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Is the pension plan the same as the 401k plan?

I was with loreal for 10 yrs , I cashed out my 401k . do I still have a pension plan

Apr 30, 2012 by Vickie from Hayward, CA in  |  Flag
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George Cones, JD Level 20

Vickie,

Sometimes those terms are used interchangeably. There are two major forms of retirement plans. Defined Benefit "DB" and Defined Contribution "DC" plans. What is the difference and why does it matter?

Defined Benefit plans pay benefits from a pool of assets often called a pension "fund." The DB Pension Plan pays benefits when a plan participant retires, often based on salary and years of service. The employee may or may not contribute, and the employer is often responsible for adequately funding the plan. The body that administers the plan often is a group of trustees. The trustees oversee the operation of the pension fund. They have to make sure there is enough money in the fund to pay future benefits, establish procedures, and invest the assets. These plans may have a number of folks help them reach their objective. The plan may employ actuaries, attorneys, accounts, custodians, investment consultants, specialty consultants and investment managers. They often spend a lot of time on plan matters. They must develop a strategic asset allocation (the mix between stocks, bonds, real estate, cash and so forth). They may spend months researching and selecting investment managers. These type of retirement plans tend to have good track records for providing benefits and getting good returns on plan investments. Unfortunately, these plans have been and are being replaced by DC plans.

In a DC plans, like 401k or 403 b plans, the employees contribute to the plan (usually on a pre-tax basis) from their wages. The participants contribution may be matched or partially matched by the employer. There are limits to contribution in these plans (although we have found that many if not most employees contribute too little).

Now the plan participant is responsible for planning his or her own retirement, without the army of consultants that the pension funds have. The results so far have not been great. Many studies show that Individual investors usually underperform institutional investors. Many workers are unprepared for retirement. There may be several reasons for this underperformance and under preparedness, for example, on the part of the participant: failure to establish and maintain a long-term strategic allocation, failure to contribute adequately to DC plan over the participant’s lifetime to reach his or her investment goals.

Some of the factors over which the plan participant has little control, are plan costs and poor plan choices. Every dollar paid in fees detracts from performance. Poor investment choices may not make it impossible for the plan participant to achieve sufficient market diversification to reduce risk and/or add significantly to returns. It is incumbant upon DC plan fiduciaries to make sure plan participants have resources available to help develop a retirment plan, provide decent investment choices, while managing the costs of the plan.

Comment   |  Flag   |  May 01, 2012 from Wilmington, DE

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A pension plan is not the same thing as a 401(k), although both may have existed at your company. You will need to contact the HR department to get the scoop on this.

Comment   |  Flag   |  Apr 30, 2012 from Orland Park, IL

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Eddie is right. i had a recent case where the client did not know if she had a pension. She did. It was $160k earning a fixed rate of 4%. Contact HR or the benefits department. Good Luck, Dan

Comment   |  Flag   |  May 01, 2012 from Asbury Park, NJ

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