Pension Plan Advantages And Disadvantages

A pension plan is a type of retirement plan where an employer and/or employee makes contributions towards a pool of funds set aside for an employee’s future benefit. The funds are invested on the employee’s behalf, which allows the employee to have a steady income upon retirement (Sirkin, 2010). Pension plans in the United States can be traced back to 1875, when the American Express Company established the first private pension plan. As the years went by, the government legislatures passed a series of regulation and acts to protect both the employer and employee. Since labor unions were prevalent twenty-five years ago, practically every large employer gave their employees a pension plan (Sirkin, 2010). Today, labor unions are falling away …show more content…
On the other hand, defined benefit plans carrying many disadvantages. In order to have a pension plan, an individual has to stay with the same company for a certain period of time, usually twenty years. Since the employee does not contribute to their pension, the employee cannot choose where and how much to invest for retirement. If the employee wants more income, he or she will have to set up another retirement plan. Most plans adjust for inflation, but sometimes the future payouts do not adjust with inflation causing the payments to be inadequate compared to the cost of living. In addition, employers face all the cost, and most of the time pension plans are underfunded. If the employee is public worker, tax payers pay for their pensions. For example, police officers, teachers, and legislatures get paid through taxes. If an individual pays taxes, the money should benefit that individual or the whole nation, not to pay for government workers retirement. In order for pension plans to be equal for all workers across the United States, individuals should pay for their own retirement with defined contribution pension plans. (Kapinos, …show more content…
An individual sets up an IRA with the help of a financial planner or bank by depositing money into it every year (Bernheim & Scholz, 1993). Although employers do not match any contributions, there are more investment options such as stocks, bonds, and CDs. If an investment does not fare well, the individual can switch investments (Bernheim & Scholz, 1993). There are advantages and disadvantages of both defined benefits and defined contribution plans. Although defined benefit plans are better for an individual employee, defined contribution pensions are better for a nation because what an individual puts into their plan, is what he or she gets upon retirement. Therefore, defined contribution pensions reduce costs to employers, taxpayers, and shareholders.
Many Americans save too little, but one can break away from the statistics to build a financially secure retirement plan by in the beginning of their careers by using a 401(k) or an IRA. It is better to look forward to retirement with a peace of mind knowing there is a monthly paycheck than working the rest of one’s life without relaxation. Start looking into retirement plans now; you will be glad you did in the