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View Diary: Bwahahahahahaha! American Airlines and Bain Capital. (282 comments)

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  •  Why should workers prefer 401(k)s? (0+ / 0-)

    What good is a few years of dramatic uptick in the value of the 401(k) portfolio if said value falls off a cliff just before the employee goes to collect it?

    I can see why corporations feel pressed to replace traditional defined benefit plans with 401(k)s, but let's not pretend that it's an unequivocal win-win for the employees, too. 401(k)s expose employees to more risk -- and when it's your retirement at stake, that's not always a good thing.

    Nothing requires a greater effort of thought than arguments to justify the rule of non-thought. -- Milan Kundera

    by Dale on Tue Feb 07, 2012 at 11:28:47 AM PST

    [ Parent ]

    •  The thing is that 401(k)s expose employees (1+ / 0-)
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      to the same risk as pensions. Money gets put aside and invested to (hopefully) achieve certain returns so that money can be paid out in retirement.

      In a 401k, your assets fluctuate with the market. With a pension, the pension's funds fluctuate with the market, but they tell you that you have the same amount in there that you'll receive.

      In the case that the market fluctuates only a little, the pension seems to work. It mitigates the risk. But it does so by making the extreme case much worse. When markets severely crash, the company ends up paying out funds contributed by current workers to retired people, draining the fund. And usually, due to a recession that coincides with markets crashing, the company can't make up the difference, and there is a catastrophic failure of the pension fund (and often layoffs and all the other bad stuff that gets piled on with a recession).

      The 401k avoids (or at least mitigates) this catastrophic risk, by allowing employees to own the risk of smaller fluctuations in the market. Retired people don't drain their 401ks. The company doesn't collapse, so they still have jobs. Etc. Etc.

      So I guess, it's really just a question of which kind of risk you'd prefer. Personally, I want to avoid the recent disasters that have been the failures of pension funds we've seen over the last few years. That's my take. Plus, I like being able to invest in things I think will do better than the market. This capability gives motivation to workers to learn about investing, which should increase their ability to gain wealth through investing, and I see that as a good thing.

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