When it comes to the Trump White House, there’s never a shortage of news and scandal.
FBI Deputy Director Andrew McCabe was set to retire after more than twenty years of service. His retirement date was set to be Sunday March 18, 2018.
He was fired on Friday March 16, 2018.
The various explanations for the firing are all over the place. The official reason was that he was dishonest about a conversation he authorized between FBI officials and a journalist. He was also criticized about a lack of candor while under oath. Others point to him being targeted as an enemy of the Trump Administration and his position as a witness who could testify whether President Trump committed obstruction of justice by firing former FBI Director James Comey.
Depending on who you talk to (and probably what political party you support), Andrew McCabe is either a hero who valiantly served America’s top law enforcement agency in a era of unprecedented corruption, or a biased conspirator looking to use his wife’s political connections to illicitly get Hillary Clinton into the White House.
But what was on the line for a man who was about to retire tomorrow anyway was his pension.
Being fired before the 18th of March means that McCabe will lose a lot of money. There are vestment dates and early retirement bonuses that federal pensions have when you are in law enforcement (and even moreso when you are a top law enforcement official). His retirement date will be his 50th birthday. He now will lose half the value of his pension and the ability to withdraw from it until at least age 57.
And so I want to take a moment and talk about pensions, a topic I had been planning an article on for some time but now sort of just jumped into without any planning.
Because in today’s financial world, it’s commonly agreed that all workers are screwed because the pensions of old are gone, replaced with the modern 401(k) designed to leave us all without money for retirement. But is that true?
The Basics Of Pensions And 401(K)s
Before we can make any comparison, we need to know what we’re talking about. Now I just had a week of dealing with really stupid customers at work, so forgive me if I’m telling you what you feel should be basic knowledge that any idiot should know. Working in customer service, I can attest that idiocy has no lower limit.
So let’s take a moment and define the two retirement solutions and understand how they work.
A pension is what’s called a “defined benefit plan”. Generally speaking, money is contributed into a retirement pool managed by the company. The company calculates your payouts at retirement (based on your annual salary, title, and years of service) and pays you a guaranteed amount for the rest of your life.
All the employee has to do is their job. They don’t have to worry about the performance of the stock market, the managing of investments, or ever running out of money in retirement. Their employer guarantees a lifetime of retirement payouts and that’s that. Hence the term “defined benefit”.
Pensions will usually have vesting periods. A “vesting period” is an amount of time that an employee needs to be with a company in order to qualify for certain amounts of their pension, or even to qualify for the pension at all. Thus, the traditional pension encourages company loyalty by rewarding a worker for having years and decades worth of service.
On a national level, Social Security is considered to be a defined benefit plan open to all American people.
A 401(k) is what’s called a “defined contribution plan”. Generally speaking, it’s an individual retirement account that has many of the same tax rules as an IRA (there are contribution limits, RMDs, and a penalty for withdrawing before age 59 1/2). The company will partner with an investment firm to offer a select number of mutual funds that the employee can invest in. The employee will usually be able to choose from a number of stock or bond mutual funds (both actively managed funds and passive index funds) as well as company stock.
In this scenario, the employee is the one who manages their investment dollars. They choose their funds, their asset allocation, and even how much they contribute. However, no return is guaranteed; you are choosing how much you are contributing and what you are investing in and putting your pre-tax dollars into a tax-advantaged investment account with your name on it, subject to the volatility of the stock market.
Your employer will offer an employer match. An “employer match” is when they will match your contributions up to a certain point. So an employer might, say, match 100% of every dollar you contribute up to 5% of your annual salary. They guarantee that they will contribute this money, hence the term “defined contribution”.
Because your 401(k) is an account with your name on it, you can take it wherever you go. You can also borrow money from it. However, the plan administrator will still set certain rules in advance governing what you can and can’t do.
On a national level, I think this is what former President George W. Bush was planning to do when he argued for the privatization of Social Security.
The Pros And Cons Of Pensions And 401(k)s
Most people will tell you that pensions are objectively better than 401(k)s and that the latter is killing the concept of retirement. And pensions really do beat the snot out of the 401(k) in a number of ways:
- The pension guarantees you a lifetime of retirement income.
- You don’t have to worry about investment management. Your company will do it all for you.
- Your 401(k) is completely at the whim of the stock market. People who retired in 2008 saw their retirements go into jeopardy while people with pensions slept soundly.
- Your 401(k)’s mutual fund charges you fees. Your pension doesn’t.
- Numerous reports show that the returns on pensions usually beat out the returns on a 401(k).
- Did I mention that your employer takes care of you for the rest of your life with a guaranteed lifetime income!? Oh yes, in the first bullet point. But what about the part where you don’t have to do anythi–second bullet point, got it.
Pensions guarantee you a lifetime of retirement income and aren’t subject to market risk and therefore are awesome and wonderful and better than the 401(k) in every way. End of story, go home everyone.
Except they aren’t.
Now I’m not saying that pensions are worse than 401(k)s. Hell, I’m not even saying that they aren’t better than 401(k)s. But the 401(k) has a major advantage over the pension.
That money is yours forever.
Obviously, the stock market may take it away from you, but no one else can. Quit? Get fired? Company goes out of business? Sucks because you no longer work, but you at least have your retirement income.
For those with pensions, a job loss could mean the eradication of their retirement income. Switching jobs when a better opportunity comes up like I’m trying to do could mean the loss of years’ worth of retirement contributions if you haven’t reached a certain vestment date. One of my biggest fans, Bryan from Just One More Year, detailed on his site way back that one of the milestones he and his wife were waiting for so they could retire was for his wife to hit her five year anniversary with her employer so she wouldn’t lose her pension.
Hell, even after you retire, you may still discover that the company has gone under and/or the pension fund bottomed out. A trucker’s union in New York is finding that out the hard way as their pension payments are being slashed by more than a third, forcing many of them to find alternate ways of making ends meet.
When you have a pension as your primary retirement source, you still don’t have financial freedom even if you are retired. You aren’t free of your employer. You’re more dependent on your employer than ever.
On the other hand, your 401(k) is yours. Absent of a court order, no one can take away your 401(k). It doesn’t matter what happens to you or your company.
Quit your job for a better one? Rollover your 401(k) into your new company’s, or roll it over into an IRA if your company doesn’t offer one. No need to wait for anniversaries or milestone dates.
Got fired? Your company can’t claw back anything. Even in unemployment, you can just have it sit and still compound.
Your company went belly up years after you retired? Not your problem. Your 401(k) is perfectly safe.
I can already hear the arguments from the pension-philes out there.
“But ARB, you moron! What if the stock market crashes!? We’re at record highs! What if 2008 happens all over again and you’re in your late fifties? You have no control over the stock market! At least you can do your job right and not get fired! Maybe you hate your customers because you suck at your job, Sucky McSuckenstein!”
And again, I realize that–really? “Sucky McSuckenstein? What are you, five years old?
I realize that the stock market can correct and crash. And despite the fact that the market goes up over the long term, this can pose a problem for those with less than five years to retirement.
And again, I’m not attacking pensions, but trying to point out that pensions aren’t so super perfect and 401(k)s aren’t the spawn of financial evil.
“Don’t get fired” is only good piece of advice up to a certain degree. As I wrote about in a previous article, one mistake in the retail banking world can mean unemployment.
In that article, I approved a $50,000 wire that Loss Prevention blocked. Had they not and the funds were no good, I’d have found myself canned. Not written up, not put on probation, but fired.
We have brand new tellers who we’re training to understand that just because someone’s account balance says they have X amount of money doesn’t mean they can withdraw X amount of money. That’s because the funds might have come from a check that isn’t cleared yet. If the funds bounce and leave the customer overdrawn, then it counts as a loss to the branch and a teller difference. Depending on the size of the difference, a single mistake can cost the teller their job.
One transaction done wrong–a check that shouldn’t have been cashed, a withdrawal from unavailable funds, an accidentally mistyping of an account number–can mean that a bank teller is unemployed.
And mind you, we get customers who will yell, scream, curse, and hurl insults at a teller until they get what they want. You have Baby Boomers screaming their heads off at teenagers with less than one month’s work experience to do something that will get the worker fired.
This isn’t a rare occurrence. This happens ALL. THE. TIME. I’ve seen this in my ten years of banking more times than I can count. I got cursed out on Wednesday. Just yesterday, I had to step in and (unsuccessfully) try to calm down a customer screaming at a new teller that just got on a box a week ago (thankfully, the branch manager came in). This woman started screaming at him that the teller was an idiot who needed to be trained.
People come in all the time with sob stories, bullying tactics, accusations of racism, and all sorts of trickster techniques geared towards getting an extra couple dollars a day early at the expense of someone else’s job.
Do you think I’m joking when I say a single mistake can mean automatic termination? I don’t f*** around about s*** like that.
“Don’t get fired” is not as airtight a defense as people say it is. Otherwise, no one would ever get fired from anything ever.
Plus, that’s not the only way to experience an unexpected job loss. Perhaps you’re laid off due to budget constraints. Or you work at Toys “R” Us which announced recently that it was going out of business. If you are a former employee with a pension from there (let’s say you were a former regional sales director or something), then you’re screwed.
Or maybe you’re fired not due to your own actions, but due to having a boss who doesn’t like you.
Regardless, having a retirement account in your name and under your control is a major benefit of a 401(k) that people like to overlook because “All I have to do is not get fired”.
All this goes back to Andrew McCabe, Donald Trump, and the case against pensions. Pensions sacrifice one kind of financial independence for another. Your company may guarantee you a lifetime of comfortable retirement, but only in return for a lifetime of servitude. It’s their money, not yours. And they decide whether or not you get it or not.
You don’t have to worry about losing it all in the stock market. But you do have to worry about the company taking it away from you. You have to worry about the company’s financial health even long after you retire.
I don’t care how much a company touts “our people” as its competitive advantage. If you think you’re anything but a number and a liability to an employer, than you’re either really deluded or too young to know any better.
If Andrew McCabe had a 401(k) instead of a pension, do you think he would have cared if he made it to retirement or got fired? Hell no! It’s all his either way!
But with his pension, the money he contributed to his own retirement was never his in the first place. And now half of it was vaporized in an instant at the whims of President Trump and Attorney General Jeff Sessions.
Maybe McCabe was a corrupt actor who deserved what he got. Or maybe Trump got Sessions to fire him to protect himself from Robert Mueller. I’m not saying either way.
All I’m saying is that this shows a major benefit of the 401(k) over pensions. Your employer can always take away what was never yours to begin with. Having the “rights” to money isn’t the same as having money.
True financial freedom is having control over your money. This is why I’m always screaming at you guys to invest your money. Earn passive income one way or another, either through stock dividends, bond interest, real estate rental payments, or blogging income. To be financially independent, you need to be an owner. An owner of your own time, of your own business, of the businesses around you, and of your own money.
Otherwise, you risk becoming Andrew McCabe, beholden to an employer as unreliable and unethical as Donald Trump and Exhibit A in the case against pensions.
Readers–What do YOU think!? Are pensions better than 401(k)s? Or do 401(k)s have a negative perception that’s undeserved? What do you find to be the most important feature of a retirement plan? Leave your thoughts in the comments below!
Disclaimer: Wanting to own my own time and earn passive income like I said, those last two links are affiliate links to Ally Invest and iPage. The former allows you to invest and the latter allows you to start your own blog. Clicking on them and opening an account with either of them earns me a commission at no cost to you. If used properly, they can be great first steps on the road to financial freedom and early retirement, so you may want to consider using their services.