Actually, the Times Got it Right on 401(k)s
The New York Times editorial page added its two cents to the retirement reform debate with a piece on Sunday by Teresa Tritch. The editorial focused on the 401(k), as well it should. You can't head off the looming retirement crisis until you acknowledge that the 401(k) is part of the problem.
The 401(k) was conceived as a savings supplement to traditional pensions and Social Security. Private pensions, however, are now all but extinct, leaving the 401(k) to do the whole job of filling the income gap between what Social Security provides and what you need for a dignified retirement.
It's a job the 401(k) was never designed to do, and, not surprisingly, it has failed to do it. According to estimates from the Employee Benefits Research Institute, on June 30 the median 401(k) held by someone on the verge of retirement age was $69,000. What's that mean? At the typical financial planner's' recommended withdrawal rate of 4 percent a year, the median retiree can count on a lifetime retirement income of Social Security plus $233 a month from his 401(k). In my mind, $233 a month is all you need to know. The 401(k) isn't working.
The Times cites a number of reasons.
- Workers don't save enough. A 401(k) is optional, so most 20-something workers, for example, don't contribute a dime. Even when employees do save, the median contribution rate is 6%, about half of what is needed.
- Too much money leaks out to loans or withdrawals. About 40 percent of people receiving a lump sum from their 401(k) when changing jobs take the cash and run rather than rolling it over. About a quarter of people in their 30s and 40s have an outstanding loan from their 401(k)s.
- Workers aren't good investors. Not surprisingly, 401(k) participants make the same investing mistakes as everyone else: They get too conservative when the market is down and too daring when the market is up.
- The plans create winners and losers based solely on retirement year. The Times cites a Brookings Institution study that shows that a worker who retired in 2008 after 40 years in the workforce could expect half as much money in retirement as an otherwise identical worker who retired in 1999 at the peak of the bull market. If anything, that's too mild: A T. Rowe Price study found that the year of retirement could make a four-fold difference in the size of equally responsible workers' nest eggs. Four-fold.
My MoneyWatch colleague editor-at-large Jill Schlesinger blogged yesterday that all the 401(k)'s shortcomings could be fixed by energetic efforts to teach participants to save enough and invest wisely. I think that point of view ignores both history and human nature. Investors, professional and amateur, have always tried to time the market and have always gotten it wrong. The majority of people in their 20s and 30s don't think about retirement voluntarily and never will. As I blogged last week, the notion that plopping workers for a few hours in front of a white board will turn them into Warren Buffetts is, to put it mildly, not borne out by history. For all the time and treasure already fruitlessly spent lecturing workers on the wonder of diversification and the wisdom of starting young, the only efforts that have really improved 401(k) accounts were automatic enrollment (signing workers up for the plan without their permission when they join the company) and target-date funds, which invest prudently without any input from the worker.
The Times proposes that the 401(k) get a serious overhaul, drawing on what has worked so far and, implicitly, on the experience of other countries whose retirement plans pay more attention to real people's behavior. There's nothing "la-la" about that. In my mind, the truly unrealistic idea on the table is the status quo-the notion that a wholly voluntary, self-directed supplemental savings plan can single-handedly provide for 30 years of retirement for a whole population. It's now abundantly clear that the 401(k) can't. For future generations, we ought to get serious about evolving the plan into something that has a chance of success. That's what the Times was saying. They're right.
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As a early stage baby boomer, I can tell you how we were squeezed.
Our business leaders pulled the rug out from under us, and replaced it with their new high stakes gambling instruments, called mutual funds and 401K plans. They then used our money to make themselves rich, looted the system, and rode off into the sunset. The rest of us workers are left fighting over the scraps. Most of us will retire very poorly.
Here is how it went:
After graduating from school, and getting a full time job, and working our way up the ladder for years, our business leaders suddenly pulled our retirement plans out from underneath us. The retirement plans were no more, and the 401K plans replaced them. They calculated our vested worth using some obscure formula, and converted our vestment into the new 401K plan.
You all have seen what they did to our 401K plans, mutual fund plans, mortgages, etc.
They robbed us blind, gambling with our money, adding no value to society.
Our 401K plans are now less than 50% of what they were worth just a few years ago.
Our homes have dropped in value by a third, a tragedy for those who invested in paying off their mortgages. Our pitiful nesteggs are evaporating.
Meanwhile, another generation still basks in the luxury of a retirement plan...
The lucky few will not let go of their wealth without a fight.
Thats what this controversy is all about.
since it is the workers that choose what funds their money is invested in and indeed it is the workers that chose to invest in the 401(k) to begin with, whose fault is it that they have lost money?
Since these robber barons were gambling with our money and adding nothing of value when the mutual funds lost money in the second half of last year does that mean that during the previous years when those funds were increasing in value that the workers were gambling and adding nothing of value to society?
people who put their money into 401ks do so becuse they trust their em,ployers and the finacial advisors.
unfortunately, we have all seen how good finacial advice has been recently
and no matter how carefully you have invested in your 401k you still were powerless to prevent the rapid drops everyone experienced and now the lengthy period of time it wll take to recover.
the 401 is too dependent on the economic conditions of the time to be a reliable retirement vehicle
"For future generations, we ought to get serious about evolving the plan into something that has a chance of success..."
We already have. It is called Social Security. If (I believe it was LBJ) had not opened those accounts up to the general fund to be used as an emergency backup--talk about letting the genie out of the lamp--there would be so much money in that system what we could all retire today. Sure, it wouldn't and shouldn't be the backbone of anyone's retirement, and we all need to relearn about savings, living debt free, and deferring immediate gratification, but the System worked. Until it was politicized.
if someone has only saved $69K by the time they hit retirement age they have no one to blame but themselves. growing old does not come as a surprise to most people, we know it will happen. Everyone knows they will need to prepare for their later years, they know where to find info about how to invest but many people would rather do that "tomorrow" and watch TV today.
most middle and working class people these days see their incomes stagnate or even decline at the same time their costs of living going up - food, utilities, local taxes, medical etc and have precious little extra to save.
they are watching the wall street meltdown suck value out of their retirement accounts and home values as well
this is called the middle class squeeze
scrimping, saving and cutting costs only get you so far - at best a hedge against rising costs
And why do you think they are squeezing the middle class, and what will be the long term result?
would this be the same squeezed middle class that just bought millions of brand new cars, has on average 3 TVs with cable/satellite and A/C? Our poor have such a lifestyle of luxury that they are the envy of the world's poor.
making assumptions here based on your nic.
paid health (sick) care
paid housing
job security in the military world.
Boy, I'm glad you went the way of the military, or you'd be in the same boat with so many others.
what many here fail to understand is that military service need not be a lifelong commitment. Enlisted personel serve a term of service which can be renewed every few years. My service ended some time ago but since I earned the title of Marine I still get to claim it for myself.
In any event, nothing in my post is based on my personal experience or planning but on hard facts. Most people have a reasonable expectation of growing older. Most people understand that as they grow older they will be less able and less inclined to work and that they will need money to finance their retirement. Those that don't plan for this have no one to blame but theirselves.
The defined benefit plans that most companies used to offer and provided a predictable and liveable retiremnet are all but gone, replaced by the 401k
Financial advisers - we all see how great tjheir track record has been haven't we. Some are even compensated to steer people in certain directions regardless of whether its the right one or not no matter which plan you select in your 401 K, agressive, moderate, or low risk, you are still subject to the roller coster ride of the wall street boom bust bubble cycle. no matter how well you pick you still loose when things are down and it still takes time to recove
r the artificial rise in the dow to over 10,000 and up is directly tie-able to the shift of tremendous sums of money of people's retirement 401k money into these risky schemes this is indeed a big shift of money into the hands of wall street - because 401ks depend mostly on stocks and mutual funds And lets not even get started on all the hidden fees the plan administrators get that rob up to 20% of the value of your plan
True, Red, the 401-k the way it is administered today, is nothing more than a vehicle for legalized theft of the future American workers slaved for.
"The 401(k) was conceived as a savings "
Eric,
You'd do the world a service by cleaning up some of the ineptness of business speak. For example: If husband and wife each work and each contribute 15% to a 401(k) and their employer matches... this amounts to a tidy sum of money. However, none of it is "savings" as the word is used in savings rate for Americans. Econonmic references are a hodge-podge of "misspeak" that leave everyone of the public out of the discussion.
Everyone knows that the 401(k) programs were set up for the benefit of wall street and we have recently observed the "boy" wonder from Texas argue the "healing power" for social security was to privatize it or at least to start in part. If you recall, he was going to "spend" some of his political capital to accomplish this! And this is all a part of the mumbo-jumbo moronic pontificating that the public has to endure. Here is a fine point for you, capital is not spent, it is invested. Something a harvard mba should certainly know.
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