I used to own a pension administration company so I'm somewhat biased. The old defined benefit plans (which few companies have any more) were simply too costly for companies, so they switched to 401K's which shifted most of the burden on employees and away from companies. I'm also biased in that I'm an employer. I don't think most employees truly realize how much health care and pension plans cost employers. They take it for granted for the most part. I know that from experience in seeing many companies and lots of employees over the decades I owned that company. With that said, 401K's are good but typically have terrible investment options. Besides that, most employees have absolutely no clue what investment options to choose from. They really need someone to tell them what to do. The problem is it is not cost effective for anyone to meet with employees one on one to talk about investment options. We just implemented a "CD fund" for those employees who just want pure safety. It's not returning much but it is safe. You can get guaranteed funds, but those are typically group annuity contracts with insurance companies. Those aren't all together bad if they are a guaranteed interest rate, but I'm not a fan at all of annuity contracts that invest in "mutual fund" type investments. They are typically expensive and not great performance. That is not always the case. So what is the solution? I think hiring a manager to manage the money in specific styles is the answer. This manager would have a general idea of the employees and their situation and risk tolerance as whole and manage the money accordingly. We have been doing this since about 2001 and the employees really like it. I'm seeing it being offered more and more.
But to get back to the 401K good or bad question....the first benefit of 401K's is that it is an extremely easy way to save money. The next benefit is if the employer matches contributions. That's just free money. Even if you just use a money market account, those two benefits are worth a lot. The investment issue is the spoiler. That is what complicates things. If your employer matches say 50% of your contributions, then even if you lose 30% in the stock market, you have more money in your account had you invested on your own in an IRA invested in the same thing. Granted you lost money, but it was the employer's money that got lost not yours. So, anytime you can get a matching, you should contribute at least the amount necessary to get the full match. Even if you put it in a money market you are getting a 50% return if the employer matches 50%! No one ever seems to look at it that way but that's reality.
In summary, 401K's are good. Pensions were better, but simply too expensive for the competitive world we are in.
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