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Retirement Series

Part 1: Navigating Your Retirement

Understanding the Difference Between A 401(k) Plan and a Pension Plan

As the saying goes, time is money — especially when it comes to your retirement.

Consider this example: At age 25, if you started investing $5,000 per year into your 401(k) until age 35, you would yield nearly $185,000 more at retirement than if you started saving at age 35 and invested the same amount of money every year until you retire at age 60. Why? Because compound interest grows your money exponentially over time.

There are many vehicles designed to help Americans save for a comfortable retirement. The two that are available to Local 25 members include a 401(k) plan and a defined benefit pension plan — each with their own features and benefits. So, what’s the difference?

What is a 401(k)?

A 401(k) plan, also known as a defined contribution plan, holds back a portion of your salary (tax-deferred) and places it into a fund that you’ll receive upon retirement. The funds are invested in the stock market, so there are some risks associated with market losses and gains, but participants can monitor their portfolios via quarterly statements. Because these plans encourage saving money for retirement, any withdrawals before age 59½ are subject to sizable taxes and penalties.

“With the 401(k), you’re vested with your first penny, so that money is yours and will always be yours,” said Mike Wilcher, Local 25 plan administrator.

Employees can elect to contribute 1-30 percent of their wages into the Local 25 401(k) plan. And, as of the recent wage increase on May 1, 2017, $0.50 per hour worked has now been allocated into every member’s 401(k) fund as a non-elective contribution.

“This method essentially requires members to realize the potential of using a 401(k),” Wilcher said, noting that the 50-cent increase puts about $1,000 toward a member’s retirement in just one year. “You can save significant amounts of money without hurting your wallet too badly. And, if you get in the habit putting 3 percent in when you first start, you’re not going to miss that money.”

Going back to the example, $5,000 per year, which is 6.5 percent of the current journeyman scale, could reasonably yield approximately $1,000,000 or more if invested from age 25 through 60. The moral? Don’t wait to start investing in your future!

What is a defined benefit pension?

A defined benefit plan, more commonly referred to as simply a pension plan, is sponsored by your employer — in your case, Local 25 and the Mechanical Contractors Association (MCA). It guarantees a monthly check throughout your retirement. Age and the number of years worked factor in to the formula for determining your retirement benefits in a pension plan.

In our Local, working 1,530 hours in a year equates to one full pension credit, with the current accrual rate of $128 per credit. So, if you accumulate 10 credits after working for 10 years and you retire at normal retirement age, you’d expect to receive $1,280 per month upon retirement.

“The better funded your pension is, there’s less risk of the fund running into financial problems,” Wilcher said. “Luckily, Local 25’s pension is well over 100 percent funded. Both funds are run by a Board of Trustees, which is comprised of an even number of both labor and management trustees, who review the plans quarterly.”

Questions about your current retirement plan, or interested in learning more? Contact Mike Wilcher at 309-794-1170 x242.