I have a son in a local Minnesota senior high school. This semester one of his classes is Personal Financial Management. One of his class assignments this semester is to write about the differences between a pension account and a 401(k) account.
He asked me the other day about my company’s pension plan. I informed my son that most companies don’t have pension plans these days. I told him that his grandfather has a pension account, but I have a 401(k) account.
My son now understands that his grandfather’s pension plan is a retirement plan account that includes a guaranteed monthly income at retirement. Every month, a check is deposited into his grandfather’s checking account.
I told my son that my company 401(k) account will never provide that same guaranteed monthly check. The amount of money that I save for my retirement is completely up to me. The same goes for the investment management decisions that I make in my 401(k) account.
My son now knows that company 401(k) retirement plan accounts are not guaranteed. Any monthly income that a company 401(k) retirement plan account provides in retirement is completely up to the individual company retirement plan participant.
I went on to explain that the risk of a company 401(k) plan is all on the individual company retirement plan participant. The company retirement plan sponsor has no risk. The company retirement plan provider has no risk.
To his credit, it did not take my son very long to figure out the major difference between a company pension plan and a company 401(k) retirement plan account.
Based on our conversation, my son told me that when he begins working he wants a pension plan instead of a 401(k) company retirement plan. He told me that managing the investment decisions in a 401(k) company retirement plan account sounds like too much work. He also stated that there are too many opportunities for things to go wrong in a 401(k) company retirement plan account.
Smart kid. He takes after his mother. I welcomed my son to the real personal financial management world that awaits him in a few years.
Ric Lager
Lager & Company, Inc.
