401(k) Plans

I think I know why, if I ran a company, I'd want to offer a 401(k) plan instead of a traditional pension.

If a guy makes $50,000 a year, and I have a 401(k) plan, all I have to budget for is that $50,000. Because the guy's responsible for putting away the money himself.....and maybe it reduces his take-home pay to $45,000.

If I offer a defined benefit plan, I'm on the hook for his $50,000 salary AND his normal cost for the DB plan. Depending on age and the formula, that could be an additional $500 or $5,000. So the same employee could cost $55,000.

The effect of a 401(k) plan is simply a net drain on one's pay, for the same benefit at age 65. If the DB plan were to feature smaller salaries, then the effects could be equalized. Or, to feature the same cost as the DB plan, the company could offer a money purchase plan that puts them on the hook for a mandatory fixed percentage of pay, say....

That's why 401(k) plans without company contributions kinda are a scheme by the company.