SHOCKER! 401Ks Cost More!


October 15, 2018

Defined benefit pensions cost less than 401(k)s because they are more efficient. Pensions are group plans where thousands of workers and their employers all pay into one fund. That fund is managed and invested by professionals, who invest for long-term growth. As a result, most public pension funds earn between two-thirds and three-quarters of their revenue from investment returns. Also, because risk is pooled and shared collectively among all members of the plan, no individual worker is at risk of losing her retirement savings if the market crashes shortly before a planned retirement.

Pension plans are also able to invest on an infinite time horizon. Pension plans have no end date. As long as active employees are paying in while retired employees are collecting their benefits, the pension plan can continue to function. This allows the plan managers to balance low-risk and high-risk investments and achieve steady returns over the long-term.

Defined contribution plans, such as 401(k)s, do not have these benefits.

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