The 401(k)- a failure?

[MichaelB]

then during the 2000 crash, equities tanked and rates dropped, a lot

companies started taking GAAP charges to equity and faced, many for the first time in years, significant statutorily required pension contributions

hence the shift to DC plans

The shift from DB to DC began in the late 80's and was in full force by the late 90's. The recapture of pension contributions fueled many S&P profit statements over that same period. By the mid 00's DB plans had been phased out for most of corporate America, the exception being executive coverage.

I've already found a few studies that show for the same benefit, DB plans can be more cost effective than DC plans. However, that's assuming full participation. That may be appropriate for a true comparison, but it's not the reality. DB plans are cheaper if all employees participate in DC plans, but they clearly don't. Everyone who would have a DB plan, wouldn't necessarily participate in a DC plan at any given company. So employers are saving via DC plans in part because participation is less than DB (full) plans, and avoiding the long term liability.

Hmmmmm....hadn't thought about that.

Another article said that while companies saved a lot by dumping DB plans and going to DC plans or combinations thereof, the savings came largely from reducing employee benefits at the same time. And companies also didn't want the uncertainty of an ongoing DB liability, especially with the COL calculations that were built in to many plans and after the double whammy of very high inflation back in the early 80's and globalization hurting many industries back around that time.

I'd still be beyond shocked to see DB plans come back...

Making DB appear more or less expensive than DC depends on the financial assumptions and can, with some ease, go either way. The problem is, when implemented in the real world, DB plans are subject to changing economic conditions, while DC are not. The real world cost to a business clearly favors the DC plan, hence it is the overwhelming choice.

 

[athena53]

And companies also didn't want the uncertainty of an ongoing DB liability, especially with the COL calculations that were built in to many plans and after the double whammy of very high inflation back in the early 80's and globalization hurting many industries back around that time.

Don't forget increasing longevity, although my life actuary friends told me at one point that life expectancies may be leveling off. Employers wanted to get rid of a commitment with a highly variable cost (depending on market returns, employee turnover, longevity, etc.) for the certain cost of a DC plan, thus dumping the longevity and market risks onto individual employees.

A friend who's in education told me that since she had to contribute 7.5% of her earnings to her pension plan, "it's just like a 401(k)". I asked if it guaranteed income the rest of her life. Yes, it did. No, Honey, it is NOT just like a 401(k).

 

[mpeirce]

This of course is McDonalds corporate, and not the franchisees that run most locations. One needs to be careful and not confuse the employees of the franchisees and the corporation.

More simple googling - there are clearly some franchised locations offering 401(ks) too:

Job Opportunities - lisa. c , enterprise/McDonald's of madison

This restaurant is owned and operated by an independent franchisee

Benefits:
Free Meals, Free Uniforms, 10% Family Discount, 401K After One Year and 21 Years of Age With Company Match, Flexible Scheduling and 1/2 Price Employee Meals During Non Working Hours​

I stick up for them because the few people I know who have worked there actually think it was a pretty decent place to work.

Also roughly 20% of McDonalds locations are corporate owned.

 

[Bestwifeever]

Show me the math where a DB pension plan, as assumed in this thread, is less costly to a business compared with a DC plan. .

No kidding. If DB plans were better for the employer, I am very surprised so many were frozen and 401(k)s put in place. Someone better tell most of corporate America they are hurting their bottom lines by ditching the DB plan.

 

[Big_Hitter]

^ not what I said - given a fixed dollar contribution budget, DB plans are more efficient at providing income to retirees, for many reasons as one poster noted.

 

[MichaelB]

^ not what I said - given a fixed dollar contribution budget, DB plans are more efficient at providing income to retirees, for many reasons as one poster noted.

Ok, if that's the point you were making, I would agree.

 

[Bestwifeever]

^ not what I said - given a fixed dollar contribution budget, DB plans are more efficient at providing income to retirees, for many reasons as one poster noted.

You said this:

...
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

A zero match 401(k) program (where the employees pay the investment fees, which was standard in DH's case) isn't more bang for its buck and more efficient than funding DB plans?

 

[growing_older]

Does anyone actually believe DB plans will make a comeback, or that Soc Sec benefits will be enhanced (aside from COL)?

I'm not expecting DB plans to make a comeback, but it wouldn't surprise me if there is eventually a government run mandatory savings program, with universal access to the TSP or something like it and required annuitization. Would likely be combined with big reductions in tax advantages for the current 401k, 403b, IRA and similar programs; RMD from Roths and general restrictions and means testing on these existing programs. I'm hoping for grandfather treatment if/when such a thing happens.

 

[purplesky]

I'm not expecting DB plans to make a comeback, but it wouldn't surprise me if there is eventually a government run mandatory savings program, with universal access to the TSP or something like it and required annuitization. Would likely be combined with big reductions in tax advantages for the current 401k, 403b, IRA and similar programs; RMD from Roths and general restrictions and means testing on these existing programs. I'm hoping for grandfather treatment if/when such a thing happens.

Hopefully some new retirement savings options will be created that will help supplement the 401k. Give workers more options.


I imagine the government(IRS) would just leave the tax advantages of the 401k in place since they get the tax dollars either way.

 

[purplesky]

This article is on Fortune.com. I doubt many here will agree with the writer but the Fidelity stats are kind of interesting if they are accurate. The writer is definitely pushing buttons and going for a reaction.
Not sure about his step 4 market data?

5 ridiculous steps to becoming a 401(k) millionaire - Fortune

Fidelity's five ridiculous steps to becoming a 401(k) millionaire

A recent study from Fidelity examined the habits of 401(k) millionaires. Fortune takes a look at that study.

Fidelity Investments wants you to believe that saving $1 million in your 401(k) is easier than it looks. It ain’t.

[mod note - edited to comply with copyright regs]

 

[bUU]

It's not solely one or the other?

It never is, but (from the standpoint of consideration of those folks who don't set out to sabotage themselves any more than the rest of us do) those folks that do set out to sabotage themselves don't matter.

WADR, at the same time there is also no evidence that all or even most low/middle class income people are in that circumstance despite making good choices but in my experience there is lots of anecdotal evidence that they make bad choices and those bad choices are a large part of the reason they have little wealth.

There is lots of anecdotal evidence that folks make choices as good as any of the rest of us and still have little wealth. Without objective evidence of an overwhelming preponderance one way or the other, and in the absence of diligently doing the work to fairly separate group "A" from group "B", we are honor-bound to give benefit of the doubt. How much are we willing to expend of ourselves to rationalize the actions and inactions that are only valid assuming that everyone poor is that way because they make worse choices than the rest of us? I suspect we'd all agree that it wouldn't be worth the "benefit" some folks would perceive in doing that differentiation. So we go forward looking at the problem straight on, setting assumptions based on anecdotal evidence aside.

How come it is that there are so much anecdotal evidence that low/middle income people who make poor financial decisions are in poor circumstances and low/middle income people who make good financial decisions are in good circumstances (millionaire next door types and people of modest means who die with multi-million estates) yet there are so few anecdotal examples of low/middle income people who make good financial decisions but are still in poor situations?

There isn't. That perception is simply a reflection of what information one may find themselves encountering based what information they choose to avail themselves of.

Here's one good anecdote for you of someone who made choices as good as any of us would have and still struggles to make ends meet:

https://vimeo.com/111668261

 

[bUU]

We often hear the pundits telling us that how much you spend is more important than how much you make in determining wealth, and that certainly seems to be true.

It is true, but what you are saying rationalizes actions and inactions, and does so in such a way that good people, making decisions as good as any of us, are to live lesser lives because those decisions didn't work out as well as they had for the rest of us. I know that wasn't your intent but that is the effective impact on this prototypical good person I've been referring to. Yes, life isn't fair, but we were moving as a society in a positive direction to reduce the incidence of that disparity. Why is it superior, in your mind, to stop moving in that positive direction and to reverse the improvements made (let's say, between 1960 and 1980)?

I wish I could differentiate between income and poor choices. I am sure it's not one or the other, and I'd be surprised if poor choices is simply "anecdotal." But I can't say with any certainty the relative influence of either.

That's actually a decent definition of anecdotal. As I alluded to earlier, I bet it isn't worth differentiating. I bet it would be better to just accept that there are good people and that making this better for them is worth whatever it would cost to figure out how many of them there are and/or working out a way to tell them apart from the bad people.

I can't see dismissing the experiences as "just anecdotal" either.

All that is necessary to avoid that dismissal is to have objective evidence of the numbers of poor people who make worse decisions than the rest of us, versus those who don't. Until we've got that, what we know is limited to what we've chosen to expose ourselves to. I think those who have the best view are those who go out into the poor neighborhoods themselves and work with the people there every day. I've met several people like that and their insights are quite illuminating, and effectively dispel the perception that being poor means being wrong-headed.

Several have talked about "the bottom."

Well, I see what you're saying, but isn't that just opening a path to manipulate the metric? If the bottom 10% of workers are skewing the results downward, let's redefine the metric so that they're no longer even counted. Lather, rinse, repeat. In addition to the switch from DB to DC, how much work has been done to exclude more and more and more from DC programs entirely? I'm not sure the two approaches can be separated from each other, and I'm not sure that the solutions won't require keeping the two aspects (the programs themselves, and the ability for every worker to adequately contribute into/participate in them) together.

 

[bUU]

I agree with you Pb, but Im afraid if we don't take it from them, they will be taking it from us to give to them. I don't see the government saying any time soon...."Go do yourself and society a favor and jump off a cliff. You should have saved more"

I am encouraged by your optimism.

Sure - can you guys give me a few days?

Please don't forget to factor in the psychological impact of the various alternatives on employee actions under myriad economic situations. I think that's the big variable in this. Recession hits? You can take away benefits and people will grudgingly accept it, and when boom times return you can shower people with bonuses to make them ignore that you haven't restored what they had before. (That's not speculative - it happened to me! I didn't ignore, and pressed for restoration, but that only got me a pay raise, not a restoration of benefits.)

I think we're trying to come up with a mathematical model to solve this problem. That's a noble but pointless effort. This is a huge container ship we're on, piloted with two by fours stuck into the water instead of by azipods or rudders.

By the mid 00's DB plans had been phased out for most of corporate America, the exception being executive coverage.

As clear an indicator of which approach is better for workers as any.

 

[pb4uski]

.....Here's one good anecdote for you of someone who made choices as good as any of us would have and still struggles to make ends meet:

https://vimeo.com/111668261

Hardly a "good" anecdote. There is not nearly enough there to make an assessment. She obviously made decent money at some point in time as a factory worker but is it unclear whether or not she was living at or above her means or saved at all when she was making good money. After her work at Wrangler ended she got her GED and trained to be a CNA which are good moves. DS is a CNA and while he doesn't work in that field anymore I can tell you that finding employment is easy and there are ads for CNAs in the paper every day so it is hard to understand why she would have periods of unemployment unless there was no work in here geographic area and she was unwilling to move or travel. CNA is a tough job. It is unclear whether she owns or rents. She decided not to have health insurance and have a serious illness and owes hundreds of thousands, but from what she describes, I would think she would be eligible for Medicaid or at least some charity care. In any case, not nearly enough to make an assessment as to whether or not she makes good financial decisions and whether her circumstances are of her own devising or not.

 

[bUU]

Hardly a "good" anecdote. There is not nearly enough there to make an assessment.

I see no merit in claiming that there isn't enough to make an assessment. There is more than enough information presented to conclude that despite having integrity and responsibility things haven't worked out for Glenda as they should because of things outside her control, things that if they happened to you or I may very well have led us into a comparable situation.

Furthermore, I think any anecdote either of us puts forward can be dismissed out of hand (which is why I said earlier that we shouldn't be considering anecdotes at all - yours or mine) because there is no objective metric for what constitutes a body of life decisions that are definitively and unequivocally poorer than the decisions that you and I have made.

 

[pb4uski]

I think you are wrong, but let's agree to disagree. You are clearly the minority view (which is fine... you are entitled to your opinion) and this whole dialogue is boring. I don't think there is anything that we could say that would change your view, and probably vice versa so any further debate is just a waste of time and keystrokes.

 

[Midpack]

Well, I see what you're saying, but isn't that just opening a path to manipulate the metric? If the bottom 10% of workers are skewing the results downward, let's redefine the metric so that they're no longer even counted. Lather, rinse, repeat. In addition to the switch from DB to DC, how much work has been done to exclude more and more and more from DC programs entirely? I'm not sure the two approaches can be separated from each other, and I'm not sure that the solutions won't require keeping the two aspects (the programs themselves, and the ability for every worker to adequately contribute into/participate in them) together.

If you're going to push your personal agenda (again), be honest enough to not quote other members out of context. But this thread has run it's course, so preach on brother...

 

[Big_Hitter]

But this thread has run it's course, so preach on brother...

in before porky!

 

[HFWR]

We can all disagree without being disagreeable ..

Cannot...

 

[Ronstar]

Thanks for the informative discussion.

[/QUOTE]