Losing more than 70% in a 401(k) plan

[youbet]

The details of the reform are critical, but the UK has a pretty good model with NEST. Both employers and employees must contribute to a retirement plan that meets certain minimum standards.....unless the employee actively opts out. So the employee is not mandated to contribute. If they do contribute there are minimum contribution levels required, if you are low income those are a smaller %age of your salary than someone with higher earnings. A "target date fund" is also the default investment option, but the employee can get more sophisticated if they want.

NEST home | UK employer pension scheme | NEST pensions

This will get most working people in the UK contributing 5% of their salary and getting a 3% employer match to a tax deferred target date retirement account. Hopefully this, along with UK equivalent of SS, will provide for retirement income. There might be some philosophical issues with this, although the opt out provision should calm those, but the objective is to get all working people in the UK to do what many on this board do......regular saving into broad index funds with risk reducing as retirement age approaches.

Is the 3% employer match mandated by the gov't? Do all employers, regardless of size, have the requirement of having a NEST plan with a 3% employer match?

How does the gov't remove the risk of investing in the default target fund? Target funds do lose money over periods of time. Certainly the gov't could not expect the individual to absorb these losses, especially just prior to retirement. Perhaps there is a guaranteed return supported with taxpayer pounds?

 

[RunningBum]

Not sure where you read in my post that I want to impose on everyone not to buy equities. For the record, I am not imposing or even wishing to give anyone the impression that they must do anything with their 401k plans.

Do me a favor - can you show ANY post where I called myself "libertarian inclined" ?

...with restricted and much safer options than equities.

I took this to mean all options would be restricted and must be safer than equities. If it's not, I don't see how it's different from probably every existing 401K plan.

I mistook Nun's libertarian post as one of yours. Sorry about that.

 

[nun]

Is the 3% employer match mandated by the gov't? Do all employers, regardless of size, have the requirement of having a NEST plan with a 3% employer match?

If the employee opts out the employer is off the hook as well. But if the employee does not opt out then the employer must pay at least the Government mandated minimum matching contribution. There have been worries about employers pressurizing employees to opt out so there has been a big public information campaign about it. All employers must offer a plan at least as good as NEST, and automatically enroll employees, big companies have their own schemes through places like Fidelity etc, but NEST is a way for small to medium businesses and the self employed to get easy access to a plan. NEST is a reaction to the low level of individual saving for retirement and a reaction to the burden that was being place on Government benefits. The small business community sees it as an unwanted extra tax, but both Labour and Conservative governments saw that the retirement saving numbers just didn't add up and this is the compromise they came up with, with the cost shared between employers and employees. The plan is generally seen as a good solution across party lines and with most of the population.

One thing I hate about NEST is it perpetuates the outrageous fees charged in the UK. The management fee of 0.3% is ok....but they will also take 1.8% of every contribution until initial set up costs are met. if they can get rid of that it will be fare less expensive than other UK schemes.

How does the gov't remove the risk of investing in the default target fund? Target funds do lose money over periods of time. Certainly the gov't could not expect the individual to absorb these losses, especially just prior to retirement. Perhaps there is a guaranteed return supported with taxpayer pounds?

They don't. NEST is just like a 401k plan. You are free to move your money around (there's even a Sharia fund available) and free to loose or make money. But everyone starts out in a target date fund that follows these principles.

Managing your pot | Saving in NEST | NEST pensions

The goal is to get the majority of people to invest at least 8% of their salary over their working life. NEST is just a 401k that you have to actively opt out of and the associate pension reform has mandated that employers must offer a minimum level of retirement plan. Most UK employers offered plans already, but the employer mandate is the really revolutionary part of the legislation and that will go into effect under a Conservative Government. Companies in the UK have to comply with many employment regulations (like 5.6 weeks minimum paid vacation) that would seem very alien in the US and the retirement saving mandate is another one of those.

 

[haha]

It is really fun to "debate" what the government shouldd do for us, but it won't happen. One way or another the government funds will dry up, and the costs of living will go up, and all the pretty planners will be disappointed.

Ha

 

[obgyn65]

I did not use use the words "impose", "all" or "must be". Read my post again - my position is more nuanced.

Apology accepted re: your libertarian comment.

I took this to mean all options would be restricted and must be safer than equities. If it's not, I don't see how it's different from probably every existing 401K plan.

I mistook Nun's libertarian post as one of yours. Sorry about that.

 

[youbet]

NEST is just like a 401k plan.

Indeed, NEST does seem very similar to USA 401k plans. The biggest difference I'm noting is that in the UK ALL employers must offer the plan (regardless of size) and must contribute at least a 3% match. Here many employees do not have a 401k (or 403b) plan available to them, especially those working for very small employers.

Was there something like NEST already in place and this is just an update? Or is the UK just late in getting into the 401k-like program game which the USA has had for decades?

 

[youbet]

One way or another the government funds will dry up

Ha

Damn. All my life it seems that just when I get to the head of the line and extend my cup for a ladle of that tasty gov't soup, the pot runs dry!

 

[NW-Bound]

It is really fun to "debate" what the government shouldd do for us, but it won't happen. One way or another the government funds will dry up, and the costs of living will go up, and all the pretty planners will be disappointed.

Ha

The truth of investing, or even just savings, is this. People hate uncertainties, and like to have some guarantees. So, they hope for a powerful or omnipotent entity like the government to protect them, but it cannot happen. I am not an economist, so the way I view this and explain below may be naive, but please humor me.

When we save (not even invest!) $1 instead of buying a dozen eggs or a bread stick to consume now, we are delaying that consumption until a later age, hoping to eat those eggs or bread when we are 80 year old.

But, what is there to guarantee that the $1 will buy the same amount of goods in the future? The eggs will have to come from the future chicken that somebody's grandchildren will raise, who also bake the bread for us from the wheat of the future.

However, what if there are not enough workers in the future to raise the chicken or to make bread? Or, the chicken feed will be more expensive due to higher cost of corn, which is caused by drought, higher cost of fuel for tractors, etc... There cannot be any guarantee, can it? How can any government be that powerful to overcome changes in weather, nature, various changing conditions, or just demography?

Some people may even think that if we all pile into gold, we could then preserve the buying power of our capital. Maybe that can work, I don't know, but only if done by individuals. If we mandate that all 401K's have to buy gold, the price of gold will certainly go up while we accumulate it, and everybody would feel really good. Then, when we get old and try to convert that gold into eggs and bread, but there are not enough youngsters or land to produce them for us, what would that do to the conversion rate of gold to eggs and bread?

Short of maintaining a society's productivity and having a certain ratio of workers to retirees, I do not see how we can maintain the same living standards, no matter how we invest or save.

 

[nun]

Was there something like NEST already in place and this is just an update? Or is the UK just late in getting into the 401k-like program game which the USA has had for decades?

Most employers offer DB plans and/or things like 401ks called SIPPs, Self Invested Personal Pensions. DB plans are becoming rare and many people were not taking up the SIPP plans offered, so the level of retirement saving in the UK was causing concern. So the new pension reform legislation mandates that all employers must offer a retirement plan that is at least as good as the one offered by the government sponsored NEST trust and that employees must actively opt out. The goal is to make retirement saving automatic and easy. It takes actual effort to opt out.

 

[youbet]

I do not see how we can maintain the same living standards, no matter how we invest or save.

Living standards based on "savings" could be inferior to, the same as or superior to the living standard that could have been purchased at the time the purchase was delayed (the "money" was saved.) It depends completely on the resources available and the population sharing them at the time we chose to redeem our savings for goods and services.

But, I tend to agree with you that it appears that more people will be sharing fewer resources in the future and therefore living standards will be "lower." There will be little gov'ts can do to change this other than spread things around a bit.

We have become so indoctrinated to fiat money that most believe shortages of life's basics such as food, fresh water and other commodities can be corrected by simply buying more with freshly printed money. Sadly, if the crops fail running the printing presses won't fill the bins.

 

[youbet]

The goal is to make retirement saving automatic and easy. It takes actual effort to opt out.

I like that.

 

[NW-Bound]

People lament the loss of pension or DB plans, but that has been happening across the world, even in China, a large planned and centralized economy. They had to go through pension reforms in the 90s, which I have read was basically an abrogation of most promises that were made.

The result has been that the Chinese savings rate is reportedly as high as 50%, so high that it hampers domestic consumption and limits their economy's growth, as everybody tightens his belt and just produces for export. People are too scared to spend.

It ain't that easy!

 

[NW-Bound]

Living standards based on "savings" could be inferior to, the same as or superior to the living standard that could have been purchased at the time the purchase was delayed (the "money" was saved.) It depends completely on the resources available and the population sharing them at the time we chose to redeem our savings for goods and services.

If you left in the caveat at the start of my quoted sentence (about productivity, blah blah blah), then we are talking about the same thing.

During the 20th century, the standard of living increases due to industrialization and modernization. People did not even have to save that much. How we can maintain the same progress in the 21st century is the question.

 

[ziggy29]

During the 20th century, the standard of living increases due to industrialization and modernization. People did not even have to save that much. How we can maintain the same progress in the 21st century is the question.

"Creative destruction" has long worked well in our economy. The problem is that today, much more of the the "destruction" comes from labor-intensive industries being replaced by much less labor-intensive industries.

 

[samclem]

We just don't have enough jobs to accommodate a lot more people working until the day they die. (This is the same problem with raising the SS and Medicare eligibility age. We already don't have enough jobs for people UNDER 65-67, and we want to add more people to the pool of job seekers?)

But it's not as though there is a fixed number of jobs that get apportioned out to a pool of available workers. The situation is far more dynamic than that. When more workers compete in the marketplace, wages go down (supply/demand) and jobs that were previously priced out of existence become economically viable. And this occurs not only on an individual level, but among nations--all else being equal, when US labor costs go down we'll recapture jobs that have moved overseas and our economy will grow (at the expense of other national economies--just as theirs have grown at our expense for the last couple of decades).
Trying to limit the set of workers, especially if it drives up government expenditures (for higher SS payments, etc--money that must be withdrawn from the productive private economy), will destroy a nation's competitive position. Trying to support/ drive up wages by limiting the population of available workers (the guild system, etc) is impractical in today's global market for goods, services, and labor.

 

[growing_older]

Nest is an interesting idea. Not as good as TSP, but universally available and strongly encourages participation. With a $7000 limit on annual contributions it's more like an IRA than a 401k, but the goal seems to have been get people to do something, not provide a scheme that can be used to ER. The withdrawal options (like the fund choices) are restricted and kind of big-brotherish in limiting people's ability to do different than the experts suggest.

If this were proposed in addition to 401k, I would support it. If this were proposed to replace 401k I can see where it accomplishes some goals of getting people who don't do the right thing to at least do something, but it would be much worse than the current 401k plans for those people who were able to use 401k responsibly.

For planning purposes, I really want the rules to stay fixed or be optional or be grandfathered. A lot of the "improvements" that are being proposed could have adverse effects on my plans just as I'm close to retirement and less able to make adjustments.

 

[nun]

Nest is an interesting idea. Not as good as TSP, but universally available and strongly encourages participation. With a $7000 limit on annual contributions it's more like an IRA than a 401k, but the goal seems to have been get people to do something, not provide a scheme that can be used to ER. The withdrawal options (like the fund choices) are restricted and kind of big-brotherish in limiting people's ability to do different than the experts suggest.

If this were proposed in addition to 401k, I would support it. If this were proposed to replace 401k I can see where it accomplishes some goals of getting people who don't do the right thing to at least do something, but it would be much worse than the current 401k plans for those people who were able to use 401k responsibly.

For planning purposes, I really want the rules to stay fixed or be optional or be grandfathered. A lot of the "improvements" that are being proposed could have adverse effects on my plans just as I'm close to retirement and less able to make adjustments.

NEST reflects the more conservative approach to retirement investing and income in the UK. Most people with SIPPs (the existing UK equivalent of a 401k) buy an annuity when they want retirement income. However, NEST is just the fund that the Government is sponsoring so that everyone has access to a certain minimum scheme. Most companies have their own schemes with companies like Fidelity etc that have more flexibility and look more like the US 401k.

FYI the UK also has the Individual Savings Account (ISA). This is like a ROTH, but has no restrictions on when you can take the money out. You can put up to $15k/year away after tax, it grows tax free and you can get at the money without penalty or tax at anytime. It's there to encourage saving for things like house down payments., but is obviously also useful for retirement saving. UK banks, credit unions and brokers all offer ISAs and you can choose from investments ranging from the UK equivalent of CDs, Government bonds to mutual funds of every flavor.

 

[Mulligan]

My GF got hired recently at a company that provides a 100% match of first 3%, and 50% of next 3%. She commented that they "force you" to have at least 6% taken out of your check for the 401k contribution without your "permission". Though she is a willing participant, I explained to her there probably is an opt out feature, but people can be incredibly stupid about money, and I am sure many did not sign up for it and foregoing "free money".

I read in another forum a few days ago, where a person was asking if they should take a job that pays $55,000 and provide a pension for the amount of about $33,000 after 25 years, which would mean he could retire at 49. The concern over taking the job? The $230 they take out of his check each month for his part of funding the pension. He said he was not comfortable with that as there was "a lot of things he could do with that money". Are people truly that dumb?

 

[FinanceDude]

Ah, the stories I could tell about bad human behavior..........

 

[rescueme]

The $230 they take out of his check each month for his part of funding the pension. He said he was not comfortable with that as there was "a lot of things he could do with that money". Are people truly that dumb?

$230? Hey, that's a couple of rounds of golf for the month ...

"Eat, drink, and be merry...."

Yes, people are truly that dumb, IMHO ...

 

[Mulligan]

Ah, the stories I could tell about bad human behavior..........

I bet I would enjoy reading them, provided none of my mistakes from the past were part of it.

 

[NW-Bound]

Yes, people can be really dumb. But I think most are not so dumb to not learn if you have some examples of people living under a bridge to point to and say "Now, that may be you in 20 or 30 years".

People are also gullible to promises that they will be so well taken care of, no matter what the economic condition of their country, or the world for that matter. Hence, I guess that causes the drive to get them to save their own money to see for themselves how "things work". And that even happened in a communist country like China, as I reported.

 

[rbmrtn]

$230? Hey, that's a couple of rounds of golf for the month ...

"Eat, drink, and be merry...."

Yes, people are truly that dumb, IMHO ...

People waste that much on coffee at starbucks...

Indeed, 100% return on contributions up to 6% of income, how could you turn that down, even if you did nothing but put it in a stable value fund.

 

[growing_older]

It's interesting to consider how much obligation we have to protect people from themselves. I would suggest that in the US there are ample opportunities to save for one's own retirement. You don't have to only save using an official program like a 401k, IRA or 403b, yet people don't seem to do so. Even with tax advantages and free money matching programs, a surprisingly large number of people do not participate in these programs or participate only to a minimal amount that will not adequately fund their retirement.

So, if horses will not drink when led to water, what do we do?

Social Security is a safety net that prevent people who have a working history from being destitute and at least feeds them. Do we no longer consider that an adequate safety net? In my area, low income people get free cell phones. Has that become a necessity to be provided universally? Do we consider a "comfortable" retirement a necessity that should be provided even if people take no active steps themselves to provide for themselves?

I think we need to agree on what we are trying to accomplish before proposing programs, or else we will have no idea if those programs will accomplish our goals or not. If we cannot articulate the goals or cannot agree on them, then whatever programs are proposed are unlikely to accomplish what we want, since we do not know ourselves.

It also seems that people proposing these programs have some goals of their own in mind that do not necessarily compliment with the goals of providing retirement for everyone. Insurance lobby wants increased annuitization which is profitable. Financial salesmen want funds with fees to tap into for their livelihood. Politicians want votes and in some cases control and power.

Making TSP available to anyone unhappy with their current 401k (or lack thereof) or changing rules to require in-service rollovers to be allowed are the only 2 proposals I've heard that don't seem to be pushed by some special interest group, and they are rarely heard about since no one seems to be pushing too hard for them. Surely it would be possible to create some plans that encourage participation or even require it, while avoiding creating a windfall for some special interest groups (raise SS taxes by X and put that money in a low cost TSP fund) but no one seems to be pushing for anything that doesn't reward some special interest.

Tales like saving too little, spending too much on Scotland trips and finally noticing that the money was running out, seem less than compelling arguments for radical changes that makes me want to contribute to funding these people's bad choices. But a scheme that required them (and me) to save a little more might be workable - if anyone really wanted to help. Color me skeptical about the politics of this.

 

[rbmrtn]

I guess an issue could be made than everyone doesn't have access to a 401k, and many of the plans have high expenses and limited/poor investment choices and no matching contributions ( which be killer to me ).

Lower income folks would say they don't have the extra funds to fund a 401k if they have mortgage/kids to feed etc.

Some IRA rules never made sense. If you can afford to fund it, you lose the tax refund. If you qualify for the tax refund, you probably can't afford to fund it...