THE NEW RULES OF RETIREMENT SAVING • 19
taxes. And it hoped at that time, since the accounts had grown in value, there would be more taxable income than when the money was contributed. This was a big shift in the dynamics of retirement. The 401(k) put employees in charge of saving for their own retirement. The employer, instead of guaranteeing a pension payout, would now administer a self-funding retirement plan. This is the great shift from defined benefit to defined contribu- tion. Think about that change in wording for a moment. It is not merely a matter of semantics. What is the difference? Defined benefit: the old pension plans have a defined benefit you would receive every month. The outcome is guaranteed. You get a check for $80,000, for example, every year for the rest of your life. Defined contribution: 401(k)s and 403(b)s have a defined par- ticipation amount. There’s a guarantee on the amount of money that will go into the account each month, but there are no guaran- tees on how much it will grow or — more importantly — how much money you will have at your retirement. We went from being assured income in retirement to only be- ing assured of a structure in which we could save. The problem with defined contribution plans is that many of the contributions aren’t so well defined. Originally, employer contributions to 401(k) plans were pretty high. That’s why they were considered “defined contribution” plans: the employer was putting in a defined amount. In the begin- ning, most employers contributed a “match” to their employee’s 401(k) accounts. That is, if you put in $10, your company might put in $10 and help you save for retirement. This kept 401(k)s more closely aligned with pension plans. Sure, you didn’t get a guarantee under a 401(k), but the employer was still contributing a large portion of a worker’s retirement funds. That’s often not the case today.
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