Thursday, January 05, 2006

401(k) over Pension

Computer and consulting behemoth IBM just announced that it would freeze its pension in 2008 and enhance its 401(k) savings plan instead. This marks a typical development in the corporate world now, away from "defined benefit" plans (pension funds run by the company and doled out to retirees as an annuity) and toward "defined contribution" plans (tax-sheltered savings accounts comprised of employee and company contributions and run by employees).

Bush's Social Security reform package may have gone the way of Hillary-Care, but developments like this illustrate that corporations are certainly taking us closer to his vision of an "ownership society."

The argument that companies use about the markets being to volatile for them to manage pensions effectively is ridiculous. If IBM wants to hire me to run their fund with more stability than the S&P 500, I'm available (and for a lot less than they're paying now for the quant jocks running fancy models with computer "optimizers").

However, my own arrogance regarding my investment abilities and my animus for quantitative investment management aside, there's little doubt that moves like this will make companies leaner and more competitive -- and companies should have that option available to them if they want to take it.

How well individuals will fund their retirements is another issue. People truly will have to become active investors now, interested in the financial markets, knowledgeable about different asset classes and mutual funds, and emotionally able to withstand significant fluctuations in the value of their savings. Those who do not contribute to their 401(k)s will be in major trouble, unless they are assiduous savers with "after-tax" money. Others will likely contribute, but avoid choosing investment options. For them, new procedures using "lifecycle" funds as default options (instead of money market or stable value funds) will be a blessing, whether they know it or not.


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