their retirement (for tax reasons).
- I can invest it all in a nice safe diversified index fund with extremely low management fees (the management fees on other funds alone between now and retirement could wind up costing me almost a years salary!).
- The 401K money vests in 4 years. The pension money effectively vests in 20 years (takes 20 years to receive a really crappy pension).
Pensions have a lot of asterisk/gotchas/limitations/etc. The devil is in the details. 401K requires some self-management, but removes most of the limitations, and you can receive a good retirement as long as you put it somewhere relatively safe, diversified, and inexpensive.
Plus if you die then either your spouse OR kids massively "win" with a 401K. A pension definitely doesn't protect their interests.
The vast majority of people are absolutely terrible at picking investments, so this is a feature, not a bug.
You don't need to be a financial expert to pick a managed fund. Just look at the fees and history and decide. A pension is like being locked into one managed fund the entire time no matter how poorly it performs or how high the fees go.
Plus some pensions don't diversify enough. I'm sure Enron's former employees will tell you all about it.
You're talking about 401(k) so I'm assuming US here. Are you using 401k to mean TSP? Or is there a federal gov't position that actually offers 401(k) plans?
And if you do mean TSP, then you'd be under FERS. Or is this a state job?
Did you also get to opt out of Social Security with this position? That's a common thing when states offer pensions. With choosing your option (401(k) and no pension) did that force you to pay into social security?
The potential for idiocy negates any guarantee for a safe and secure retirement. If they're idiots they'll lose your money. Anyways, if that's your preference why not take the cash and give the money to an investment manager of your choosing? Why let your employer choose the investment manager and force it on all your coworkers?
> Regardless of who is in charge, the switch has nothing to do with the people managing them and only to do with saving the company money.
Oh yeah, no doubt. But hypothetically, given the same present value, I would rather take cash over a pension plan that may or may not be managed well and exist in 40 years.
There's no magic behind the management of pension funds; they're utilizing the same markets. So how can they "guarantee a safe and secure retirement"?
They can't and that's the problem with them. During boom times they promise the world and in lean times they go bust, or worse, put the onus to pay for it on the next generation (while those people face cuts to their future benefits). No thanks.
Pensions are almost always better for the worker. The issues on the employer side are almost always a result of underfunding, or “diversion" of employee funds for some short term crisis.
So they're a better deal except when they're not in that you can lose it all or have your benefits drastically reduced through bankruptcy etc.
More broadly, defined-benefit pension plans were designed for a world where you expected to work your career at the same organization. Pensions tend to make it very expensive to move around companies. (Hence, people in the US military sticking around for their 20 year mark for example.) It's very much a related problem to health care being tied to employment.