401(k)s shift retirement risk and funding burden from employer to employee
Evidence
The best type of retirement account, the defined benefit plan my father had, is increasingly a relic of the past. (Remember, it guarantees a retirement payout regardless of the amount contributed, which means the employer takes on the risk of how the funds are invested, putting the financial burden on them rather than on the employee.) The most common type of retirement plan available today is the defined contribution plan, most commonly referred to as a 401(k): If your employer sponsors one and you decide to participate, you agree that a certain portion of your salary will be placed, tax-free, into your retirement account. If you are lucky enough to have an employer match, then your employer will pay additional funds up to a certain amount. However, defined contribution plans only guarantee that an employee will have whatever money remains in the account at retirement based on the employee’s investment decisions. If the employee makes what turns out to be poor investment choices, or is just unlucky, then they will have little to no retirement funds. And while employers often match contributions, the burden of funding the plan remains on employees. If the employees don’t contribute, the employers don’t match. — Dorothy A. Brown, The Whiteness of Wealth, 382
Categorization
Category: Causal Relationships
- DEFINE: Precisely defines the difference between defined benefit and defined contribution plans—a tax-code mechanism the reader needs to name and explain.