The 401(k)- a failure?

[pb4uski]

Quote:

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]

Quote:

Originally Posted by pb4uski 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]

Quote:

Originally Posted by 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...

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]

Quote:

Originally Posted by Mulligan 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]

Quote:

Originally Posted by pb4uski 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]

Quote:

Originally Posted by 2B 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.

Quote:

Originally Posted by 2B 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]

Quote:

Originally Posted by karen1972 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]

Quote:

Originally Posted by Big_Hitter 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?

[Big_Hitter]

given a fixed contribution "budget" (call it x percent of payroll or whatever), DB plans provide a greater benefit to full career retirees - there is plenty of material on this issue

I'm not anti DC, each has it's advantages and disadvantages


We may go full circle once the retirement "crisis" truly manifests itself, who knows.

[pb4uski]

Quote:

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

+3 If it did provide great bang for the buck companies would not be dropping them like hot potatoes.

[Big_Hitter]

they are simply more efficient, that's all I'm saying


contribution volatility, ppa cash calls to get to 80% funded, GAAP balance sheet/expense issues don't exist in DC plans

[Big_Hitter]

back on topic, as one poster mentioned, 401k is a law, that's it


people, in general (certainly excluding er.org forum members) don't save, even when presented with great matches and huge tax-advantaged vehicles to do so


to get that nest egg, as also mentioned earlier, requires discipline, a bit of luck and financial accumen

[pb4uski]

Quote:

Originally Posted by Big_Hitter given a fixed contribution "budget" (call it x percent of payroll or whatever), DB plans provide a greater benefit to full career retirees - there is plenty of material on this issue I'm not anti DC, each has it's advantages and disadvantages We may go full circle once the retirement "crisis" truly manifests itself, who knows.

Is that because vested DB participants effectively benefit from contributions relating to DB participants who leave before they vest?

Whereas DC participants don't benefit from unvested contributions and any unvested contributons are returned to the employer/sponser?

[Big_Hitter]

correct, plus you have those that terminate vested before retirement age

[samclem]

Quote:

Originally Posted by Big_Hitter given a fixed contribution "budget" (call it x percent of payroll or whatever), DB plans provide a greater benefit to full career retirees - there is plenty of material on this issue

Oh, I can buy that. But that's not the same as saying the employer (or the employee) gets more bang-for-the-buck for each dollar contributed. That whole "full career" thing excludes a lot of people, and the company "saves" a lot (some of which goes to the full career retirees) by paying a fairly meager benefit to those who leave before that--the vast majority of employees in most jobs in today's world.

A lottery ticket provides great bang-for-the-buck--if you win.

To the extent the 401K has improved the mobility of employees, I think it has had a big positive influence on the economy as a whole by enhancing the efficiency of matching employees to jobs they are best qualified/want to do. OTOH, things that make leaving a job more "sticky" (pension vesting, family heath care provided by employers, etc) make US industries and employees less productive.

[MichaelB]

Quote:

Originally Posted by Big_Hitter given a fixed contribution "budget" (call it x percent of payroll or whatever), DB plans provide a greater benefit to full career retirees - there is plenty of material on this issue.

Defined benefit often conflicts with fixed contribution. That's one (of many) of the reasons they have been phased out.

[Big_Hitter]

certainly employees who change jobs more frequently will find a greater benefit under DC plans, no argument there

[Big_Hitter]

Quote:

Originally Posted by MichaelB Defined benefit often conflicts with fixed contribution. That's one (of many) of the reasons they have been phased out.

agreed, but they can be designed (prospectively) to have fixed contributions