Time Mag: Why its time to retire the 401 (K)

[kyounge1956]

OK.... this is an interesting quote

"There are people in the Obama Administration who are supportive of some kind of guaranteed system," says Dean Baker of the Center for Economic and Policy Research. "People should not have to shoulder the risk of a bad turn in the market."

(I added bold)....

So my question would be... who SHOULD sholder the risk of a bad turn in the market? And also, who should benefit from an unexpected good turn in the market?

You're right.

People don't have to shoulder the risk of a market downturn if they don't want to. They have the option of saving via safer vehicles such as CD's or a "Worry-fee Investing" approach. IIRC there are some members of this board who have taken those or similar routes. You might have to start earlier, save more and/or work longer, but you won't get bitten by a bear market.

 

[Maurice]

OK.... this is an interesting quote

..."People should not have to shoulder the risk of a bad turn in the market."

So my question would be... who SHOULD sholder the risk of a bad turn in the market??

Not people, apparently. Maybe animals? Plants?

 

[ziggy29]

Excellent point, not thought about that. First thing I'll do when I RE is to roll the 401(k) into an IRA and I expect many "with it" folks do exactly this. May well be a good reason quoted average balances always seem incredibly low.

Agreed. Another point is that the 401K balances of people with good pensions are mixed with the ones who don't.

A low 401K balance is a retirement disaster for people without a pension, whereas a 401K or 403B plan may be an afterthought to someone who has a solid (and preferably COLA'd) pension waiting for them. So it's possible that the 401K balances of future pensioners are dragging down the average and making things look worse than they are.

 

[FinanceDude]

clifp, great letter, but I would like to point out that while there is "some" transparency in 401Ks, there are a LOT of fees and expenses on those plans. FINRA and others are looking at this, but the insurance lobby is pretty strong. The average 401K participant in a plan from Principal or hartford are paying about 2.5-3% a year, and folks never talk about that because noone knows about it, not even the PLAN SPONSORS.

I think a guy off the street has more financial literacy than 99% of the so-called "financial reporters"...............

 

[Bimmerbill]

I see this more and more. "People are dumb, so the gov't needs to step in and save them from themselves."

 

[samclem]

I see this more and more. "People are dumb, so the gov't needs to step in and save them from themselves."

True. And when government steps in to save them with money taken from us, then the dynamic changes and we (rationally) favor laws that restrict everyone's right to do the costly/"dumb"/unfavorable things in the first place. It's a self-perpetuating cycle of liberty reduction.

Seat belts, motorcycle helmets, retirement savings, health insurance . . .I think personal fitness/wellness is next.

 

[nun]

I have nothing against the defined contribution plan and like it's portability and the control it gives me. But their introduction at the expense of defined benefit programs was an effective pay cut for many people. The employer match in no way replaced the value of the defined benefit plan and that difference didn't appear in the employee's pay packet.

A non-contributory 401k plan or an equivalent increase in salary would have been fair. With wage stagnation, the reduction or elimination in 401k matches from employers and rising health insurance wage disparity is becoming unsustainable.

 

[Independent]

The article (editorial) says that we need a privately-run plan that allows people to pay in a fixed percent of their salaries and get back a guaranteed monthly check.

That's easy. Any 401k plan can offer a TIPS fund. Any retiree can roll the assets at retirement into an IRA that buys a COLA'd life annuity.

The only problem with that plan is that people want a higher yield than approximately CPI+2.5%. But that's all the market yield you can get on a guaranteed investment. People want the yields from high-risk investments, but they want "somebody else" to bear the risk.

Most people on this board have figured out that you've either got to give up the yield or take the risk. Too many Americans haven't. So TIME can sell magazines by complaining about the real world.

 

[nun]

Most people on this board have figured out that you've either got to give up the yield or take the risk. Too many Americans haven't.

America, and the rest of the first world to a lesser extent, just consumes too much. We've been living on credit and off the backs of developing nations for too long. It worries me when I see countries like China, India and Brazil starting to follow the same pattern. Everyone just needs to save more and expect and spend less. Thrift is a guaranteed way to grow your money and with a lot less risk than many investments.

 

[ziggy29]

That's easy. Any 401k plan can offer a TIPS fund. Any retiree can roll the assets at retirement into an IRA that buys a COLA'd life annuity. .

A TIPS *fund* provides no such guarantee of principal preservation plus a certain real return. Only individual TIPS held to maturity do that, and the option of holding individual TIPS is an option for very few 401K plan participants (and generally only those who have a brokerage option instead of being limited to a list of included funds).

 

[Hamlet]

I also wonder if the quoted balances are per account or a total for a particular person. If someone has changed jobs several times and has 4 accounts with balances of about 50k each, does that get recorded as a 200k balance or 4 50k balances?

If they aren't correcting for that, their balance info is pretty useless.

Excellent point, not thought about that. First thing I'll do when I RE is to roll the 401(k) into an IRA and I expect many "with it" folks do exactly this. May well be a good reason quoted average balances always seem incredibly low.

 

[Independent]

A TIPS *fund* provides no such guarantee of principal preservation plus a certain real return. Only individual TIPS held to maturity do that, and the option of holding individual TIPS is an option for very few 401K plan participants (and generally only those who have a brokerage option instead of being limited to a list of included funds).

I understand that the fund doesn't gurantee market values. However, retirement savings might have 35 years from the time you buy till the time you sell. Over that time period, I'm assuming that the swings in market values aren't large enough to matter.

The last 3 years have seen quite a bit of TIPS fluctuations, but the highest and lowest prices of the Vanguard fund have been about 7% above or below a trend line. I'm figuring that's a pretty small variation if it's the end of a 35 year holding period.

Maybe more important, the price of a COLA'd SPIA is likely to reflect the current yield on TIPS. So what you give up to market value when you sell your fund is recovered in a lower price for the SPIA.

Maybe you've done the math, I haven't. It seems to me that the difference between a fund and individual bonds over that time period is pretty small.

 

[CyclingInvestor]

I have nothing against the defined contribution plan and like it's portability and the control it gives me. But their introduction at the expense of defined benefit programs was an effective pay cut for many people. The employer match in no way replaced the value of the defined benefit plan and that difference didn't appear in the employee's pay packet.

I, for one, am quite happy I started working just as 401ks replaced pensions. Maxing them out from 1983-2006 (and rolling them into stocks in IRAs) is the main reason I was able to retire at 48. I only had 4 jobs in my career (not bad for a programmer), but that would have chopped up any pension I would have earned (had they been offered) down to peanuts compared to the dividends from my IRAs.

 

[ejman]

I, for one, am quite happy I started working just as 401ks replaced pensions. Maxing them out from 1983-2006 (and rolling them into stocks in IRAs) is the main reason I was able to retire at 48. I only had 4 jobs in my career (not bad for a programmer), but that would have chopped up any pension I would have earned (had they been offered) down to peanuts compared to the dividends from my IRAs.

I also maxed out on all available tax deferred avenues (mostly 401 K) during my working years (as did my wife) and so we were able to retire at 52, 7 years ago at the end of the prior bear market. The Time article indictment of 401K's on account of low balances is preposterous. Sure if you put little or no money in them there will be little to show at the end!

 

[FUEGO]

I, for one, am quite happy I started working just as 401ks replaced pensions. Maxing them out from 1983-2006 (and rolling them into stocks in IRAs) is the main reason I was able to retire at 48. I only had 4 jobs in my career (not bad for a programmer), but that would have chopped up any pension I would have earned (had they been offered) down to peanuts compared to the dividends from my IRAs.

True! The benefit of NOT having a pension to look forward to is that we are all independent agents. Barring the 2-6 year vesting periods for some 401k matches, we can leave one employer and go to another for a quick boost in pay. Or move to a different industry for more money or better conditions.

 

[check6]

Sure if you put little or no money in them there will be little to show at the end!

One has to have a liveable wage to begin with. My wife and I were associated with an industry that continued to go to the employees for survival. When I retired in '08, my hourly rate had decreased to what it was in '89.

 

[samclem]

One has to have a liveable wage to begin with. My wife and I were associated with an industry that continued to go to the employees for survival. When I retired in '08, my hourly rate had decreased to what it was in '89.

If the business was close enough to being unprofitable that wage concessions were needed (and workers agreed to them), it's likely that any pension plan would have been cut, too, if it had existed. It sounds like what you describe isn't a problem with 401(k)s, it's a symptom of a business under heavy competitive pressure (or in a dying field). No type of retirement plan can protect workers from that.

 

[nun]

I, for one, am quite happy I started working just as 401ks replaced pensions. Maxing them out from 1983-2006 (and rolling them into stocks in IRAs) is the main reason I was able to retire at 48. I only had 4 jobs in my career (not bad for a programmer), but that would have chopped up any pension I would have earned (had they been offered) down to peanuts compared to the dividends from my IRAs.

Like you I've had several jobs and have done well maxing out my 401ks and rolling them over into IRAs. The 401k was sold to America on it's flexibility, but it was mainly a way for companies to transfer the cost of retirement saving onto the employee. We all ended up taking an effective pay cut and it was even worse for the people who either couldn't afford, or were too short sighted, to contribute to their 401ks. For most people I think the 401k has been a disaster.

Overall the level of workplace benefits has steadily declined since the introduction of the 401k and the recession and an over reaction to the abuses seen in the auto industry have made things even worse. I began my career in the UK where benefits were good, 4 weeks vacation, company pension plan, of course NHS health care and it was an adjustment to come to the US 20 years ago and work in private industry with 401ks, health premiums and an almost identical net tax rate. I now work in state government and I recently compared the benefits to those of a large defence contractor and there was no comparison

State Defence contractor
Vacation 4 weeks 2 weeks
Health $80/month HSA, $24/month with large deductibles.
Retirement 6% match 3% match

The State also has 403b and 457 savings options not available with the defence company and at 55 with 10 years of service you can retire from the state with full medical coverage for the same monthly premium.

I'm lucky it that I have a few options in ER, but increasingly I worry about the stability of the US in which case I'll return to the UK

 

[samclem]

..............State...... Defence contractor
Vacation 4 weeks 2 weeks
Health $80/month HSA, $24/month with large deductibles.
Retirement 6% match 3% match

The State also has 403b and 457 savings options not available with the defence company and at 55 with 10 years of service you can retire from the state with full medical coverage for the same monthly premium.

I think this might be one reason many in the US doubt that more government workers will be effective in reducing the overhead costs of our health system.

A non-contributory 401k plan or an equivalent increase in salary would have been fair.

"Fair" is whatever the two parties (employer and employee) agree upon, right? The market determines what is "fair."

 

[nun]

I think this might be one reason many in the US doubt that more government workers will be effective in reducing the overhead costs of our health system.

...and yet countries with reasonable benefits, rather than the poor benefits that are the norm in the US, have lower health care overheads and costs. The benefits I have should be the norm, the pendulum has swung too far and the middle class is quickly becoming poor because of stagnating salaries, diminishing benefits and the rising costs of college and health care. The 401k might not need to be retired, it might just become extinct because no one can afford to save for retirement and they'll just have to work until they die. The improvement of benefits should be supported by all who work.

 

[nun]

I think this might be one reason many in the US doubt that more government workers will be effective in reducing the overhead costs of our health system.

"Fair" is whatever the two parties (employer and employee) agree upon, right? The market determines what is "fair."

Oh no this could get nasty

I don't think markets have any concept of moral concepts like fairness, which is one of their weaknesses, many might see it as a strength.

A negotiation should be between parties of equal power. In the auto industry the Unions got ridiculous benefits because the management was weak. But the situation is usually that unions are weak or non existant so there's no negotiation - a company can just impose a reduction in benefits. This is just as bad as the the decline of the middle class will destroy America's economic engine. The lack of buying power of the US middle class that started in the 1980s was hidden by borrowing and credit until last year. Now we need to redistribute wealth back to the middle class if we are going to see growth again.

 

[samclem]

Now we need to redistribute wealth back to the middle class if we are going to see growth again.

Got it. I think you'll be happy with the changes we're making.

 

[ziggy29]

Now we need to redistribute wealth back to the middle class if we are going to see growth again.

Note my prior post where I mention my experience with the online calculator. It is the middle class which will have the highest effective marginal "tax" rates of all with these health care reform proposals, due to the rapid phase-out of government health insurance subsidies smack-dab in the middle of the middle class income range. Yes, that technically only applies to those who don't have employer-based insurance, but I see this as a convenient excuse for private sector employers to abolish their health insurance just like so many have already done with pensions.

How that translates to "redistributing" wealth back to the middle class is beyond me, frankly.

 

[nun]

Got it. I think you'll be happy with the changes we're making.

Good reply, but I'm a socialist living in the US so I don't think I'll ever be truly happy here....This is how I often feel....

 

[samclem]

It is the middle class which will have the highest effective marginal "tax" rates of all with these health care reform proposals, due to the rapid phase-out of government health insurance subsidies smack-dab in the middle of the middle class income range.

[moderator edit]

The mandatory health care premiums are not a tax. They are a, um, well, you know. As it's not a tax, I'm trying to figure out who will administer the penalty that will be levied upon those who don't get the insurance. I guess it will be another new government agency (cha ching!). Well, at least nun tells me that their employees will have great benefits.