The Champions of the 401(k) Lament the Revolution They Started

[Big_Hitter]

The mechanics are simple, the politics are hard. Tell Joe the gumminit is forcing him to do something and watch him holler.

google "Australia superannuation"

they basically outlawed DB plans quite a while ago and force employers to put in something like 10% of pay into a DC plan

 

[nun]

So forcing people to "do the right thing" "for their own good" is where America has end up.

Sigh

Forcing is never the solution, a carrot, or simply inertia, is better than a stick. In the UK retirement saving is not mandatory for the employee, but everyone is automatically entered into either an employer plan or if the employer is small into a Government sponsored DC plan called "NEST".The employee can opt out if they want, but they have to actively choose not to save and to give up the employer match.

So you have a choice, but in the US you choose to save and in the UK you choose NOT to save.

 

[Walt34]

Forcing is never the solution, a carrot, or simply inertia, is better than a stick. In the UK retirement saving is not mandatory for the employee, but everyone is automatically entered into either an employer plan or if the employer is small into a Government sponsored DC plan called "NEST".The employee can opt out if they want, but they have to actively choose not to save and to give up the employer match.

Exactly. I read about this in a couple of financial behavior books. This became clear with the organ donation checkbox on driver's license renewal forms. In states where the default was changed to be an organ donor the donation rates went up a huge amount (50%? I forget.).

So if the employer makes the default to save 10% to a target date fund AND to gradually increase the percentage with each raise until it gets to ~18%, most people will do that. Now, whether they'd have sense enough to leave it alone until retirement is a different question....

 

[meierlde]

Set the default option on 401k to 10% contribution and put it all in a target date fund. Limit loans and withdrawals other than in retirement. Even Joe should be able to handle that, especially if it's a default part of the plan so no additional action is needed.

Note that many companies have moved to opt out for 401ks from opt in, i.e. you are enrolled in the 401k for some percentage unless you take affirmative action to not enroll. This seems a simple solution. Note that a number of companies increase the percentage as raises occur also.

 

[Big_Hitter]

Note that many companies have moved to opt out for 401ks from opt in, i.e. you are enrolled in the 401k for some percentage unless you take affirmative action to not enroll. This seems a simple solution. Note that a number of companies increase the percentage as raises occur also.

yes, and some do this annually so you have to opt out each year

 

[Alan]

Exactly. I read about this in a couple of financial behavior books. This became clear with the organ donation checkbox on driver's license renewal forms. In states where the default was changed to be an organ donor the donation rates went up a huge amount (50%? I forget.).

So if the employer makes the default to save 10% to a target date fund AND to gradually increase the percentage with each raise until it gets to ~18%, most people will do that. Now, whether they'd have sense enough to leave it alone until retirement is a different question....

I listened to a Freakanomics podcast today that talked about this well known behavior pattern, and they did mention that opting out of 401k plans instead of opting in makes a huge difference in the number of folks that stay in 401k plans and get the employer match.

One simple study to demonstrate the effect of outside influence on our decision making was to have subjects spin a wheel of fortune to see what number they get and then ask them to estimate the % of members of the UN that are African countries. The % guess was extremely well correlated to the number they got on the wheel of fortune, if their number had been high then their % of countries guess would also be high, and vice versa.

 

[scrabbler1]

Back in my working days (I worked in the actuarial field, specializing in personal auto), I recall New Jersey changing a default option for one part of the auto insurance policies sold in that state. When Option A was the default option, around 3/4 chose A. But when Option B was changed to the default, around 3/4 chose B. And it made no difference that B cost less (but offered less coverage in some instances) than A.

 

[dtbach]

I have both a military pension and a solid 401K plan. But I would say that I am definitely in the minority. Most of my family has basically nothing. And for sure they are jealous of me and think that I am "superior" to them. I contend that they are the "majority" of Americans and have been left behind. I'm sorry for them, but am not sure what should be done about it.

 

[Hyper]

With my last employer, those co workers that were able to get in right when 401k started (1985ish) did ok as long as they contributed full amount right up until retirement age which many of them have done recently which is 32 ish yrs invested. But just ok! I was 12ish yrs past the start of 401k's and went through more downturns which didn't time out good and I just seemed to keep losing because of the timing but also IMO 12ish yrs after the start of the 401k, I believe the politicians and WS learned how to take full advantage of 401ks and continue to do so. My last employer 401k was a screwed up plan as they elected a few employees from different departments to select the funds we were able to chose. Those funds were ridiculous most times. Also the managing co (prudential) I believe was very misleading. 401k should work in most cases ok if started immediately at a young age and worked up until retirement age. But just ok.

 

[jazz4cash]

Megacorp rolled out 401k in '83. I remember in great detail. Not many signed up. We were lucky they chose Fido and they also had some in house index funds that were cheaper than Vanguard. I dove in and rode out the dips. Most of the plans I've seen that were managed by insurance cos are pricey and limited.

 

[Just_Steve]

I just checked my DB plan web site my DB is funded at 1.1 million. It only shows employer contributions which are $800,000
My contributions were 3% for the first 1/3 of my career 6% for the second third of my career (due to a pension enhancement that dropped full retirement from 30 years age 62 down to 25 years age 55) and 0% for the final third of career. I also contributed to 401k no match and a 457b no match. I get just shy of 50K a year in DB payments and if I die tomorrow my wife will get just shy of 40k a year for life.
Knowing what I know now and if I had to do it all over again, I would go DB every time.

 

[growing_older]

Knowing what I know now and if I had to do it all over again, I would go DB every time.

Easy to say at the end of your career, when you are secure in knowing you have earned the DB pension and it is funded and all the vesting is satisfied. I had several DB pensions during my career, but they were all discontinued or the company went out of business before the vesting formulas awarded me much of anything. I'm much better off with a DC scheme where that money is mine to take with me.

 

[hankster]

Exactly. I read about this in a couple of financial behavior books. This became clear with the organ donation checkbox on driver's license renewal forms. In states where the default was changed to be an organ donor the donation rates went up a huge amount (50%? I forget.).

So if the employer makes the default to save 10% to a target date fund AND to gradually increase the percentage with each raise until it gets to ~18%, most people will do that. Now, whether they'd have sense enough to leave it alone until retirement is a different question....

That's a huge issue. Between 401k loans, panic selling, market timing attempts and various other blunders, it's not surprising to see even some long term participants with shockingly low balances

 

[GTFan]

The other issue is all the 401ks someone can accumulate when job-hopping. It's a real problem and often that money is forgotten.

 

[athena53]

The other issue is all the 401ks someone can accumulate when job-hopping. It's a real problem and often that money is forgotten.

Or people liquidate them even though they get hit with ugly taxes. Every one of mine got rolled over into a self-directed IRA at a brokerage.