Investing In A Pension Plan?
Dave tells Mary that her husband shouldn't invest in his company's pension plan for two reasons.
QUESTION: Mary and her husband have been investing in his employer’s 401k plan at 7% because that’s what they match. Now her husband wants to invest in the pension plan through his employer as well. What should they do?
ANSWER: A pension plan is typically what an employer gives to the employee for years of service to the company – it’s usually not something the employee invests in. Sometimes teachers have a pension plan and can buy back years to get a better retirement package, which is a form of investing into a pension plan.
I would not invest in this pension plan for a couple of reason, which I tell teachers this all the time:
- Pension plans base their calculations on a 7% rate of return, which is what you’d be making on your money.
- You also have very little control over the pension plan. Pension is an asset of the company and if the company goes under, your pension is gone. The 401k is different because you own that, whether the company goes under or not.