"Running on Empty. Running into the sun but I'm running behind.
-Jackson Browne
Internal Revenue Code section 401(k) is the only section of the US tax code that the average person can cite.
They know it has something to do with whether or not they can retire with dignity. Or retire at all.
The adoption of section 401(k) in 1982 turned out to be one of those big moments that changed everything.
401(k) plan investments are a primary driver of the investment markets. It is the employee retirement benefit that most companies offer. The performance of the plan's investments are also the reason that many people are pacing the floors at night, worrying if their retirement will get delayed or destroyed.
Until 401(k) came along, pension plans were usually defined benefit plans.
A defined benefit pension gives you a set number of dollars for set period of time. It usually pays out over the course of your lifetime after you retire. (Like an immediate annuity does.)
With a defined benefit plan, the employer takes responsibility for making sure pension money is safe and properly invested.
With the advent of the 401(k), employees with little or no investment experience were required to pick among investment options offered by an employer.
Employees were put in the position to fail. Many have.
It is up to the employer to pick what investment company handles the employee's money. If the employer picks a dog, with few options, the employee is out of luck.
Even worse, some companies push their employees to use 401(k) money to buy stock in the company they work for. If the company goes broke, people lose their jobs and their retirement savings, too.
There is a second major problem: Not putting enough money in the 401(k) to begin with.
401(k) plans give people a lot of freedom but my experience in working with injury victims and lottery winners who get big money is that too much freedom is not a blessing.
Freedom without perceived consequences can lead to disastrous decisions.
I've always encouraged people to put the maximum amount into a 401(k) plan. Few do.
Many put in little or nothing at all.
Now many are looking at a bleak retirement.
Defined benefit plans encouraged people to stay at the same employer. 401(k) plans do not.
I've watched tons of people change jobs and then blow the 401(k) money before they start their new job.
It's been said that 90% of people with a lump sum of money will run through it in five years or less. The same statistic can hold true for people who receive 401(k) rollovers as it does for lottery winners.
When historians study the cause of the 2008 economic meltdown, they will see that the change from defined benefit plans to 401(k) plans in 1982 was a factor. It was one of many shifts where dramatic changes were made in people's lives and liberties. People didn't realize just how dramatic until years later.
If we are going to keep from running behind, 401(k) is one of those things that we need to fix.
Follow Don McNay on Twitter: www.twitter.com/Donmcnay
401K take responsibility for your own retirement...
Defined contribution plans are the answer to the pension mess. Your retirement income is what you save and contribute. No magic wand (defined benefits) that multiplies what you ever contributed...no big pile of money for politicians and union leaders to dip into...no big pile of money for the state to "manage" (steal).
Secondly, 401ks have a silver lining that never gets talked about anymore. If your in a defined benefit plan you are STUCK in the company you work for because that is the only way to get the defined benefit. The portability of a 401k was not only wanted, but needed, in order for people to pursue employment to their best economic advantage. And oh by the way, this portability has contributed at least in some small way to wages rises for poeple at the top. Competition for good personnel.
Third, the people who took the biggest hits in 401ks in the past couple years were mainly invested in the Stock Market. Those markets have recovered, meaning you should have as much money in them now as you did back then. If you were riding the stock market when it was soaring, and then rode it to the bottom, and THEN sold your stocks, you don't understand the stock market. And you should never have been invested in it.
LASTLY, AND MOST IMPORTANTLY!!! If you did not understand my third point, and you have a 401k and are invested in the Stock Market, I would highly recommend you shift your money to a more fixed income asset.
And if you re-read my post, I never said anything about diversification. I said fixed income investments. If you don't understand a markets, whether that be stocks, bonds, commodities, or futures, you shouldn't be invested in them. That should be common sense.
That is the problem. People are told that their funds are back where they were. Meaning they lost big time.
This is an attempt to gloss over the fact that they lost big money. No one dares talk about where the 401k's would have been if they had not been raided by the banks.
The simple truth is these people have lost money that can never be recovered. In most cases your 401k statement will not even show the amount of your loss.
Remember: Your 401k statement will show that your position has improved. It will even look like you have gained ground. But that is because you have been putting money in it every month. Look very closely and you will see that your individual investments may be losers. But how can you really tell if y7our statement shows you have more in there now than you did a year ago. That is enough to fool most people into thinking their 401k is not losing them money when it really is.
http://abcnews.go.com/Business/colorado-man-wiped-401k-fund-guidance-needed/story?id=16264550#.T6KxAOhYuCf
My strategy now is to follow Paul B. Farrell's advice in the MarketWatch columns and build a Lazy Portfolio for my retirement.
http://www.marketwatch.com/lazyportfolio
What goes up also has the risk of going down.
Another talking head who bugles about the dangers of risk without explaining reward. Another pundit of the risk free society league