When 401k Came Into Our Lives

"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 people can cite. They know it has something, and often everything, to do with whether or not they can retire with dignity.

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.

These plan investments are also the reason that many people are pacing the floors at night, watching their retirement get delayed or destroyed.

Until 401(k) came along, pension plans were usually defined benefit plans.

A defined benefit pension is one that gives you a set number of dollars for set period of time. It usually pays out over the course of your lifetime after retirement.

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, many 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 are a lot of people hurting. It is sad to watch retired people, or people close to retirement, lose 40 or 50% of their 401(k) plan's asset value in one year. They will never be able to make that back up.

There is a second major problem -- Not putting enough money in the 401(k) to begin with.

401(k) plans give people too much freedom.

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 they are looking at a bleak retirement.

Defined benefit plans encouraged people to stay at the same company. 401(k) plans do not.

I've watched tons of people change jobs and then blow the 401(k) money before they started their new job.

90% of people with a lump sum of money will run through it in five years or less. The same statistic holds true for 401(k) rollovers as it does for lottery winners.

I am appalled that both presidential candidates have proposals that will make it easier for people to blow their 401(k) money.

There are a variety of ideas the presidential candidates are completely ignoring.

One would be to make it easy, and cost efficient, for employers to go to defined benefit plan and guaranteed income plans. That would make sure that our retirees have money for the rest of their lives.

Second would be to change the way 401(k) plans are administered. Take them out of the employer's hands and let employees invest in whatever, and with whomever, they like. Just like they do with their IRA accounts.

When historians study the cause of the 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.

Don McNay is the Chairman of the Board for McNay Settlement Group in Richmond Kentucky and author of the book, Son of a Son of a Gambler: Winners, Losers and What to Do When You Win The Lottery. You can write to him at [e-mail] or read other things he has written at www.donmcnay.com

Comments

[DuganS1]

"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."

...or the employee could have spent five minutes on the phone with a financial advisor from the company who runs the 401K. Also, most choices of funds within these 401K programs are conservative.

"Even worse, many companies push their employees to use 401(k) money to buy stock in the company they work for."

From what I know, employees typically accumulate stock in the companies they work for via bonuses.

"If the company goes broke, people lose their jobs and their retirement savings, too."

...and you'll be out a job..

"There are a lot of people hurting. It is sad to watch retired people, or people close to retirement, lose 40 or 50% of their 401(k) plan's asset value in one year. They will never be able to make that back up"

Stock prices go up and down. This is not the first time there has been a big selloff in the market, far from. For those with longer time horizons, it is a great opportunity to accumulate more shares every two weeks at much lower prices. This is actually beneficial for folks who don't have to retire in the next five years.

About pensions, pension money is often invested in stocks as well, so pension funds often suffer as much as mutual funds.

[robinhood2]

(continued) A Federal government run plan that promised savers 3% + the inflation rate on money set aside would probably be better than what many employees have now and would be much more portable. Read Teresa Ghillarducci's recent book on defined benefit plans and how to save them. Of course, a poorly run government plan could end up creating more problems than it solves if the dollars raised are simply squandered on income redistribution schemes or in paying for more military adventures.
As of late 2008, it is obvious that 401K plans are not working well for many employees. Investment balances are too small to adequately supplement Social Security and many employees have no 401K plans at all. Defined benefit plans that still exist are causing major financial problems for their sponsors and may yet bankrupt them. The City of Vallejo filed for bankruptcy, in part because of its expensive public safety pension benefits, It won't be the last government sponsor to do so. Many government pension plans are seriously underfunded.

[iambusto]

No its not better. Stocks over 10-20 years produce much better returns than that.

besides, you being forced to invest in US treasury is laughable. This is just a sneak way of US govt. realising that the foreign nations in the future will start asking for higher coupon treasury or stop buying our debt and so to fund our govt best way is to force our citizens to buy US debt.

let it be a voluntary program. if you contribute to the fed govt plan, you get the benefits of it. if you choose 401(k), IRA etc you go your own way.

dont force me to invest in US treasury just because you cant find other buyers of the US treasury in the future at cheaper rates.

[robinhood2]

The current system may be better for you and me (and it has been good for me) but for a great many people it is a failure. Many people are not contributing enough, their employers offer lousy choices and the employees themselves make poor investment choices. The reality is that many of my former co-workers knew more about "American Idol" than about their 401K plans.

[robinhood2]

My 401K worked out reasonably well for me. I was a good saver and my employer had a good matching policy. I rolled it into a self-directed IRA when I retired early. Yes, my IRA is down for 2008, but not as bad as the market averages. I actually hedged my investments by writing covered calls against all my stock positions. Real so-called hedge funds don't seem to do much hedging at all. They are more like the old style gambling pools of the 1920's and probably use more leverage than what was common or even possible in 1929. I don't miss the old defined benefit plans I was a member of. I never stayed around long enough (10 years was the requirement) to vest any benefits in any of them. They were designed for long time employees when job markets were far more stable than they are today. Defined benefit plans worked out well for old time auto workers, so well in fact that they brought the companies to the brink of bankruptcy. Many airlines with great defined benefit plans went bankrupt.
Although many (most?) employees really are not qualified to run their own 401K plans, employers could could do a better job by keeping plan expenses low and avoiding mutual fund and administrators with high fees. (continued)

[proreality]

"The privilege of working for me tax"

[poppaculture]

If you think ABORTION is a hot topic, wait until Boomers and their kids start asking for EUTHENASIA.


(it will be interesting when fiscal conservatives advocating personal responsibility begin to clash with pro-life proponents in the discussion about taking care of the elderly destitute ... so watch for this on our collective horizon)

[JBS]

FWIW, I put the maximum allowed by law into my 401K when I had one ... ain't a whole lot of it left now, and I've never touched a cent of it.

Current value is about 80% of the original investment.

Seems to me it's a moot point whether Obama or McCain are going to make it easier for me to "blow" what I don't have any more anyway.

[LouisvilleLiberal]

Me too....since I was 20 'til now - over 25 years. 3 stock market "crashes" later and a few good years in between and now I have barely what I put in if I figure what I have lost is the employer match and the profit in the good years. I did take out money to buy a house and I am thankful that I bought what I could afford on a fixed rate mortgage....and that it's value is more than the mortgage.

I have pretty much given up hope of having enough to retire on in 20 years....it doesn't seem to accumulate like they said it would. The choices are limited and I have little say in what happens to the money after I elect to participate - and the idea that the salesmen who "advise" you is a joke.

In my opinion, the 401k law was a Republican scheme to eliminate the employers responsibility of the risk of offering pensions...instead they offer a small match if they have a good year and the employees are on their own.

[Samalabear]

A lot of people saw the writing on the wall when King George tried to privatize Social Security.

[SunlakeDude]

Unfortunately, there are a lot of people, mostly Republicans, whe are continuing to push this plan to privatize Social Security. There are 2 main reasons: 1st to shift the "risk" to individuals and away from the government and corporations. 2nd to continue plowing huge amounts of money into the stock market. If you think the recent crash of stock prices is bad imagine how bad it would have been if there hadn't been all that 401K money in there? So, they figure, what it needs is even more money shoveled in, money that isn't going to be taken out on a whim. And McCain's health insurance plan is worse than what we have now. That would again, shift risk to the individual by forcing millions to go it alone and attempt to buy individual health insurance policies from companies whose business it is to pay out far less than they take in, in premiums. So, in McCain's America you truly are on your own. Then, they would set their sights on Medicare and Medicaid until everyone, no matter how destitute, would completely on their own and vulnerable to "market forces". And all this is being proposed under the guise of giving people "choices". The only people in this country who truly have "choices" are the wealthy. And that's not likely to change any time soon.

[LouisvilleLiberal]

Privatizing Social Security would also let the government off the hook fo rthe Social Security "Trust Fund" that has been spent. Social Security would be perfectly solvent if the money would have been set aside for the retirees that are coming of age now. Their Social Security was funded with an increase in the SS tax back in the 80's but the government spent the money.

Now, they are going to have to increase taxes - most likely by eliminating the cap that the weathier wage earners enjoy - in order to cover the benefits already earned.

[vippy]

and people voting for McCain may see their Social Security Program and Medicare gone by the
wayside too. How ludicrous.

[SunlakeDude]

This is all true and we allowed, or should I say, our leaders allowed our manufacturing jobs to go overseas. But a nation that, with a few exceptions, doesn't make anything of real value is destined to fail. We cannot make it as a nation just providing services to each other, building houses and furnishing and accessorizing them and writing mortages and second mortages on them. This was all done at the bidding of large corporations who saw it as a way to improve their bottom line. The problem with "globalism" is that it is destined to fail. When serious oil shortages arrive which they will do in just a few years and with no real replacement for oil we will not be able to buy plastic salad shooters here in North America that were manufactured on the other side of the planet. Globalism will be seen for what it really is; an experiment and one that failed due to inadequate energy sources. The wonderful performance of the stock market, particularly in the 1990s, will not be repeated again. Making huge gains by investing retirement money in stock-based funds is a thing of the past. Anyone who thinks they can continue to do just that and come out ahead is in for a big dissapointment.

[LouisvilleLiberal]

I believe that "re-localization" will become a buzz word as energy prices increase and outweigh the savings of manufacturing in China and India. I'm betting that by 2010, we are going to begin to reverse some of the globalization that has taken place over the past 20 years.

[SunlakeDude]

If you love the way your 401K has been performing this year then you'll LOVE privatized Social Security!

[MadeinAmericaProud]

this is a great article. Excellent timing. The more people read and understand the importance of this message, just maybe, the old American way has died. In other words, old jobs had pensions. We gave that aways because we were told years ago our wealth would trickle down.

I personally have been trickled on but it has not been wealth and I am a veteran. All the things the military promised me years ago if I sign up went just like the pensions did. In fact I think it is worst. I put my life on the line. I am alive but many didn't make it. How are we treating our new veterans?

When we started voting our manufacturing jobs away to other countries, and was told to focus on the financial sectors, it does not add up to good common sense. Without many jobs, how long can the sector last on plastic credit cards/ Well, we have our answer. Now these other countries own this USA super power.