Now Time Magazine Blasts the 401(k)

This week's Time Magazine cover story looks at the nation's de facto retirement program, the ubiquitous 401(k), and pronounces it inadequate. Welcome to the club, Time. This blog has been calling the 401(k) a failure since June. In August, the New York Times weighed in, making the same points. Glad to see MoneyWatch.com is being read in all the right places.

You should read the Time story. The writer is the excellent Steve Gandel, a former colleague of mine at Money, and he makes all the right points.

• The problem with the 401(k) savings plan is not the plan's design (although fee disclosure and behavioral savvy could stand improving). It's that the plan is being asked to do more than it was meant to do. It was always meant to supplement Social Security and pensions. Instead, it has replaced the latter, and it's not up to the job.
• It's not about the current downturn, either. Downturns will inevitably happen over the length of anyone's career, but when they occur matters hugely in the ability of the plan to assure you a decent retirement income. If you're now in your 30s or 40s, you'll be able to shrug off the losses of 2008 by the time you retire. If you're within 10 years of retirement, you'll never recover. The timing-is-everything aspect of the 401(k) isn't so terrible if it's a supplement to a traditional pension, which provides a stable base of income. But now that the 401(k) is the foundation of Americans' retirement planning, it simply leaves too many people subject to the random busts of the market.
• The solution lies in a finding a way to share the end-point risk, if you will-to insure it away. The GAO and other organizations have reviewed some of the options. Making it easier to roll part of your 401(k) balance over into an annuity is a start-in a sense, that would allow you to create your own pension and insure yourself to some extent against outliving your money. (Or, let's face it, outliving your ability to make good judgments about your money; you won't always be as sharp as you are now.)

Time may not quite command the attention of policy makers and corporate titans the way it once did. But the idea is now in the mainstream that the nation deserves a better retirement program than "401(k) and pray." Good.

Continue reading on CBS MoneyWatch.com

 

 

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Comments

[MarenS]

Sad to see that a legitimate debate on 401ks only generates 10 comments. Wonder why the economy is in the toliet? Because an article on Jon and Kate would get 500 comments!

[gfulmore]

This idea of returning to pensions instead of 401(k) plans is a farce. Read my lips: Young people today will work for 10-20 companies within several careers before they are done. There is no way a pension from any of those companies will provide meaningful retirement. And what about the pensions from some of the airlines or the steel companies, as examples. Those and others went bust and turned their retirement assets over the government to guarantee a retirement income of much, much less than promised. Who would trust a company today to LAST for 30 years, let alone keep the pension fund funded. No, 401(k) plans are much better. Workers can build savings everywhere they work that offers plans. They do NOT have to consolidate them. Once retired, as I am, the 401(k) can supplement Social Security, private savings and other revenue sources, as needed. For many of us, our 401(k) funds will become our largest source of retirement savings.
Social Security is designed to provide about 1/3 of one's retirement income. On average, it comes in at about 43%. Fewer and fewer people end up with pensions. More and more have 401(k) plans. Thank God for the latter. I know in the case of myself and my wife, our 401(k) plans are the basis of our future retirement needs.
Forget returning to traditional pension plans. Much of this nonsense is pushed by investment firms that make money off pension fund activities.

[GTRich2004]

"Welcome to the club, Time. This blog has been calling the 401(k) a failure since June."

Let me say welcome to the club to you as well. People have been calling 401(k)'s failures for the past 10+ years. As a financial advisor told my former boss once, the biggest retirement scams are anything that starts with 4 and ends in a letter. All 401K's did was help companies justify killing their pension programs. After all, they are going to give you a 401K and possibly even match a few hundred bucks right? So why should they offer you a pension as well.

If they will tell you, go ask your HR representative what % of people in your company actually contribute to their 401K and what the average yearly contribution is. I bet the numbers shock you.

[gfulmore]

And, might I add, financial planners do not like the 401(K) plans because, for the most part, they cannot skim a management fee off them for their "professional management" of same. Traditional pension plans are GONE. GONE! They will not exist in the future for a variety of reasons. They are relics of the past, not that they were bad. They were good when there were strong unions and jobs that lasted a lifetime. Kiss those days good-bye. Invest in your 401(k) plans. This is an investment that will pay off in the future. It is the best bet, next to Social Security, to be there when you retire. And watch out for these anti-401(k) guys. Many will tell you not to count on Social Security. Bad advice. Very bad advice.

[MarenS]

The real problems w/ 401ks are the following:
1. Matching funds and the initial tax deduction make the investment look far better than it is.
2. Investment companies give you the funds they are unable to sell on the open market b/c without item #1 (above) it looks like a bad investment.
3. Investor has almost no way of protecting themselves against market downturns, no available "stop loss" number can be implemented to sell your shares in a downturn or when the fund underperforms.
4. Investment companies rely on Item #3(above) to make their company profits. They know how to derive profit from your losses.

A 401k can be useful, but the risk needs to be better managed at the individual level by having other stocks and funds and less money at this risk level.

[seawolf77]

One more way for the company to steal from you. They say you are overpaid only one year. The first. After that they pay you less than you are worth your whole life. And in the end, if you keep your nose clean and kiss enough rump roast and put out a little effort now and again you'll retire a mere shell of a man to live out your so called golden years when your kids really hate you the most. Along the way you'll be sedated by alcohol and drugs, porn and sports, barbecues and baseball games. Why did this all look so much better when I had a chin.

[Binckeslaw]

The company pension was replaced with an inferior 401(k) model. Now employer provided healthcare is currently on the same track. We all need to recognize the changes that are well underway.

Up until the early 1980's most company pension plans were defined benefit plans which fixed a retiree’s monthly payment for life and did not require employees to contribute. Defined contribution plans replaced defined benefit plans in the 1980's. The defined contribution plans fixed an employer’s contribution to the pension plan but did not guarantee a specific monthly benefit. 401(k) plans were originally offered as a supplement to company pension plans. But they began replacing the pension plans by about 1990. Employers initially matched a significant part of the employee's contribution. Over the last several years employers have stopped matching the employees' 401(k) contributions.

The same slippery slope applies to employer provided healthcare. Employers used to pay 100% of the cost of healthcare insurance for employees and their families. Employers subsequently stopped paying for the healthcare insurance family members often requiring employees to contribute toward their own health insurance. Initially contributions were meager. They have reached 50% in many companies today.

I envision a scenario where employees will pay 100% of the cost of employer sponsored health care insurance.

It's now more important than ever for American workers to vocally participate in the current once in a generation movement for reform. Will reforms benefit the insurance industry or America's insured? We need a single payer system.

[dadw5boys]

401k's REALLY SCREWED UP THE STOCK MARKET !!!!!

The 401k's had so much money when they moved into a stock they moved in like an elephant.
And when they moved out there was a gaint sucking sound of profit leaving.

They pressed the Businesses and Corpioration for quick profits and never ended dividends.

Soon Corproations had to take action limiting their voice in the company and that HURT ALL STOCK HOLDERS.

[josephXY]

What is really amazing is this sort of mainstream policy: waiting long enough until serious
problems exist, all the while all too eager ad revenue from any source, including the financial
sector, and then coming along with the sensational news that something is wrong, has not worked out.
Danny Schechter gave an insight some time ago:
http://rinf.com/alt-news/media-news/where-was-media-when-sub-prime-disaster-unfolded/2854/

[TryToBeFlexible]

401K was always a big give-away to Wall Street. Encouraging Americans to put all their savings into 401K mutual funds greatly increases "demand" for stocks and runs up the price of stocks, so the stock options of the rich make them more money. Then, in the end, millions are left with deflated stocks in their 401K plan, no retirement on the horizon. Once again, millions are treated like cattle to be milked and slaughtered to pay for the extreme and exuberant lifestyle of the criminal oligarchy, who have bought congress.
When the uber rich can pay to have every law tweaked to funnel more money their way, government has basically become a vast criminal enterprise. The uber rich now can afford massive outlays for continuous propaganda to keep the mind control of the stupider of the cattle herd members in their corner.

[gfulmore]

And where do you think pension monies have been stored? Look at the holdings of CALpers, probably the largest pension plan in the world. It is diversified, but a huge percentage is in stocks and bonds. The beauty of the 401(k) plan is that the individual is in charge of the outcome, for the most part. Pension plans are dependent on the success of the company over a long period of time, which is problematical, to say the least, these days.
401(k) plans are the way to go!!!! Mine has been extremely successful.