Despite the offer of stock based compensation for employees, I still think this is a bad idea. The 401k is one of the most effective ways to encourage long-term savings among employees. Its an important benefit with significant tax advantages.
I feel like my entire life I've read about companies going belly up, raided by vulture capitalists, and in the end a court determines that the pensioners get nothing and have no case.
There are two main problems with pensions that I see:
1. The longer you work someplace, the more locked in you are. Pensions are structured such that working at the same place for 40 years is better than working at four different places for 10 years each, even if you get paid the exact same salary.
2. When you die, your children get nothing. With the 401k, whatever your balance is goes to your heirs. You can argue that it is better for society for your children to get nothing: that is a valid point of view. But we have a system in place where some people pass on assets to their children and others do not, and the differentiator between the two is the employer. That’s crazy, and the only logical way to play this game is to be on the winning side.
But I would prefer an insured and well-managed pension plan that cannot be touched but the company than a personal 401k.
Not everybody wants to play wall street games to insure a good retirement plan. I would prefer pay someone to do it.
Or will you buy from a new company with lower prices and better R&D because it doesn’t have pension obligations to pay yet?
Pensions are basically just 401k's with the risk spread over a larger pool. You know like insurance. A well run pension assumes a conservative rate of return, a conservative inflation and a life expectancy. Then it funds at a level needed to assure a fixed payout to a portion of its workers. No differently than a 401k, except that its a larger pool capable of absorbing market downturns that happen while people are drawing on it just as it absorbs higher returns.
The problem with many of the US pensions were that they were seen as places to raid, or underfunded to gain a slightly better quarterly number, or they were intentionally screwed by wallstreet banks who sold them assets with fixed rates of returns they knew were false. AKA pension plans have been the target of all kinds of fraud, very little of which has been prosecuted.
And then there was the propoganda. Which worked really well. Hey do you want a pension which will pay you 50% of your salary for the rest of your life or this $50 a month which will grow at 8% a year and you will retire with $ million dollars you can do anything with? The business were much happier to cut their pension obligations and match their workers with a far less substantial 401k benefits. Giving your workers $2k a year in 401k matches without any future risk looks a lot better on the balance sheet than putting $5k in a pension for them and assuming the risk that it will be enough to keep them from depending on government handouts.
I feel like this sentence undermined the rest of them. Even giving them $5k would be better for everyone involved, as now the company wouldn't have to assume the risk and the employee would be able to direct their own investment.
But from a company overhead view, the company could just contribute whatever amount they want in a pension too. The problem though is that then they would have to use the conservative numbers and point out that the pension might only be 10% of their salary or some other similarly low value.
I think if they put error brackets around the 401k they would look a lot less rosy. Here choose a pension with $ a year, or put the money in a 401k and it may yield $$$$ or it might yield $. In one case you will be able to retire on the beach, in the other you won't be able to retire at all. Or you just go with the safe pension option that lets you retire with the same lifestyle.
Which despite the "corporation" in the name, is just another government agency tasked with dealing with failed pensions.
Sort of the pension version of the FDIC.
edit: And to add to this, the funding of the pension is required to be a separate pot of cash from the operation of the business. There were a number of companies in the 1990's/etc that got in a lot of legal trouble for using their pensions as financing for the business.
https://www.federalreserve.gov/pubs/feds/2004/200423/200423p...
http://www.pensionrights.org/issues/legislation/company-stoc...
To your point, the goal is to optimize for capital appreciation and minimizing tax drag on that capital for its investment duration.
I think the reasoning is to protect the employee from poor investments. I’ve never seen one that allows you to trade on individual stocks, only funds.
The problem with GP's scheme isn't that there's a good reason you can't hold whatever security you want in your retirement account: it's that you can't make the contribution in-kind from a taxable brokerage to your tax-advantaged 401(k)/IRA.
It's true that that's rare: but that's because your employer is giving you a shitty 401(k). Ask me about the Latacora 401(k) one day.
Employees are in a position to speculatively contribute to their 401K not knowing if the offered match is going to happen.
---- quote ----
It is the third straight year the automaker has not made any contributions to its 401(k) plan, according to the filing.
The Tesla Inc. 401(k) Plan automatically enrolls participants in the plan with a deferral rate of 5% of employees' salaries with the option to contribute more, according to the plan's most recent Form 5500 filing.
According to the Form 5500, the plan allows for an "employer discretionary matching and/or an employer discretionary non-elective contribution subject to certain eligibility requirements." Those requirements were not met for the 2019 plan year, according to the Form 5500.
The nature of those requirements for Tesla to make contributions to the 401(k) plan was not available. The stock price for the automaker was up 695% for the year ended Dec. 31.
There are tons of added benefits to having your money in a place where you can actually control it (i.e. buy specific stocks with no maintenance fees). I am starting to see the tax deferral status as a sales tactic to lock people into lucratively-managed funds. There are so many ridiculous constraints around how much you can contribute that the tax deferral feels meaningless once you put all of the factors together over a truly meaningful sum of money.
All of that said, I am totally onboard with encouraging healthy savings habits for the masses, but for more advanced users there are definitely better options out there.
To make a point specifically toward Telsa - I feel working for one of Elon's companies is sort of a risk in and of itself. You know you are going to be worked harder and maybe be compensated less. The stock offering is paltry for the average case when considering the volatility of the underlying and lack of diversification. For the advanced user case, TSLA might make perfect sense. More savvy employees may decide to trade their TSLA shares on their brokerage or directly through other platforms in order to build a more diversified portfolio.
Me and my fellow bogleheads are ... skeptical.
Saying that your brokerage account substantially outperforms your retirement account is perfectly compatible with a Boglehead perspective: all that means is that your brokerage account holds SCHB and your retirement account holds some infernal actively managed trash from Voya or whatever.
There's a clear broken incentive there: a 401(k) manager with a sibling advisory firm will happily be the loss leader on giving companies 401(k)s for free because they'll make up for it in management fees. This is strictly bad for employees, who rarely have the knowledge to differentiate between 401(k) plans and even more rarely have the agency to do anything about it.
Then, I encountered about a decade of real-world experience and actually tried my hand at investing in things that made a lot of sense to me, not based on historical pricing or other ridiculous voodoo, but based upon my knowledge of those securities relative to my experience in the technology sector. At no point do I screw with day trading or options. Simple long positions gets the job done. Risk still must be managed, even if we decide we are OK with more of it.
I will absolutely grant you that the boglehead methodology makes sense if you dont want any stress at all regarding your investments, or otherwise have concerns that actively managing your money would devolve into a gambling addiction. For most people, this is probably the best path.
If you consider where the incentives and power lie in the system, you might come to the realization that these ideologies might be based upon ulterior motives which are at your expense. If you are managing trillions of dollars in 401k assets, the last thing you want is for everyone to take full ownership of their portfolios and divest from managed funds.
401k to match (which would mean 0 if no match)
IRA (Roth preferred if an option) to max
Then 401k to max individual contribution
The reason is related to what you describe. Brokerage accounts (typical of IRAs) give you much more freedom and often much better investment options (often better index funds, if nothing else). The reason to go back and max the 401k is the tax advantage in retirement. And if the funds were bad (mine aren't, fortunately), you could always move your 401k into your IRA.
And with an IRA, you can only deposit money not stocks. You have to sell first, deposit the money, and reinvest.
The employer could match with shares in some circumstances, but the point of the article is that Tesla is forgoing all matches, so that's not relevant.