The 401(k)- a failure?

[photoguy]

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).

Thanks for posting this.

I'd never heard of the savers credit before (and wouldn't have been eligible) but we're fired now and DW has some temporary income (training the replacement of her replacement) so we might be able to take advantage of this.

 

[growing_older]

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.

Wow, I hated those presentations. I eagerly looked forward to the first few, because I thought a chance to put away much more in a 401k than I could in an IRA was a great opportunity, but what I found was high fees, poor investment choices and a pushy salesman who knew a lot less about investments than I did was trying to get people into high fee funds. He also had an "advising" business, so seemed to want to dwell on how complicated everything was unless you had his help.

Don't get me wrong, 401k has been very good for me, despite many years with company rules that limited contributions by percentage to well below the statutory maximum and a few as HCE that were even more restrictive. I consistently rolled over high fee plans when I changed jobs and made the best of the poor investment choices available in combination with better choices in my rollover IRA. Anyone could have done as well, but relatively few of my coworkers did.

When I was a participant in DB plans, I did much worse. Vesting rules severely limited any benefit I was accruing and even when I did qualify for a benefit, the plan was revised or abandoned and paid out pennies on the dollar with creative accounting. Had one of these been my primary retirement vehicle, I would be unable to retire ever, much less be contemplating ER. Defined Contribution plans (like 401k) have been hugely successful for me despite their problems, and a big part of that is that I actually own the account and somewhat can control it. It didn't require any brilliant investing moves on my part, just putting in a reasonable amount and choosing a consistent investment in index funds with low fees and letting them alone despite market ups and downs.

The 401k I had were all deeply flawed. But the higher limits on contributions than IRA limits were a huge plus. Makes me very jealous of small business owners who control their own plans and can make profit sharing matches up to much higher limits. That, plus the ability to move to an IRA when I changed employers, were all I needed to make a relative success of the program - always assuming I actually did make contributions. In the 401k meetings I did attend, it was astounding how many people did not contribute, or who contributed only 3% to get the company match, and had no idea it would be insufficient.

 

[Andre1969]

I just added up my 401k/Rollover IRAs and came up with, ironically, $401K!

I guess that's pretty good, considering I didn't start investing in a 401k until the last two weeks of 1997, and wasn't able to start hitting the federal limit until 2005.

 

[MaddMaxx]

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.

pensions were never sustainable with people living longer, nor do I want to trust a company to fully fund my retirement 40 years after I start working for them. I want complete control of my retirement from how the money is invested and when I collect it. A 401k gives me that. I am glad pensions are disappearing. People just need to adapt and learn to save, like I did as well as most of the people on this forum.

 

[aaronc879]

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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My former company started a policy where they automatically signed up new hires for a 3% contribution. You had to go to HR and request it to be stopped if you didn't want to contribute. Almost everyone in the company contributed at least 3%. Maybe that's the solution? If they never see that money then they don't miss it.

 

[Bestwifeever]

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.

These are two really important points, and the second one, about individual vs group risk, is one I forget about. It is as if we all self-insured our homes using only our premiums vs buying home owner policies.

Re the first point in the post about most people being crappy investors: In a post on another thread, Alan mentioned his financially savvy BIL in the UK had been able to opt out of the national retirement plan and self manage his retirement funds (paraphrasing here), an option no longer offered, and he told Alan his money would have done better had he left it in the system.

 

[growing_older]

I am astounded at how many people say they cannot afford to save. At almost every income level, there are people at lower income levels who are making things work. At the start of my career, I had little money and very little income and I vividly remember being able to scrape by. I would prefer not to live like that again, but I could if I had to. It means at every income level I have been fortunate enough to enjoy, I know I was previously able to live on less than that, so I do and save the difference. I don't have to live like a pauper always, just live like I used to before my last raise.

For the most part, coworkers who describe themselves as unable to save have been in similar situations, but don't seem to make the connection that living like they used to on a lower income is possible - and they could save the difference. They also seem to not make the connection that unless they save a significant amount, they will not have a significant amount saved. Maybe it's just procrastination augmented by fear of making a financial mistake. I'm good at procrastinating everything else in my life, but I know I cannot procrastinate this, well not too much anyway. A bit saved now is worth a lot more later.

I think the majority of statistics purporting to show the 401k is a failure are poorly designed and deliberately distort the situation to fit the thesis. But I cannot deny that lots of people seem unable or unwilling to use the excellent tools that a 401k (even flawed) provide in order to provide for themselves. This isn't necessarily a problem with 401k and perhaps any savings vehicle would be similarly blamed. If you fixed all my complaints with 401k (high fees, low limits, limited choices, bad advice) it would probably do nothing to cure the problem of people just not investing enough. That's an issue that goes beyond 401k.

 

[Ronstar]

My former company started a policy where they automatically signed up new hires for a 3% contribution. You had to go to HR and request it to be stopped if you didn't want to contribute. Almost everyone in the company contributed at least 3%. Maybe that's the solution? If they never see that money then they don't miss it.

That could be the solution. I believe our company now contributes 3% for all employees as part of the new safe harbor plan that we switched to. Hopefully that will get people to start saving for retirement.

Maybe 401k laws should be changed to require that all employees of a company having a 401k get the match, not just those that contribute. That would lessen the "failures" that the article refers to.


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[bUU]

I am astounded at how many people say they cannot afford to save. At almost every income level, there are people at lower income levels who are making things work.

Anecdotes are easy, but I don't think that that is as true today as it was years ago.

A UC Berkeley study showed that there is a high correlation between wage rate and savings rate, so it doesn't seem likely that people, in general, have frivolous reasons for failing to save, but rather it seems that if people earned more income then they would save more. That sound like a problem with wages, rather than a problem with saving.

I also think that geography has a lot to do with it. Poor people generally need to live where family and services are, and for many that means a generally high cost area to live. The census revealed that there are almost 1.7 million poor people in NYC. (Putting aside that question of how would the costs of such a thing be paid...) Moving them all to a place where their expenses would match their wages wouldn't work because there aren't enough jobs for 1.7 million poor people in low COL places and the jobs in NYC aren't accessible from low COL places. So the disparity between wages and costs also seems to be a problem, rather than it being a problem with saving.

I think the majority of statistics purporting to show the 401k is a failure are poorly designed and deliberately distort the situation to fit the thesis.

Doubtful. I think rather that they are including in the statistics a large number of people who don't fit the model of those for whom 401(k)s serve well.

 

[athena53]

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.

IRAs/401(k)s have their own tax pitfalls. At one point I had Berkshire-Hathaway in the IRA because that was the only place I had the $$ to buy it. I realized that whenever I sold it and withdrew the proceeds it would all be treated as ordinary income even though it had huge long-term capital gains imbedded in the value. I gradually bought BRK.B with after-tax savings as I accumulated more $$ and sold the BRK.B in the IRA and bought investments more likely to generate short-term gains. Then, of course, taxable withdrawals are added to your Adjusted Gross Income, which can bump up your Medicare B premiums and reduce your deductions for items which have to exceed X% of your AGI. More hidden taxes. Ah, well, that's how my brother the hotshot tax accountant can afford 3 houses.

Another word on DB pensions: yeah, they're nice, but as others have noted, they're only REALLY nice if you stay with one company for a long time. I have one for $12K/year that will start in 3 years when I turn 65. It was from a company where I worked from 1985-1995, at which point I was downsized in a wave that preceded an IPO. The other started at age 60 (no choice) for $10K/year from a company where I worked 5 years before it was acquired and the plan was terminated. I can't complain about a future steady stream of $22K/year but that's about 10% of what I was making at my last job. Too much happens in corporate America to assume you can stay with one company for most of your career.

So far I haven't heard another reasons 401(k)s "fail": people liquidate them when they leave jobs. At one company where those of us not covered by the pension plan got an extra 6% of salary put into the plan every year in March (in addition to company match on the 401(k)), I had a coworker who would immediately withdraw it and spend it. Sometimes you can't fix stupid.

 

[Dash man]

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.

Sounds like you don't think the individual bears any of the responsibility.

 

[Big_Hitter]

pensions were never sustainable with people living longer

sure they are - you just have to fund them properly

 

[MaddMaxx]

sure they are - you just have to fund them properly

and exactly how are companies supposed to do that during recessions when they have to choose between funding a pension or keeping the company profitable? or is that not the workers concern?

The biggest benefit of the 401k is that the company matches my contribution bi-weekly, I don't have to worry about the condition of the company 20 or 30 years later when I am ready to live off of those funds, The money is already in my account. If the company struggles while I am working and they need to cut back or off the 401k matching, I can either choose to stay with that company until conditions are better, or go somewhere else where I can then continue to get 401k matching...the important thing is that I am in control of my retirement funding.

 

[Big_Hitter]

and exactly how are companies supposed to do that during recessions when they have to choose between funding a pension or keeping the company profitable? or is that not the workers concern?

if the company can't afford to make the contribution there are these things called minimum funding waivers


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

 

[Big_Hitter]

I don't have to worry about the condition of the company 20 or 30 years later when I am ready to live off of those funds,

there is this thing called PBGC

 

[unno2002]

[FONT=&quot]If the money taken under the Social Security (both employee & employer “contributions”) went into the 401k, it would make a significant difference. I’ve ran spreadsheets for myself and the wife, and we would have been MUCH better off with the money in a 401k, than our promised SS benefits…[/FONT]

 

[Big_Hitter]

[FONT=&quot]If the money taken under the Social Security (both employee & employer “contributions”) went into the 401k, it would make a significant difference. I’ve ran spreadsheets for myself and the wife, and we would have been MUCH better off with the money in a 401k, than our promised SS benefits…[/FONT]

no doubt that we aren't getting the return on contributions that our parents did, that's why it's called a "social" insurance program

 

[MaddMaxx]

if the company can't afford to make the contribution there are these things called minimum funding waivers


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

again, your putting your hopes on someone else providing money to you at some future decade for retirement...a process that is failing all over this country.

While DB plans do provide more bang for the buck for the retiree, I cant see how you say they are more efficient to a company then DC plans, I don't hear of 401k plans failing and even if they did, you have the choice to leave that company and resume saving in a 401k somewhere else. Whats not to like about that?

If PBGC is so great, why is it that pensioners are having to settle for smaller pensions then were promised?

 

[Midpack]

[FONT=&quot]If the money taken under the Social Security (both employee & employer “contributions”) went into the 401k, it would make a significant difference. I’ve ran spreadsheets for myself and the wife, and we would have been MUCH better off with the money in a 401k, than our promised SS benefits…[/FONT]

Except comparing a paygo system (Soc Sec) with the associated demographics to an individual investment is irrelevant. And previous generations were (much) better off with Soc Sec, they spent your contributions as they came in. If you want to switch now, make sure you review the math first.

 

[Big_Hitter]

properly funded db plans aren't failing, they are thriving and a sign of a flourishing society - I think both DB and DC (or a hybrid) are necessary to ensure adequate retirement security for the US as a whole


if you can't do a search yourself i'll see what I can dig up for you on the efficiency issue; it's factual and I don't argue about facts - there is plenty of DB propaganda out there


what pensioners? the PBGC does have a limit guarantee but it's pretty high at SSNRA

 

[MaddMaxx]

properly funded db plans aren't failing, they are thriving and a sign of a flourishing society


if you can't do a search yourself i'll see what I can dig up for you on the efficiency issue; it's factual and I don't argue about facts


what pensioners? the PBGC does have a limit guarantee but it's pretty high at SSNRA

YRWC - Yellow Trucking had to negotiate with the Union to try and keep the doors open, Union workers had to accept less of a pension. How about Detroit city workers? I believe they also had to accept a pension cut.

KPERS (Kansas Pension) has just above 70% funding, is expected to be in real trouble in the coming years. Chicago city employees? Same issue.

 

[Big_Hitter]

PBGC doesn't guarantee public pension plans

 

[purplesky]

Sounds like you don't think the individual bears any of the responsibility.

Thats the point. Shifting the complete responsibility of retirement saving on middle and low income workers during a 30 year flat wage economy has created a retirement disaster.

The 401k was created for high income executives to defer paying taxes.

The movers and shakers knew exactly what they were doing as they eliminated pensions and shifted retirement saving responsibility on their underpaid employees.

So now we the taxpayer will subsidize many of corporate Americas employees while they are receiving a paycheck and also all the way to their grave.

And just think of all that capitol that is parked offshore.

 

[bUU]

Thats the point. Shifting the complete responsibility of retirement saving on middle and low income workers during a 30 year flat wage economy has created a retirement disaster.

[Emphasis added.]

Precisely. The switch from one extreme (which really wasn't the way things were, given that many people were not covered by DB plans) to the other extreme (which really isn't the way things are ... yet, given that some people can still live on Social Security in some places) is what's most concerning. What's best would be something that shares the responsibility - a system within which everyone can reasonably be expected to have the opportunity to gain and hold a full time job for which they can earn enough income and/or DB benefits such that they can pay their own way and secure their own future. Somewhere between the elimination (and original scarcity) of pensions, and the comparison between wage rates and corresponding costs of living, the math was ignored. The way things are now, and the way things are going, things simply don't add up. The data I mentioned earlier in the thread shows that when people earn enough they do save for the future.

 

[Dash man]

Thats the point. Shifting the complete responsibility of retirement saving on middle and low income workers during a 30 year flat wage economy has created a retirement disaster.



The 401k was created for high income executives to defer paying taxes.



The movers and shakers knew exactly what they were doing as they eliminated pensions and shifted retirement saving responsibility on their underpaid employees.



So now we the taxpayer will subsidize many of corporate Americas employees while they are receiving a paycheck and also all the way to their grave.



And just think of all that capitol that is parked offshore.

Pensions were never a benefit to more than about 40% of employees, so there is a big misconception that there was a major shift as you say. Those that did have pensions often risked losing them if they didn't complete 30 years of service, but changes in laws have changed that. In the past workers often did work until they dropped or their families had to care for them. The 401k changed things by allowing workers to save in tax deferred accounts for their retirements, but as they say, you can lead a horse to water but you can't make them drink. The problem is people fail to save, nothing more. They choose to spend on immediate gratification rather than for their future. Employers pay market wages to employees and employees are free to look elsewhere for work or to upgrade their skills (as I did) to earn more. Those who wait for others to send money their way will likely be waiting a long time.
As far as the "Capitol" you speak of, it's still in Washington DC. If you mean the cash companies hold abroad, a change in the tax laws would likely be an incentive to bring that into the U.S.