The 401(k)- a failure?

[MRG]

Exactly,
That's why I don't put much stock into these reports. They take real data and ignore reality to make whatever point they choose. Many people don't roll 401k over, or have multiple accounts as I do too. But the author is never asked to support their failed assumptions. Then others take them as fact, creating more confusion.

 

[Mulligan]

I looked forward to the annual presentations, or at least considered it important, and my HR Mgr and I tried many new ways to get people on board. After almost 20 years "selling" 401k's to employees every way we could dream up, sadly we never had as much success as we were hoping for.

When I retired early, some of our non-participants were shocked and asked how it was possible for me to retire at 57? As much as I wanted to answer, I didn't...

You have just reinforced my opinion that "financial education" for many people (heaven forbid high schoolers) is a waste of time. In theory it shouldn't but it is. Then people want to look back in their life and say they wish someone would have told them to do it, and I will bet you some of your workers will too despite it being laid out there.
Outside of avoiding public beatings as an incentive to save, people are going to do what they are going to do. Yes, I am generalizing as some do benefit, but not as many that could/should. I certainly have wasted money over the years and not done what I should have. But I did it anyways!


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[meierlde]

You have just reinforced my opinion that "financial education" for many people (heaven forbid high schoolers) is a waste of time. In theory it shouldn't but it is. Then people want to look back in their life and say they wish someone would have told them to do it, and I will bet you some of your workers will too despite it being laid out there.
Outside of avoiding public beatings as an incentive to save, people are going to do what they are going to do. Yes, I am generalizing as some do benefit, but not as many that could/should. I certainly have wasted money over the years and not done what I should have. But I did it anyways!


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Of course if you follow the sermon on the mount you do not take heed of the future as you are told it will take care of itself. Further if you expect the world to end before you reach old age then why bother saving? There are so many apocalyptic predictions around today (and for at least the last 60 years and in fact 2000 years, recall that the first christians thought the world woudl end in their life time), that one could conclude that a fatalistic attitude at best is the way to go what will be will be.
With polls showing that 22 percent of americans think the world will end in their lifetime its not surprising at least that those who think so would follow the biblical motto of "eat drink and be merry"

 

[photoguy]

You need to make at least $120K to be affected by that rule. The last thing i'd be is "pissed" if I made $120K/yr.

It's definitely a problem that is good to have.

I shouldn't have any cause to complain as I was well compensated but I know I would be extremely mad if I had my 401k clawed back. I guess it's just bias on my part (tendency to overweight bad things instead of the good).

 

[MRG]

It's definitely a problem that is good to have.

I shouldn't have any cause to complain as I was well compensated but I know I would be extremely mad if I had my 401k clawed back. I guess it's just bias on my part (tendency to overweight bad things instead of the good).

Yea, a good problem to have, and it definitely sucks eggs.

 

[ArkTinkerer]

A misleading title for this article. 26 U.S.C. Sec. 401k is just a section of the tax code providing that certain earned income can be saved tax deferred. It is neither a success nor a failure; it is just the law.

The failure is the wholesale abandonment of defined benefit pensions and shift to defined contribution plans for retirement security, with the concomitant shifting of risk to those who in many cases are ill suited to bear it. The failure is an economy that has given almost every bit of productivity gains over the past 30 years to capital rather than labor, such that employees who are not highly skilled have not seen sufficient income gains to allow them to save for retirement, on a tax-deferred basis or otherwise. And, yes, the failure is a society that values current consumption over virtually everything else.

Not sure of this line of thought. To my way of thinking, the defined benefit is a combination of future burden on the business and a private version of an annuity. Just like many state and local governments, businesses can and did underfund and overpromise their pensions. They then abandoned them by various means including bankruptcy. Those who got defined contributions got the defined contributions even if they died--the funds went to their heirs. Defined benefit, you die, you might get a death benefit but most likely it was like an annuity paying the other participants who out lived you. Doesn't mean one is always a better choice for everyone.

 

[Gumby]

Not sure of this line of thought. To my way of thinking, the defined benefit is a combination of future burden on the business and a private version of an annuity. Just like many state and local governments, businesses can and did underfund and overpromise their pensions. They then abandoned them by various means including bankruptcy. Those who got defined contributions got the defined contributions even if they died--the funds went to their heirs. Defined benefit, you die, you might get a death benefit but most likely it was like an annuity paying the other participants who out lived you. Doesn't mean one is always a better choice for everyone.

I'm sorry I was not clear. I was talking about the investment risk. Most individuals are crappy investors, without the ability or inclination to learn how to manage their defined contribution plans. They choose investments that are ill-suited to their needs, panic and sell when the market turns against them, jump on the bandwagon after the market has surged, and otherwise achieve substandard returns. Their risks are also concentrated - as in, if they lose money right before they personally need it, they are hosed. Traditional pensions, by contrast, are managed by professionals who are less likely to make these mistakes. And the risk of poor performance and timing of withdrawals is spread over the present and future pension recipients as a group, as well as over time.

 

[pb4uski]

Someone starting out in the work force today and making $25K/yr every year until age 67 would only get $1145/mo or $13,740/yr in SS. That's a pretty big cut in pay for someone who already could barely get by let alone save for retirement. A lot of people in that income range work physically demanding jobs and probably can't work until age 67 so their benefit would be even lower.

Where are you getting your data? I recently read a study that for the lowest quintile of Income that SS replaced 70 something percent of gross income for a single and 60 something percent for a couple.

 

[samclem]

But if you gross $25k, presumably you live on $22k or less after taxes and other deductions are taken out and SS will cover a lot of that and you don't need to max out a 401k to make up the gap.

And if you make up to $30K per year (MFJ, $18K if filing single), Uncle Sam will give you a 50% match on your IRA or 401K (via the Savers Credit). The credit is up to $1000. Matching continues, at a reduced rate, up to an AGI of $60K (MFJ or $30K if filing single).

It doesn't sound like much, but just the government match amounts to 5% of the person's earned income. If our $25K earner stays at that pay level for 45 years (to age 65) and then retires, just the government matching contributions (at 5% real growth) will equal $170K (or almost 7 years worth of income). The $2K contributed each year by the worker would be worth another $340K. Altogether he'd have over half a million dollars (those are "then-year" dollars, worth what they were when he was 20). Withdrawing at 4% per year, plus his SS, he'd have considerably higher income in retirement than he ever had while working.

That's with no employer match at all. Done strictly with an IRA, if need be, at $166 per month. Even saving 1/2 that amount (equivalent of working an extra 2.7 hours per week at the federal min wage), plus SS, would be a pretty good retirement for a person accustomed to that income.

 

[meierlde]

Where are you getting your data? I recently read a study that for the lowest quintile of Income that SS replaced 70 something percent of gross income for a single and 60 something percent for a couple.

Making a few assumptions. Assume the career average is 2083/month. Then the Formula does 826*.9 or 743 a month, and 1257 *.32 or 402 for a total of about 1145 per month. (Based upon the 25k income)

 

[aaronc879]

Where are you getting your data? I recently read a study that for the lowest quintile of Income that SS replaced 70 something percent of gross income for a single and 60 something percent for a couple.

I plugged it into a SS calculator. I can't find the exact site I used. I just Googled 'SS calculator' and used one of the ones that came up.

 

[purplesky]

A misleading title for this article. 26 U.S.C. Sec. 401k is just a section of the tax code providing that certain earned income can be saved tax deferred. It is neither a success nor a failure; it is just the law.

The failure is the wholesale abandonment of defined benefit pensions and shift to defined contribution plans for retirement security, with the concomitant shifting of risk to those who in many cases are ill suited to bear it. The failure is an economy that has given almost every bit of productivity gains over the past 30 years to capital rather than labor, such that employees who are not highly skilled have not seen sufficient income gains to allow them to save for retirement, on a tax-deferred basis or otherwise. And, yes, the failure is a society that values current consumption over virtually everything else.

Great post.

 

[bUU]

The failure is the wholesale abandonment of defined benefit pensions and shift to defined contribution plans for retirement security, with the concomitant shifting of risk to those who in many cases are ill suited to bear it. The failure is an economy that has given almost every bit of productivity gains over the past 30 years to capital rather than labor, such that employees who are not highly skilled have not seen sufficient income gains to allow them to save for retirement, on a tax-deferred basis or otherwise. And, yes, the failure is a society that values current consumption over virtually everything else.

That's it in a nutshell.

 

[Midpack]

The failure is the wholesale abandonment of defined benefit pensions and shift to defined contribution plans for retirement security, with the concomitant shifting of risk to those who in many cases are ill suited to bear it. The failure is an economy that has given almost every bit of productivity gains over the past 30 years to capital rather than labor, such that employees who are not highly skilled have not seen sufficient income gains to allow them to save for retirement, on a tax-deferred basis or otherwise. And, yes, the failure is a society that values current consumption over virtually everything else.

Great post.

That's it in a nutshell.

But what drove these "failures?" Ultimately consumers?

 

[marko]

Seems to me that several weeks ago, right here on this forum there was a long discussion about DC fretting about all the trillions of dollars in 401k/IRAs avoiding taxes and calls for caps, means testing etc.

A few weeks later, the same program is a failure with an average of only $18K in holdings? Now it is no longer a program but has become an 'experiment' (per the article title) that failed?

 

[bUU]

But what drove these "failures?" Ultimately consumers, you and I, played a key role. "We" made those "failures" inevitable.

Yes, true. Just like consumers are at fault for the poor service we get from cable companies, and how poorly we're treated by airlines, workers are at fault for the failure of our nation's systems to help people secure their own futures. We let it happen.

 

[Midpack]

Yes, true. Just like consumers are at fault for the poor service we get from cable companies, and how poorly we're treated by airlines, workers are at fault for the failure of our nation's systems to help people secure their own futures. We let it happen.

Might even say we consumers (unwittingly) made the "failures" inevitable.

 

[48Fire]

When I started saving in 401k around 25 years old at 22% (with match), my 40 year old coworker was not contributing at all. He said he could not afford it with three teenage daughters. Then he got laid off. I imagine he is going to work until he is very old. I am currently ER, and often look back on these little episodes in life, grateful I took the path I did.

 

[marko]

At least articles like this take the heat off of those of us who've gained nicely from their 401k.

Instead of being vilified for not paying taxes on my gains; now I can play the part of a poor victim of a failed program!!

 

[Greencheese]

The comments have been rather interesting...

I agree the average person has no clue what they're doing with a 401k but nowadays with the rise of target date funds most people are able to do a set it and forget it approach and do OK at the very least.

 

[Ronstar]

Our 401k plan was fine. Started in 1986, and company gave a generous match. I would max out whenever allowed by the plan. When I became an owner in 1992, I was shocked by the number of employees that didn't take part in the plan or only contributed a few pct. There were several years that I was designated as a highly compensated employee due to my ownership, not my salary. I would normally have to stop contributing at around 90% of the max.

So I would always give my pro-401k spiel to the employees in hopes that the numbers would shift and I would be no longer designated as an HCE. I couldn't get the people in the plan to contribute more, and I had similar luck in recruiting new people to the plan. Some said that they couldn't afford it. Some didn't trust the company management of it, even though the employee controlled the investments. And some didn't want to invest in something pretax that could be taxed at a higher rate later. We eventually went to a safe harbor plan, and I was able to fully contribute. And I don't believe that most of my former coworkers currently contribute more than a few pct of their salary.

The article in the OP doesn't surprise me. People simply would rather spend money now than save for their future. Maybe they believe that SS will be enough.


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[misanman]

The 401K ended up working great for me. It is the cornerstone of my retirement program. Of course, I was in a position to take advantage of it.

 

[ImThinkin2019]

We have always considered 401(K)'s as a wonderful opportunity. They are a major portion of our retirement portfolio. We could shelter 16% of our pay from taxes, and the company would give us another 4%? Fantastic.

For this to work, we needed to understand how important it is to LBYM. Among other things, I give a lot of credit to my mother who told us many times when we were little "if you save your money for a rainy day, then on that rainy day you can go to a movie, or buy a coloring book if you want" .

Have we been the best investors? No, we made some mistakes. But consistently saving and enjoying two bull markets helped us recover from the boo boos. (Of course, let's not forget the big drops either, or the "lost decade" of the early 90's.)

I tried a few times to give retirement saving education classes to coworkers and they had little effect. Now I give positive recognition to those who are "walking the walk". Interestingly, they come from a variety of income levels. From household incomes of $40K to much higher. (The $40K household income individual owns 3 houses, maxes out their 401(k), and is set for early retirement.....)

If we are going to keep the responsibility for saving on the individual, then given human nature I suspect it will be necessary for people to see a bunch of tragic examples to shock them into a change in behavior. The Boomers generation will provide these examples. I suspect the media will display these although they may be cloaked in "the system does not work" and "it's not my fault".

It will then be up to us to be examples of the benefits of LBYM, so people can see the contrast.

I think we will be a stronger society if we do continue to put responsibility on the individual, with some safety net for the truly unlucky. My opinion anyway.

There is always pressure from the group that thinks responsibility should be shifted to "someone else". I think the author comes from this camp.

 

[FUEGO]

Even though 401ks worked fabulously well for me and others that actually save, there's definitely room for improvement.

If there's a place for better regulation and more laws, it would be the 401k plans. Open the TSP up to everyone and all employers. Make it the default option for participant contributions and employer matches with auto-enrollment for all new employees. Make the lifecycle L fund the default option (with the year of the lifecycle fund based on age of the participant). Make the default deduction percentage 6% with +1% per year auto increases.

Then make anyone who wants to deviate from the defaults go through an arduous process. Sign forms, jump through hoops, have a mandatory waiting period, make alarms and flashing lights go off, get psychiatric counseling, etc so that they make an informed decision to totally fcuk over their future self.

 

[Fermion]

Yeah, one thing that occurred to me was that there's no law prohibiting savings outside of 401(k)s! My Dad probably had them only the last 20 years of his working life. Almost exactly half of my investments are after-tax, with the rest being rollovers from 401(k)s of various past employers. If you'd looked at my 401(k) balance just before I left my last employer, I was 61 years old and it was about $30K. Pitiful!

No law but they have started charging your outside investments an extra 3.8% in tax on top of the normal capital gains, interest and dividend taxes.

If you are in a job that starts low and has peak earning years, you may not have much in a 401k but need to save a lot in after tax vehicles. You really have to play the tax game to avoid all of the potential tax traps that a 401k or pension plan just glides past.