More people forced into ER and early social security

[dex]

Why is the 401(k) a con?

Possibly because companies moved away from defined pensions to 401k w/matching $ from the company. Now companies are dropping the matching $ or reducing them.

Pensions weren't/aren't too good also since they rely upon the company being in business for many decades. If you work for a company for 40 years then that company needs to be in business for another 25-30 years to cover your life span. That could be a con also.

But, pensions were also a con. Usually, a person had to work for 5-10 years to be vested and then work at the same company for decades to get a a worth while amount out of it. So if you changed companies before vesting or didn't stay long enough you didn't get much.

I also think the pensions discussion is a red herring. Unions, government and large corporations had them but a large percentage of workers did not.

 

[FIREd]

I guess I missed the part where employers have a moral obligation to provide for their employees' retirement either via defined benefit plans or defined contribution plan matching.

 

[nun]

The 401K itself isn't a con. The "con" was the bait and switch played on the (mostly non-union, private sector) workers who were told it was going to be a great way to *supplement* pension and SS income.

Yes that's a better way to state it. The 401k costs the company far less than a DB pension plan and those savings were not returned to the employees as increased wages, they went to shareholders. It was initially introduced as a supplement to pensions and then replaced them and sold on it's portability and potential returns, remember when projections used 8 and even 10% annual returns.

I'm all for the voluntary nature of the 401k, and being single and well paid it has worked for me, but the removal of the non-contributory pension plan was an effective pay cut for employees and has lead to the average low level of retirement savings for middle class families who have costs like education to also support. Very few of my friends with children max out their 401ks and some say they just can't afford it. If they had a DB as part of their employment contract at least they'd have something to look forward to other than just SS.

The terrible current state of retirement preparation in the US shows just what a disaster the 401k etc has been for most people.

 

[nun]

I guess I missed the part where employers have a moral obligation to provide for their employees' retirement either via defined benefit plans or defined contribution plan matching.

Not a moral obligation, it's contractual

 

[MichaelB]

I can understand the transition from DB to DC plans being unfair to middle aged and older employees. Making individuals responsible for their own retirement planning and funding without them having the financial knowledge or tools is also a flaw and weakness.

There might be an element of business all too happy to get rid of pensions for non-executive employees – but alongside is perhaps some excess passivity on the part of employees that haven’t planned their retirement finances.

I think the 401(k), along with Roth and IRA (and SEPP, and Keogh, etc) , are great options and have really pushed my children to take maximum advantage. Maybe we need just 2 options – before and after tax contributions.

Dex – agree with your view on pension hypocrisy.

 

[FIREd]

Not a moral obligation, it's contractual

Personally, my wife and I have never worked for an employer that contractually owed us any type of retirement benefit. The 401K match, if any, was always treated as a bonus. The employer reserved the right to stop paying it at any time and for any reason.

 

[ziggy29]

Not a moral obligation, it's contractual

Except where collective bargaining agreements mandate it, most DB pension plans I've seen (as well as 401K matches) were stated up front as being subject to termination by employers at any time and for any reason.

 

[nun]

Except where collective bargaining agreements mandate it, most DB pension plans I've seen (as well as 401K matches) were stated up front as being subject to termination by employers at any time and for any reason.

I agree, with the reduction in collective bargaining agreements the majority of working Americans have little employment protections. I understand the need to have flexibility in employment and be able to hire and fire given economic circumstances, but I just feel that it's been one way traffic for the last 40 years and the pendulum has swung too far away from the employee. The current terrible state of retirement savings surely shows that the current environment isn't working. To say it's the fault of people for not planning isn't addressing the problem. Maybe the having to opt out of contributions plan will go some way to solve things.

The real issue is that the community on this forum is so far from the norm. Most people don't think like us or have our resources - for whatever reason so the options for retirement funding aren't working for them. Unless we want to retire into a dystopian future we should all be concerned with getting a better solution.

 

[ziggy29]

... I just feel that it's been one way traffic for the last 40 years and the pendulum has swung too far away from the employee.

Yes it has, at least in the private sector -- but in the era of cheap global competition, what is the answer?

 

[dex]

Yes it has, at least in the private sector -- but in the era of cheap global competition, what is the answer?

Inquiring minds want to know.

 

[SunsetSail]

...The real issue is that the community on this forum is so far from the norm. Most people don't think like us or have our resources - for whatever reason so the options for retirement funding aren't working for them. Unless we want to retire into a dystopian future we should all be concerned with getting a better solution.

I agree and this is a good point. I think the ultimate solution is to educate from a very young age - people need to learn to take care of themselves financially so they don't effectively become wards of the state. This wouldn't be contradictory to teaching charity and generosity in fact it could dovetail into teaching that the first step in generosity is ensuring that you don't ever become a financial burden on anyone else. I don't know a solution for those who have most of their working years behind them other than to keep working or reduce their lifestyle to a level on par with SS. I do think the decision (and burden to find a solution for themselves) should always rest with the individual and not the government, employer or anyone else.

 

[FIREd]

I agree, with the reduction in collective bargaining agreements the majority of working Americans have little employment protections. I understand the need to have flexibility in employment and be able to hire and fire given economic circumstances, but I just feel that it's been one way traffic for the last 40 years and the pendulum has swung too far away from the employee. The current terrible state of retirement savings surely shows that the current environment isn't working. To say it's the fault of people for not planning isn't addressing the problem. Maybe the having to opt out of contributions plan will go some way to solve things.

The real issue is that the community on this forum is so far from the norm. Most people don't think like us or have our resources - for whatever reason so the options for retirement funding aren't working for them. Unless we want to retire into a dystopian future we should all be concerned with getting a better solution.

I think the "golden age" for retirement is probably over. Contextually, it amounted for less than 1% of all human recorded history. It was probably a fluke and it certainly proved to be unsustainable. We might be simply reverting back to the mean. People will have to work longer and/or provide for their own retirement. It sucks, I know.

 

[Andre1969]

This sounds like a good thing to me. Reduce SS age (say 55) and benefits
and move in with the children and look after the grand kids. Denser living arrangements would make better use of resources and we'd have more close knit families.....hang on I just described the Waltons.

"Daddy, when I grow up, can I marry you?"

"Sorry Elizabeth, got two sisters ahead of you, and that Mary-Ellen's lookin mighty fine!"

 

[ziggy29]

I think the "golden age" for retirement is probably over. Contextually, it amounted for less than 1% of all human recorded history. It was probably a fluke and it certainly proved to be unsustainable. We might be simply reverting back to the mean. People will have to work longer and/or provide for their own retirement. It sucks, I know.

I think it's pretty clear that retirement is being redefined in a way that will make it less of a middle class expectation. We happened to catch economic lightning in a bottle in the 25 years after WW2 and started basing future assumption on that abnormally prosperous period.

In the future if the middle class wants a long, comfortable retirement they will have to divert a LOT of their income starting at a very early age. That means not all will achieve it, particularly if it remains voluntary.

 

[rescueme]

In the future if the middle class wants a long, comfortable retirement they will have to divert a LOT of their income starting at a very early age. That means not all will achieve it, particularly if it remains voluntary.

Exactly. The bi*ch I have, growing up in the time I did was the changing of the rules in mid-stream. I did not have the defined benefit (pension) plan of my parents/grandparents working in the private sector, nor the structure that my children would have in later years.

Heck, I was with two separate companies and "lost out" on two separate plans due to "old rules". The first, because I did not stay in the j*b for ten years (I left at eight, for a better j*b). The second started out with a good pension plan, but was eliminated when the 401(k) came in.

Including IRA's (which also were not available till our mid-30's, just before our respective 401(k)'s), we've gone through tax-deductable, taxable, and Roth IRA's, due to changes along the way.

Including the various "standards", along with the education required for each product along the way, no wonder that those in their 50/60's are going to have a difficult time. If you're older, you probably have a pension; if you're younger, you probably have a 401(k) and an IRA from the first year you start work. It's the folks in the middle that are getting squeezed.

We're lucky. My DW/me did take advantage of what was available through the years, through all the changes. But we also understand we're not typical of most folks our age.

 

[ERD50]

We happened to catch economic lightning in a bottle in the 25 years after WW2 and started basing future assumption on that abnormally prosperous period.

Yes, and considering that many of those people who enjoyed that prosperity also suffered the Depression and rationing and other sacrifices of WWII, I'd say we were due for an 'abnormally prosperous period'.

I agree with you, with global competition and other factors, just treading water is about all one can reasonably expect for the foreseeable future (how long is that anyway?).

-ERD50

 

[harley]

I think the "golden age" for retirement is probably over. Contextually, it amounted for less than 1% of all human recorded history. It was probably a fluke and it certainly proved to be unsustainable. We might be simply reverting back to the mean. People will have to work longer and/or provide for their own retirement. It sucks, I know.

I suspect that if the last 50-60 years was less than 1% of recorded history and we're reverting to the mean, you youngsters who didn't squeeze in under the gate better work on your hunting and gathering skills and plan on dying of old age in a few weeks.

 

[ERD50]

the 401k is the biggest ever con played on the American workforce.

I completely disagree from my perspective, .... I understood the implications of not having a pension .... The 401k (along with regular taxable savings) provides me with the flexibility to FIRE earlier and with less restrictions.

I think the ultimate solution is to educate from a very young age - people need to learn to take care of themselves financially so they don't effectively become wards of the state.

Very well stated SunsetSail. Good to see that you 'get it'. All of us should do what we can to make sure our kids, or other young people in our life 'get it', too. Personally, I'd like to see some sort of annual or quarterly training class that all employees would need to take, so that this sinks in.

I'd feel a lot better if I 'owned' the benefits I was promised. Pensions, retiree health care, any future benefit that isn't a fully funded contractual obligation is a bit of a scam. Companies used these benefits to attract employees, yet, they were 'promises' and we could not know which companies would be able to keep their promises or not. A pay-as-you-go system is much better, IMO.

401k a 'con'? Gee, my 'con' is worth about 4x the value of my non-COLA'd pension. Which is the 'con'?

-ERD50

 

[timwalsh300]

I'd feel a lot better if I 'owned' the benefits I was promised. Pensions, retiree health care, any future benefit that isn't a fully funded contractual obligation is a bit of a scam. Companies used these benefits to attract employees, yet, they were 'promises' and we could not know which companies would be able to keep their promises or not.

Agreed.

As a military service member I am promised a COLA'd pension, worth maybe $45k/year in present dollars, starting in my early 40's if I stick around for 20 years. A lot of people seem to think that such a generous DB plan is the best deal in town. And if all works out as promised, then they are probably correct.

But I'm young and a lot can change over the next 60 years. Rather than vague promises of future payments, I would much prefer to see this money in my paycheck now so that I could save/invest/diversify it myself.

Tim

 

[nun]

Agreed.

Rather than vague promises of future payments, I would much prefer to see this money in my paycheck now so that I could save/invest/diversify it myself.

Tim

Me too, the thing is that you don't see that money. The "401k con" was the removal of DB plans without replacing their value with increased employee wages that sensible people would then save for retirement. The replacement of DB plans with 401ks that are majority self funded resulted in an effective pay cut. The poor management, corruption or insolvency of DB plans is just further evidence of the contempt in which the US middle class is held by the occupants of the boardroom and a poor excuse for the 401k.

I don't know what fraction of the retirement savings fiasco is because of poor financial management and what part due to the decline in real wages over the past 40 years, but both are surely part of the problem. However, I have friends with children who are in their 40s are sensible, hardworking, have college degrees and work in professional jobs and I know that they are only contributing to their 401ks up to the company match and don't have large 401k balances. They also have to save for college, many have seen their health premiums increase while their wages stagnate and most are frightened about their jobs. Whenever, we talk about finances I'm embarrassed that I'm so close to ER. I'm frugal and I have a good job, but the major reason I can contemplate retiring is because I'm single and have no children and live pretty much as I did in college 30 years ago; I have a line item in my budget for beer. The majority of Americans can't live like that because they have greater responsibilities and those are the ones that need a realizable path to retirement and one just doesn't exist anymore.

 

[chinaco]

I agree with a lot of your post, but don't put all the blame on people for the impending disaster. Sure, people should spend less, but the destruction of the defined benefit pension plan is a major component of the problem and that's down to employers wanting to boost profits and take compensation away form employees to give to shareholders. It worked for a while, but was as shortsighted as spending recklessly.

Not assigning any blame. Just stating what has been commented on in the popular press and in many posts on this forum... "Many Americans have not prepared for retirement".

I agree that the loss of defined benefit plans has left some to fend for themselves. But nevertheless, people have to deal with reality.

 

[haha]

Whether they realized it along the way or not... these people over spent in their younger years (assuming the lack of a job is not temporary).


The tough reality is that the day of reckoning has come for many boomer retirees... as it will for many more in the next 20 years. Americans have been over spending in their younger years (living above their long-term means). Their future standard of living will be lower. To try to keep it near the previous level, they can continue working as long as they can... but they are much less likely to get a job with the same replacement wage. Many will need to stop work because of health problems as they age.

The moral of this story is save early and live within one's long-term means. Better yet, plan for a potential unexpected events such as forced early job loss which translates to a plan of LBYM (at a young age) to mitigate the risk. If things workout in their favor... they may be able to FIRE.


The sad fact is that many people who wind up in really bad circumstances got there because of no plan what so ever. They just kept spending! Those who planned and saved may not be where they had hoped... but are likely in a much better position.

At least many boomers have pensions... it will be much worse for the next generation unless they get their financial life in order.

This is an incredibly poorly informed and complacent post. I am really surprised at your lack of understanding.

Many of these people never had any money to save- if there ever was anything left after rent and food and a little beer to make Dad's life endurable, it went to getting some child's rotting teeth fixed.

I realize that the "disadvantaged" groups with political power, or the power to scare municipal governements with threats of violence will do better, but there will alwys be people who really cannot make it in the modern world, which demands intellectual and behavioral traits and skills that are way beyond these groups. Some from thse groups will always make it in the world, but let us not forget the bell curve; it is real.

I am not saying that we should necessarily try to do anything about this, but why heap scorn on people who are already downtrodden and hapless?

Ha

 

[NW-Bound]

"Many Americans have not prepared for retirement"...

My two younger brothers have good income, yet I doubt that they save any money other than maxing out their 401k. They don't want to crimp their lifestyle by giving up fancy home improvements and the BMW SUVs. But it's their choice. I don't ask.

And I am sure that many workers do not or cannot even max out the 401k contributions.

 

[mf15]

Here is a little story. This is back in 1974 or so, my wife worked for Philco Ford/Aeroneutronic Ford, she worked in HR and gave people their exit interviews and whatever, since they were laying off. Guess who got layed off at 9 years and 11 months, when you needed 10 years to vest in the pension. Her bosses told her no problem will fix it. Well 36 years later she still is a little POed. Funny thing is we still buy Fords.
Old Mike

 

[ERD50]

The "401k con" was the removal of DB plans without replacing their value with increased employee wages that sensible people would then save for retirement.

It's not a 'con'. It may have been a reduction in the total compensation package that people received, but they were free to look for a better one if they could find it.

Companies didn't 'need' to offer pensions - they did it to compete for employees. And they could compete (and did) with 401K matching. If they could have just cut compensation, they would have - they didn't need to wait for any 401K rules.

I believe that what you are seeing is the effect of global competition, the 'flat world'. That may be a harsh reality for many of us, but it isn't a 'con'.

The majority of Americans can't live like that because they have greater responsibilities and those are the ones that need a realizable path to retirement and one just doesn't exist anymore.

Probably true for too many, but it would carry more weight if we didn't see record sales and long lines for non-necessities like iPads and iPhones in the midst of a deep recession. Are the majority of those people funding their retirement before buying toys? I doubt it.

-ERD50