FERS Archives - Ferguson-Johnson Wealth Management

By Jon Powell, CFP^®

With many kinds of retirement plans out there, it can be hard to tell the differences among them at first glance. Two of the most popular types of retirement plans offered by employers are the 401(k) plan and the pension plan.

An employer typically provides one or the other, but not both. While it’s unlikely that you’ll have a choice between the two, you’ll probably come across one of these plans throughout your working years, so it’s essential to understand how they work and what they mean for your retirement.

What Is a 401(k)?

A 401(k), or defined-contribution plan, is a common retirement plan offered by employers. With a 401(k), you elect to contribute part of your salary into a retirement account. You can choose from a range of investments such as index funds, mutual funds, and target-date funds.

You also have the ability to change your investments, however, they are limited to the investments your employer offers. You can contribute up to $20,500 (as of 2022) each year, and if you are 50 years of age or older, an additional $6,500 catch-up contribution.⁽¹⁾

Your employer may also choose to match your contributions up to a certain amount. The total limit for employee and employer contributions is $61,000.

There are two types of 401(k) plans: a traditional 401(k) and a Roth 401(k). In a traditional 401(k), your contribution is taken from your salary pre-tax. Your traditional 401(k) grows tax-deferred, and you only pay taxes when you withdraw from the account in retirement.

Because these contributions are tax-deferred, contributing to a traditional 401(k) means you lower your taxable income at the time you contribute.

A Roth 401(k) is funded with money after you’ve already paid taxes on it. The money in your Roth 401(k) grows tax-free in your account, and since you’ve already paid taxes on your contributions, when you withdraw funds, you withdraw them tax-free.

Thus, the key difference between the two boils down to when you pay taxes. If your employer offers both, you need to decide whether it makes sense for you to pay taxes now or when you retire.

401(k) plans are also generally subject to required minimum distributions, meaning you will need to begin withdrawing from your plan when you reach age 72.⁽²⁾

What Is a Pension Plan?

A pension plan, or a defined-benefit plan, is an employer-sponsored plan that guarantees an amount of income in retirement. The amount you receive in retirement is determined by a few factors, such as your length of employment, your salary, your age at retirement, and any other specifications set by the employer.

Your employer is responsible for contributing to the plan and all the investment risk is on them as well. However, you may need to work several years at the organization before you are eligible for a pension plan. Additionally, with a pension plan you have no control over how it’s invested.

Depending on the plan, you may be allowed to contribute part of your salary as well. You are also guaranteed regular payments for the rest of your life, though the plan might offer you the choice of a lump-sum payment.

Which Plan Is Better: 401(k) or Pension Plan?

Both plans have their advantages and disadvantages. Pension plans have been around longer, however, 401(k) plans are much more common today. In fact, as of March 2021, 52% of employees had access to a defined-contribution plan such as a 401(k), while only 3% had access to only a pension plan (12% had access to both).⁽³⁾

If you have a 401(k), it is up to you to save for your retirement. You have more control but more responsibility as well. With a pension plan, your employer is responsible for funding the plan.

If you like knowing you will have a guaranteed income in retirement and prefer not having to contribute any of your own money, a pension plan will be more attractive to you. If you’d rather have more control over how much you put toward retirement, a 401(k) may be a better fit for you.

Setting Yourself Up for Success

Planning for retirement can feel daunting—but you don’t have to figure it out all by yourself. Choosing the right partner as you plan for the future can help you set yourself up for success in retirement. And finding a financial advisor that understands your unique situation and goals doesn’t have to be difficult.

At Ferguson Johnson Wealth Management, our mission is to simplify navigating the complexities of retirement, helping you plan wisely so you can live fully.

We understand that retirement plans are not one size fits all. That’s why we work with you to develop a plan tailored to your needs. Reach out to us at 301-670-0994 or by email.

Does Open Season Apply to Me?

If you are enrolled in the Federal Employees Health Benefits (FEHB) program, the Federal Employees Dental and Vision Insurance Program (FEDVIP), or you take advantage of the Federal Flexible Spending Account Program (FSAFEDS), you should pay attention to this annual enrollment period. The life insurance and long-term care insurance programs are not included during this time.

What Can I Do During Open Season?

For both the FEHB and FEDVIP programs, federal employees can enroll, change their plan, make adjustments to their plan options, update enrollment type if your family’s coverage needs have changed, or cancel your plan. If you choose to do nothing, your plans will automatically continue.

That is not the case with the various federal FSA programs. If you do not re-enroll during open season, your FSA will lapse. Even if you don’t want to contribute for 2022, keep in mind that any unused funds from 2021 will not carry over if you don’t re-enroll.

What’s Changing?

Every year there are typically some increases in premium costs and individual plans may change their option. The U.S. Office of Personnel Management (OPM) will announce specific details and the new 2022 premium rates on their website closer to the start of open season. You will also be able to compare plans and find information applicable to your job or status (active employee or retired).

Start preparing now by thinking about the health needs you experienced this year and whether or not your health insurance met those needs. Then think ahead to next year. Are there any life changes coming your way? Will you be getting married? Adding to your family? Do you take new medications now? If so, consider increasing your coverage or adding coverage for your spouse.

The Takeaway

In the midst of what sometimes feels like a world gone mad, take some time to prioritize your employee benefits. The government provides these as a thank-you for your hard work, so make sure you maximize them and use your open enrollment period to make decisions that align with your life.

And if you haven’t heard anything about open enrollment, reach out to the human resources department at your work to find out if there is a scheduled meeting or webinar to highlight this year’s benefits. Remember, your HR department is there to walk you through these decisions and answer any questions.

At Ferguson Johnson Wealth Management, we specialize in helping government employees manage their finances and prepare for retirement. If you have questions about your government benefits or have yet to start planning for your future, we’d love to help. Please don’t hesitate to call our office at 301-670-0994 or email us.