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

[Big_Hitter]

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

good article - title is snippet

 

[2017ish]

Agree that it was a good article; read it over the weekend.

Tough to put myself in the shoes of the people not making out well under this, as DW and I (like many here) have been among the big winners of 401k. Some of those featured in vignettes in the article, I have no sympathy for (the lawyer who has nothing in his mid-60s!).

Others just don't have the ability/sense to wait on the marshmellow... But were they, on average, better off in the defined plan era, given the vesting requirements, payouts also tied to income, and risk of employer bankruptcy?

Tough policy issues--makes me hesitant to be philosophically consistent with respect to social/medicare. (I.E., for much/most of population, including many of my relatives, they serve well as the backstop they were designed to be.)

 

[pb4uski]

This caught my eye:

Some early 401(k) supporters are learning about its shortcomings firsthand. Mr. Whitehouse, the former Johnson & Johnson human-resources executive, says his 401(k) took a hit after 2008. He could retire if he had to, but if he wants to maintain his standard of living for several more decades, he must continue to work, he says.

The 65-year-old currently lives in Orlando and is in-house counsel for ABC Fine Wine & Spirits, a Florida chain with about 140 stores. He plans to work into his mid-70s.

It would be appealing, he says, to have an old-fashioned pension. “A pension is pretty valuable,” he says.

I wonder if he panicked and went to cash back in 2008 as we know those who stayed the course have been rewarded.

I do recall early on that the 401k was pitched as a DIY savings supplement to SS and defined benefit plans. My employer at the time and my subsequent employer had both. my last employer had migrated from a DB plan to a DC plan prior to my joining them.

I guess for me the tough question is how much we need to protect people from their own lack of discipline. I'm sure if you changed it so savings was mandatory there would be a lot of complaining (like we see with SS), and probably most by those who would ultimately most benefit. Strange world.

 

[FIREmenow]

I guess for me the tough question is how much we need to protect people from their own lack of discipline. I'm sure if you changed it so savings was mandatory there would be a lot of complaining (like we see with SS), and probably most by those who would ultimately most benefit. Strange world.

I wonder if the "experiment" is not finished playing out. In other words, it is only after observing (many of) these catastrophes that folks will pay attention to their own well-being. It is still early in this scenario, I think.

As my father used to say, "People will not change until it is too painful NOT to change."

 

[nun]

Replacing defined benefit plans with defined contribution plans like the 401k shifted risk and expense from the employer to the employee. The marketing material about portability and control of your money was used to obscure the massive reduction in the size of benefit it caused for employees.

I'm sure the people on here have done well with their 401ks, IRAs 403bs etc, but they would probably have done better with a well managed DB plan and the larger employer contributions that often came with those old plans.

 

[pb4uski]

I wonder if the "experiment" is not finished playing out. In other words, it is only after observing (many of) these catastrophes that folks will pay attention to their own well-being. It is still early in this scenario, I think.

As my father used to say, "People will not change until it is too painful NOT to change."

True... it seems to me that my kids generation are more diligent at saving for retirement after having seen how many of their parents are ill-prepared and as a result are working longer.... often in jos that they dislike and are not happy with.

 

[Alan]

I worked for 4 different companies with DB plans and am receiving 3 monthly checks, soon to be 4. To replace the monthly income with savings I would need at least $1.2m and probably closer to $1.5m.

I was fortunate that my last employer also provided a 401k so I had 17 years of being able to make contributions.

Being financially savvy I prefer the DC style 401k plans but realistically I can see how DB plans can be a big boon to most folks.

I knew several otherwise smart folks at work who used move to cash at the bottom of every downturn, and also used to take out 401k loans.

 

[candrew]

I guess for me the tough question is how much we need to protect people from their own lack of discipline.

I believe an equally tough question is how much we need to protect people from the excesses of Wall Street speculation that was largely responsible for the last economic meltdown.

Like you, I was the beneficiary of not only a workplace 401K with employer matching contributions, but a defined PB plan as well. Not only did we witness the balances in our 401K's plummet, but the solvency of our PB plans became shaky as well.

I'm good with having taken on the responsibility of insuring my financial well being. At the same time, I'd like some relative degree of assurance that the game is not rigged against me through more rigorous oversight and holding accountable those responsible for their fraudulent actions.

 

[ERD50]

Replacing defined benefit plans with defined contribution plans like the 401k shifted risk and expense from the employer to the employee. ...

In the narrow sense that is true, but not in the 'big picture'. What if the employer goes belly up? Well, there is the PBGC fund, that is insurance that was paid for by the employer, but could actually be considered as part of employee compensation, so therefore came out of the employee's (virtual) pocket.

The benefit is capped. And what if the PBGC runs out of money? Maybe the taxpayers will chip in? And we are right back to the taxpayers (the employees), funding their own retirement. Either way, it is our money.

Risk is never really shifted - somebody takes it on, and they don't do it for free.

-ERD50

 

[GrayHare]

Should it come to pass that several high-profile pension plans collapse or have benefits cut, the 401k will suddenly look more appealing.

 

[fritz]

I wonder if the "experiment" is not finished playing out. In other words, it is only after observing (many of) these catastrophes that folks will pay attention to their own well-being. It is still early in this scenario, I think.

As my father used to say, "People will not change until it is too painful NOT to change."

I had one small non-contributing pension that took 10 years to vest (or it was all for not as with most companies). Got it and left at 10 years, but was not the greatest pension. Company was bought out several times and the last Mega Corp to buy it offered a lump sum rollover at 55 (was not offered by original company). Took it and never looked back. Investment of lump sum will now pay more than original quote at 65 and I still have the lump sum to leave to wife/family (not so with original set up). As I recall - when they shortened vesting to 3-5 years (regulations due to employees being fired as they approached 10 years), companies seized the new 401K to get out of the pension business. So much for looking out for employees.

I've done very well with savings/investments, in and outside of 401Ks and we retired early at 58/57. LBYMs worked well for us. I always felt employees were thrown under the bus with 401Ks, due to the quickness of the change from pensions and lack of employer involvement with the programs. Many use outside firms to manage these at very high costs (again, looking out for the company trumps employee benefits).

Although many folks complain about 401Ks vs. the good old days of pensions (especially those who failed to save enough), I feel they have a future for retirees in private business sector (even public). Going back to the good old days (ways) was not as rosy as some would paint it. Insurance companies have all been trying very hard and succeeding with regulations to get themselves in them with annuities (there's your pension if you want the old days/ways). I know several relatives who lost everything (their pensions and investments in company stock programs) when their companies went broke and were bought out (deliberate?) and are still working -Lucent Technology to mention just one.

 

[pb4uski]

I believe an equally tough question is how much we need to protect people from the excesses of Wall Street speculation that was largely responsible for the last economic meltdown. ...

Specifically what speculation are you referring to? and by whom? We want names.

 

[Walt34]

Others just don't have the ability/sense to wait on the marshmellow... But were they, on average, better off in the defined plan era, given the vesting requirements, payouts also tied to income, and risk of employer bankruptcy?

If the company didn't go under and funded it, pensions were probably better I think. Back then people didn't change jobs as often, and an advantage of the 401(k) is it's portability. I have a DB pension, but I also had the same employer for a bit over 29 years. That doesn't happen as often now, especially in occupations that are cyclical like oil or manufacturing.

However as FIREmenow points out perhaps this is just the beginning of the story. A generation of financial tragedies would be an important lesson to the generations following, as the 1930's Depression was to the generations following, at least for a while.

And one has to remember that some people exist solely to serve as an example to others of what not to do, like the 60-year-old lawyer who has saved nothing. I'm sure his daughter will start saving early, or at least when she sees the results of not doing so.

 

[Bir48die]

Specifically what speculation are you referring to? and by whom? We want names.

I'm with you as this is a hugely generalized statement. I assume this has to do with bundling of mortgage backed securities? Any way it is a broad indictment.

I have been the victim of being let go right before my pension vested. Plus, the company went belly up later so who knows. After that I went all in when 401k's were offered and later when I was allowed to participate in a Deferred Compensation plan for highly compensated employees. I learned to live on the least amount of money possible while I socked the rest away.

As I was taught early on...wants versus needs.

 

[sengsational]

After reading this
I started to think about the zero sum game aspect of the 401k vs DBP. Given more opportunity to mess-up, does that put those who were concentrating on this stuff at an advantage? To extend the article, if everyone had the same coconut stash, nobody could drop out of the workforce early.

 

[pb4uski]

I don't get that... it depends on what you spend and need to maintain your desired lifestyle. Also, some people are more "into" work than others.

 

[nun]

In the narrow sense that is true, but not in the 'big picture'. What if the employer goes belly up? Well, there is the PBGC fund, that is insurance that was paid for by the employer, but could actually be considered as part of employee compensation, so therefore came out of the employee's (virtual) pocket.

The benefit is capped. And what if the PBGC runs out of money? Maybe the taxpayers will chip in? And we are right back to the taxpayers (the employees), funding their own retirement. Either way, it is our money.

Risk is never really shifted - somebody takes it on, and they don't do it for free.

-ERD50

Ideally a DB pension plan's ability to payout should not rely on the finances of the employer. Contributions should be mandated and be made with every paycheck and held and managed by a separate trust with a fiducial responsibility to the pension plan members. If a company goes "belly up" the pension trust would then have to give out pensions based on a reduced length of service and would eventually wind itself up.

The big slight of hand in all this is that many DB plans were non-contributory and employees thought that a 3% match today was better than some far off DB pension and they were so wrong.

There are many threads on here where people with mega-corp, military and public DB pensions are looked on with some envy and for good reason because they are often a far nicer benefit that a SWR from a 401k. I took $280 from my public employee DC plan to buy into the DB plan and got a $20k /year pension with a 3% COLA on the first $13k starting at age 55, that's nice to have.

 

[Clone]

During my career at megacorp, I was chided several times by folks that had jumped ship and chased bigger salary at other companies. I also remember a cover on 'Fast Company' that said the old Norman Rockwell version of working at one company with a pension was buggy whip living. Only a fool would stick around the old smokestack industries and brick and mortar.

They may have been right. But the old megacorp hung in there, instituted a great 401K plan, also a really good bonus plan for middle management and up. 35 years with one company paid off big time with a very nice pension, a substantial 401k balance, and retirement healthcare.

But there are other similar companies that did not survive and prosper, and the folks who went down with the ship did not fare as well. And not all of those folks that chased the big tech money got the pot of gold either.

You improve your odds for success when you find the discipline to fund your own investment accounts. I was fortunate that I could use my bonus to top off my 401k contributions many years. The folks that spent that money on vacations, bling, or new vehicles may have the memories, but not the equity now. I think that success is a combination of determination, working hard, making good decisions, and a certain amount of luck.

 

[LOL!]

This sentence bothered me in the article:

More than 30 million U.S. workers don’t have access to any retirement plan because many small businesses don’t provide one.

Every single one of those 30 million U.S. workers have access to an Individual Retirement Arrangement (IRA) which is a retirement plan. That is $5,500 they could contribute every year. That would allow workers with incomes up to $55,000 a year to contribute at least 10% to their retirement plan. If they were married, then they could contribute more (though their spouse could be working and make a contribution to their own IRA themselves).

Now I believe that someone making $40,000 a year may not even be able to contribute $5,500 to an IRA, but at least they have a retirement plan unlike what the article suggests.

I would also imagine that the vast majority of workers with retirement plans at work do not even contribute more than $5,500 a year to them anyways.

Furthermore, low income people can invest in a taxable account tax-efficiently without any limits. With present tax laws, a taxable account for a low income person is just as good tax-wise as a Roth IRA because there would be no taxes on qualified income and no taxes on long-term capital gains and they would be able to tax-gain harvest and tax-loss harvest.

Apparently, IRAs were introduced in 1974.

Of course, journalists are not usually the sharpest people when it comes to taxes and investing, so what do they know.

 

[Big_Hitter]

^ IRAs are 100% contributory so they don't count as employer-sponsored retirement plans, which is the point of the article

 

[growing_older]

This sentence bothered me in the article:

Quote:
More than 30 million U.S. workers don’t have access to any retirement plan because many small businesses don’t provide one.

Every single one of those 30 million U.S. workers have access to an Individual Retirement Arrangement (IRA) which is a retirement plan.

Not to mention that anyone can save and invest outside of a "retirement plan" as well. I am regularly surprised when coworkers lament that they cannot save any more because they have maxed out their IRA. Not so, you don't have to limit saving for retirement inside retirement plans.

 

[LOL!]

It might be heresy on this forum, but if the government said that I had to save 10% of my salary into the TSP (or other low-expense ratio passively-managed index fund portfolio) before I could save for anything else (car, college, housing expenses including down payment, medical expenses, vacations, booze, marriage), then I would have been OK with that.

 

[growing_older]

It's certainly true that many people are inadequately prepared for retirement. But this was true before as well. The heyday of pensions was a short historic period and even at their best many people were not covered. There were vesting rules and pension calculations that meant employers bore more risk, but they also underfunded pensions, manipulated employment so that early years were minimized and worked the system to sometimes expel employees just before they earned a vested benefit. It wasn't all sweetness and light.

If the current system of allowing people to make investments on their own, or providing some limited tax breaks so they can make investments on their own, or allowing employers to set up limited plans to allow tax advantaged savings isn't working, then maybe some additional safety net could be helpful. But that doesn't mean we should throw out the systems that DID work for some people.

Maybe adding a mandatory contribution to a TSP like investment would help. But taking away the deals under which people have been planning their entire working lives for a political point of view seems very unfair.

 

[exnavynuke]

Should it come to pass that several high-profile pension plans collapse or have benefits cut, the 401k will suddenly look more appealing.

Teamsters’ Pension Plans Seek Massive Cuts to Retirees to Stay Solvent

The Central States Teamsters pension plan, covering more than 400,000 participants, expects to receive permission shortly from the Treasury Department to cut benefits to those participants, possibly by as much as 30 percent.

they didn't get permission this time, but that doesn't mean they won't and the NY teamsters is asking for even more drastic cuts.

This is not the first pension plan to cut benefits, but it is something that happens (and has been happening for a while) sometimes. There's a pension "insurance" company that many pensions use to guarantee benefits, but that company was so underwater that Congress passed the law allowing pensions to cut benefits due to inadequate pension funding, allowing the cuts that people are now starting to see come down the line.. Not something that inspires a lot of confidence in their solvency and ability to provide such guarantees long-term.

There are upsides and downsides to both pensions and 401k style plans, with the management/choice of the investments and the contributions made being the two primary variables both avenues need to have controlled properly in order for either to succeed.

I'm fortunate that my "pension" comes from the VA, is COLA adjusted, and is tax-free. I'm also fortunate in that I have the knowledge and understanding to invest on my own as well as a financial situation that allows me to do so aggressively.

When I review resumes of people applying for positions I have to interview them for at work, I can tell you that most of the people in my industry spend less than 5 years at any one employer. That wouldn't be very effective for them in the "olden days" of pension vesting.

 

[ugeauxgirl]

Replacing defined benefit plans with defined contribution plans like the 401k shifted risk and expense from the employer to the employee. The marketing material about portability and control of your money was used to obscure the massive reduction in the size of benefit it caused for employees.

I'm sure the people on here have done well with their 401ks, IRAs 403bs etc, but they would probably have done better with a well managed DB plan and the larger employer contributions that often came with those old plans.

We would not have done better with a DB plan- we are 53 and 46 and can retire NOW- most people with DB plans have to wait till they are old enough to qualify for the payout. About half of our portfolio value is in 401k- type plans, and we were able to accumulate the amount we have in a large part because of the tax deduction- we couldn't have saved this much if we'd had to pay taxes on it up front.