The ever-increasing popularity of retirement plans, whether private or employer-sponsored, is spurring more individuals every year to consider their future earning and expenditures. Two of the most popular retirement plans are pension plans and 401(k) plans. Each has benefits, and each has detriments. Regardless of the retirement plan type or types that an individual chooses, planning for a stable financial future is imperative.

Pension plans were first established in 1875 when The American Express Company developed a retirement savings plan for its employees (“History” n. pag.). Over the next 135 years, pension plans have seen tax rule changes, the implementation of investment acts by the US Government, labor relations rule changes, and many financial and governmental changes. For most employers and employees, the understanding regarding a pension plan is that the employee will be able to maintain the same lifestyle after retirement as before. This is accomplished through contributions from both the employee over time in the form of deferred pay, concluding in funds available for use after an employee retires from the company. The benefits to the employer are that the contributions made to the pension fund are not taxable through the payroll tax.

The benefits to the employee are that the contributions made to the pension plan are tax deductible, the investment income in the pension plan is tax exempt, and the plan belongs to the employee, not the employer, which prevents loss of this money due to the company’s bankruptcy. Additionally, if the employee dies before retirement, the pension plan is not lost, but rather given to whomever the employee has designated.

Drawbacks to pension plans for employees include having no choice in how the pension contributions are invested. Additionally, many pension plans fail to take inflation into account when calculating the ned for future income.

The benefits of a 401(k) plan are preferable to some employers and employees. For employees, the benefit of having the employer match a contribution is a hige asset. Not all companies match or contribute, but many do as an addition to a comprehensive benefits package to attract stable employees. Also, the tax advantages to an employee’s contribution to a 401(k) are appealing. Contributions are deducted from wages prior to taxation, so an employee does not pay taxes on the amount of the contribution. The downside is that the money is taxed after retirement as it is used. Employees may also take out loans against some 401(k) plans, which can be helpful in crisis situations. Finally, a benefit to the employee is the control over how the investments are made. Benefits of a 401(k) for an employer include being able to attract good employees and a 401(k) plan puts the burden of the investment choices on the employees and takes it off of the employer.

Downfalls of 401(k) plans include dollar cost averaging, where if the market is trending up, money is made, but in times when the market is trending down, money is lost. From an employer perspective, 401(k) plans are expensive to manage, and matching contributions, if given, are costly as well. Additionally, many employees don’t really understand their 401(k) plans and are unlikely to carefully monitor the market and make adjustments accordingly.

Overall, both types of retirement plans have good points and also some concerning factors. Individual decisions based on future income and retirement goals are the most important consideration when choosing a retirement plan or plans.