The 401(k)- a failure?

[pb4uski]

....I have always been a nut that wished the govt could confiscate a small portion of each persons check (and not spend it) and then give it back in an annuity at retirement. ...

They do Mulligan. Or am I missing something?

 

[Midpack]

Several have talked about "the bottom." Since this thread is (was?) about 401k's, we're really not talking about the "bottom" are we? Most of the lowest (two) quintile(s) probably doesn't have access to a 401k. I'd think we're talking the top 60-80% of incomes where 401k's are more prevalent. I was anyway...

 

[Mulligan]

They do Mulligan. Or am I missing something?

Yes you are PB... A better explanation on my part! I mean as a supplementary retirement annuity separate of SS that is truly your money. Not being partially drained by other benefits SS pays out such as old men fathering children from young women and then getting a check sent to you every month until they are 18 even if you are a billionaire!


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[pb4uski]

Several have talked about "the bottom." Since this thread is (was?) about 401k's, we're really not talking about the "bottom" are we? Most of the lowest (two) quintile(s) probably doesn't have access to a 401k. I'd think we're talking the top 60-80% of incomes where 401k's are more prevalent. I was anyway...

You're probably right but I suspect there are still lots of people in the lowest two quintiles who have access to a 401k (or could do the same things themselves with a myIRA or tIRA or Roth).

DS is currently in that area and one of the two jobs he has had since finishing his training had a 401k, which he contributed to at my suggestion even though there was no match and rolled it into a Roth when he changed jobs.

At one of the megas I worked at we have loads of people in those income levels that had access to a 401k.

 

[MichaelB]

I wish I could differentiate between income and poor choices. I am sure it's not one or the other, and I'd be surprised if poor choices is simply "anecdotal." But I can't say with any certainty the relative influence of either. bUU's paper shows the trend, but not "why."
./.
I'll keep looking...

Please do keep looking. This discussion often touches on the need to limit and defer current consumption, then uses income as a measure of potential savings opportunity. If this is true, higher income might automatically result in a higher natural savings rate before needing to defer, so a 3% savings rate by a low income household might actually reflect more sacrifice than the 9% saved by the upper income family. A true measure and comparison of hard choices and deferred consumption should reflect this.

 

[pb4uski]

Yes you are PB... A better explanation on my part! I mean as a supplementary retirement annuity separate of SS that is truly your money. Not being partially drained by other benefits SS pays out such as old men fathering children from young women and then getting a check sent to you every month until they are 18 even if you are a billionaire!

I see what you are referring to now. That has been proposed by some as a solution, but how much nanny-state and loss of freedom of choice do we want?

As much as I would like to see all citizens live at or below their means and save for the future, I am loathe to the idea of making it compulsory and impinging on our freedom. If they ever start making the receipt of SS benefits means tested as some have proposed then I would probably change my mind.

 

[mpeirce]

You're probably right but I suspect there are still lots of people in the lowest two quintiles who have access to a 401k.

Benefits :: McDonalds.com

Additional Benefits
Short-term disability
Term life insurance
401(k)
Paid holidays
Vacation
Educational assistance
​

2013 Global Responsibility Report

Financial benefits for U.S. Walmart associates
Financial benefits for our eligible full-time and part-time U.S. associates include 401(k), bonus incentives and stock purchase plans. We match contributions made to the Walmart 401(k) Plan, dollar-for-dollar up to 6 percent of annual pay, as well as to the Associate Stock Purchase Plan by matching up to 15 percent of the first $1,800 purchased each plan year. Since the matching contribution was introduced to the 401(k) Plan, the number of associates who choose to save for their retirement through the U.S. 401(k) plan has increased by 45 percent. We continue to work hard to encourage associates to save for their future.
​

 

[pb4uski]

Yes, but what percentage of their workers who are out of high school are eligible for those benefits? The impression that I have is that they (and other entry level employers) frequently "manage" associates work schedules to minimize people who would qualify for these benefits, but I hope that I am wrong.

 

[Big_Hitter]

stock purchase plans (spps) can be pretty good


my old megacorp had a 423 plan where we could purchase up to 15% of pay (some limit applied) and got to buy the shares with after tax deferrals at the end of the year at the LOWER of 85% of the beginning of year or end of year share price. Saved a ton of money that way until they had to end it when FASB made companies start booking a liability for it.

 

[mpeirce]

Yes, but what percentage of their workers who are out of high school are eligible for those benefits? The impression that I have is that they (and other entry level employers) frequently "manage" associates work schedules to minimize people who would qualify for these benefits, but I hope that I am wrong.

Sure, we all know some good and some bad employers, but they aren't all bad.

5 Employers With Generous 401(k) Matches - US News

McDonald's. The company that invented extra-large fries and soda provides many of its employees with a supersized 401(k) match. McDonald's matches each dollar an employee contributes to the 401(k) plan with three dollars, up to the first 1 percent of pay. For employees age 21 and older who have been with the company for at least a year, the company also matches a dollar for each dollar saved on the next 4 percent of pay.​

From further googling I see there is a 20 hours minimum you need to work to qualify for 401(k), profit sharing, and the stock purchase plan. Seems reasonable to me.

 

[pb4uski]

I would agree that 20 hours is reasonable... by coincidence that was the same cutoff for similar benefits at my last mega job. 300% match on the first 1% of saving is quite generous, as is 100% on the first 4% for people 21+ with a year of service. I wonder that their participation rates are.

 

[ArkTinkerer]

Many companies do manage their employees to try and keep more part time than full time employees. The managers are usually very up front about it. It is usually only the managers and maybe assistant managers that have any chance of going over part time and qualifying for benefits like a 401K.

One thing that SS does provide and that we often leave out of the equation is payments for disability and survivor benefits to widows and children. I don't think these are huge if you compare the expense of providing these thru private insurance but for those at the bottom they matter and should not be ignored as a benefit.

 

[travelover]

Sure, we all know some good and some bad employers, but they aren't all bad.

5 Employers With Generous 401(k) Matches - US News

McDonald's. The company that invented extra-large fries and soda provides many of its employees with a supersized 401(k) match. McDonald's matches each dollar an employee contributes to the 401(k) plan with three dollars, up to the first 1 percent of pay. For employees age 21 and older who have been with the company for at least a year, the company also matches a dollar for each dollar saved on the next 4 percent of pay.​

From further googling I see there is a 20 hours minimum you need to work to qualify for 401(k), profit sharing, and the stock purchase plan. Seems reasonable to me.

I would love to see what the median and mean values are of McDonald employees' 401(k)s.

 

[Big_Hitter]

I would love to see what the median and mean values are of McDonald employees' 401(k)s.

BrightScope Ratings

go for it

 

[travelover]

BrightScope Ratings

go for it

Thanks for the link!

Unfortunately this only gives the mean, not the median, which can be fantastically skewed by the top.

 

[pb4uski]

McDonalds Corporation Profit Sharing and Savings Plan currently has over 51,600 active participants and over $3.3B in plan assets.

Net Plan Assets $3,290,000,000
Total Participants 52,000
Avg Account Balance $140,000

But I get an average account balance of $64k if I divide $3.29 billion by 51,600. Unless perhaps the the 51,600 includes those with zero balances and the $140k average balance is only based on participating employees with other than zero balances.

Math is hard....

 

[Mulligan]

I see what you are referring to now. That has been proposed by some as a solution, but how much nanny-state and loss of freedom of choice do we want?



As much as I would like to see all citizens live at or below their means and save for the future, I am loathe to the idea of making it compulsory and impinging on our freedom. If they ever start making the receipt of SS benefits means tested as some have proposed then I would probably change my mind.

I agree with you Pb, but Im afraid if we don't take it from them, they will be taking it from us to give to them. I don't see the government saying any time soon...."Go do yourself and society a favor and jump off a cliff. You should have saved more"


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[karen1972]

There are several issues with 401ks and the analysis. 1) people don't stay at the same company for years, so many will have multiple 401ks or more likely their 401ks get cashed out.. which undermines the whole things. Sorry but if you leave your job and have $1300 saved say.. you then get that check in the mail.. the fact is MOST people don't roll it over. This whole thing of if < $5K then send them a check is a serious problem. 2) too many companies no longer match..so when your company isn't matching the incentive is really not there 3) while target dates are great, small companies are being hosed and their plans are terrible. 4) who educates these people to invest?? ie a poor person has never bought a stock in their entire life, so you aren't learning it from your parents, and your not learning it from school, so you get the 20 minute talk from the 401k advisor who wants to take 1-2% of your money to invest for you. robbing the poor even more blind.


The 401k is great for people in the upper tax brackets, that have matching, that make enough money to max it out every year and know how to invest and have the options to invest. It was really my only write off when working.. saving me 1000s on taxes, sure I'll take that any day. I just don't know if I'd think the same if I was in the 15% tax bracket with bad funds, no matching.. I'd much more likely be putting money into a ROTH IRA...and since you don't make that much, the limits there suffice.

 

[2B]

Several have talked about "the bottom." Since this thread is (was?) about 401k's, we're really not talking about the "bottom" are we? Most of the lowest (two) quintile(s) probably doesn't have access to a 401k. I'd think we're talking the top 60-80% of incomes where 401k's are more prevalent. I was anyway...

IMHO I think the lowest two quartiles are probably better off using an after tax account or a Roth IRA (and only then to get a company match). The bottom half of the tax code pays very little tax and can only lose in the future in a tax deferred IRA. Poor investment choices and fees are also a drain. The only compensation to drive me into an IRA would be a company match.

 

[2B]

I agree with you Pb, but Im afraid if we don't take it from them, they will be taking it from us to give to them. I don't see the government saying any time soon...."Go do yourself and society a favor and jump off a cliff. You should have saved more"

Finally, a proposal that would solve the problem. Now we need to make that mandatory.

 

[2B]

As much as I would like to see all citizens live at or below their means and save for the future, I am loathe to the idea of making it compulsory and impinging on our freedom. If they ever start making the receipt of SS benefits means tested as some have proposed then I would probably change my mind.

SS is already means tested and will probably become more so. The tax rate for SS is the same percentage for high and low incomes but high earners replace a much lower percentage of their former income. If someone has other income, SS will be taxed. I expect any "solution" to SS to involve increasing the level of taxation (above the non-indexed limits currently in existence) and raising the SS tax rate.

 

[pb4uski]

IMHO I think the lowest two quartiles are probably better off using an after tax account or a Roth IRA (and only then to get a company match). The bottom half of the tax code pays very little tax and can only lose in the future in a tax deferred IRA. Poor investment choices and fees are also a drain. The only compensation to drive me into an IRA would be a company match.

I agree and am steering DW and a low/middle income friend to do just that... contribute to a 401k if available with a match but otherwise contribute to a Roth or after-tax accounts. The Savers Tax Credit is a different form of a match that works for these people.

SS is already means tested and will probably become more so. The tax rate for SS is the same percentage for high and low incomes but high earners replace a much lower percentage of their former income. If someone has other income, SS will be taxed. I expect any "solution" to SS to involve increasing the level of taxation (above the non-indexed limits currently in existence) and raising the SS tax rate.

I understand the current means testing but it is more subtle than what I was thinking might be coming down the pike.

 

[ArkTinkerer]

4) who educates these people to invest?? ie a poor person has never bought a stock in their entire life, so you aren't learning it from your parents, and your not learning it from school, so you get the 20 minute talk from the 401k advisor who wants to take 1-2% of your money to invest for you. robbing the poor even more blind.

This is a huge part of the problem in my opinion. This is a major downside to how we help poor people in this country and probably most of the developed world. If they are taught that someone else is always looking out for them and that they can spend everything from check to check how do they learn any different? To make matters worse, in many programs, the more you help yourself, the less you get, often to the point of it being against your self interest to provide for yourself. (ACA subsidy cutoffs for example!)

Based on this, even when presented with a chance at a 401K, and especially one without a match, few would take it. When told that they can't take it out until age 59 (no one at any company I've worked for ever mentioned 72T, rule of 55, rolling Roth conversions) uninformed workers are even less interested (if that is possible).

 

[samclem]

there is no argument that DB plans provide the biggest bang for the buck in the retirement arena, from an employer cost perspective - they are way more efficient than DC plans

This is so different from the popular perception ("companies dropped DB plans and went with DC to save money") that any additional info you can provide would be appreciated.

If "bang" in "bang for the buck" is measured as "perceived value to employees" (which is what any retirement plan or other compensation is all about), then it might be that employees place more value in a dollar of a company's DC contribution than a dollar of DB contribution--which would also seem to be against the common perception that employees really want and value a company pension.

Or, maybe DB plans are efficient in providing benefits because they are funding retirements for a large group with easily-calculated mortality rather than the highly inefficient guessing game we are forced into with a DC plan based on our less-knowable individual mortality (driving lower monthly benefits to cover longevity risk). Of course, this can be addressed with an annuity, but at some cost.

Or, maybe DB plans cost employers less because of "features" that employees would consider serious drawbacks: Failure to pay out anything if the employee leaves before being vested, crediting formuli that are end-loaded and provide low benefits for the first years of a career if an employee departs, etc.

Anyway, I'm just looking for more information. It would seem that if employer-sponsored DB plans offered more "bang-for-the-buck" as far as the employees were concerned, they'd be the norm, rather than becoming less prevalent.

 

[Midpack]

I am reading all these reasons some people are unable to handle or afford saving for retirement, whether through 401k's or other investments. Does anyone actually believe DB plans will make a comeback, or that Soc Sec benefits will be enhanced (aside from COL)?

I was confused by the DB plans provide the biggest bang for the buck observation too. Certainly not for employers?