401K pioneer

[Bigdawg]

Interesting beginning to 401K's back in 1982.

The inventor of the 401(k) says he created a ‘monster’

 

[athena53]

I had an employer announce rollout of a 401(k) in 1983. We were acquired before that happened and the acquiring company didn't have one. It was delayed for another year or so.

I see two major issues with the 401(k). One was mentioned in the article: some plans are just bad. I've been through a couple of those. One, with a GE sub, had either company stock or proprietary funds with no available information other than what it was worth the day you looked it up. No publicly-traded mutual fund could get away with that. Interesting that the guy who publicized the 401(k) used Vanguard for his clients. I wish there were more benefits administrators who were that conscientious.

The second was the number of companies that used it as an excuse to terminate traditional DB plans and pocketed a lot of $$$ in addition to dumping interest and longevity risk back on their employees. Let's say the employer was putting 6% of payroll into the DB plan. That expense is gone. Even if they offer a match in the 401(k), the typical max seems to be 3% of payroll and of course that applies only to the small % of employees who contribute enough to get the maximum match. Some had vesting requirements for the match so even then, people who left before (typically) 5 years didn't get all the company contributions. I know of one employer that had a zero match. So, they got out of paying any retirement benefits at all. Tacky.

The only company I knew that did it right was one that acquired my employer in 2006. They'd terminated their DB plan so it wasn't available to us, but they matched 100% of the first 6% we contributed PLUS everybody got 6% regardless of any other $$ they put in (even if they didn't participate at all) as a replacement of what they would have gotten in the pension. So, I put in 6%, they put in 12%.

While I like the portability of 401(k)s, in general I believe they haven't served employees as well as DB pensions.

 

[jazz4cash]

I was very fortunate that megacorp rolled out a fairly benevolent 401k plan in '84 I think. It was a huge meeting in the auditorium but the old timers were skeptical since it was replacing the profit sharing plan. Little known fact that was mentioned in the newspaper excerpt is that 401k contributions bypassed soc sec taxation by virtue of the salary reduction.
Also amazing to see the interest rates of the day...17% conv mortgages!


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[Car-Guy]

I always saw the 401k as a pay increase, not a pay cut or salary reduction plan, even back in the mid 80's when I jumped in with both feet. How can a 6% "match" be a pay cut... I could write a book (well maybe just a short story) on my history with 401k's. But flipping to the last page, by the time I ER'd five years ago, my 401k was worth well over a million. And, other than maybe the first few years when I started to contribute, I never missed the money I was putting in. From my POV, it was/is a great program.

I don't expect I'll need the 401k money for a long time (if ever) but RMD's are coming in a few years and that will eventually force me to start taking it out.

 

[gauss]

Little known fact that was mentioned in the newspaper excerpt is that 401k contributions bypassed soc sec taxation by virtue of the salary reduction.

Uhh -- I think somebody got this part wrong. This is true for HSA contributions but not 401(k) contributions -- unless you are talking about the employer match.

I am not sure, offhand, how 401k deferrals effects the employer's FICA contributions, but I always thought that it was handled the same as the employee portion (ie fed and state tax deferred - FICA, however, still applies)

-gauss

 

[jazz4cash]

Uhh -- I think somebody got this part wrong. This is true for HSA contributions but not 401(k) contributions -- unless you are talking about the employer match.

-gauss

No it is correct as mentioned in the WSJ article, but only in the early years. After a few years they started basing SS deduction on the gross earnings before 401k contributions.

 

[gauss]

I am not sure how it worked historically but in the past few decades, while I have been paying attention, 401k deferrals were subject to FICA withholding.

Are we saying the same thing here?

 

[jazz4cash]

I am not sure how it worked historically but in the past few decades, when I have been paying attention, 401k deferrals were subject to FICA withholding.

Are we saying the same thing here?

I agree 401k deferrals are subject to FICA and have been for a very long time. I only brought it up in light of the early days of 401k. I remember reading the prospectus and the term "salary reduction" made think twice about signing on but paying lower SS taxes, getting a match and the flexibility to borrow convinced me to take the plunge. Too bad employers and the financial industry don't always offer plans that have employees needs as a priority. Net result is many people will wind up with even higher fees and annuity products.


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[treeofpain]

One major benefit of 401k is that any remaining funds can be inherited by the next generation, while with db plans, the benefit ends with the person or their spouse. Am I missing something here?

If this is indeed the case, then you could argue that db plans have actually worked against multi-generational upward mobility, since any plan benefits cease with the generation that earned them.

If I am misreading this, please comment.

 

[athena53]

Yes, the portability is a benefit, especially with today's mobile workforce (due to reduced loyalty on both sides). Of the 7 employers I had during my career, 4 were for 3 years or less. Still, it leaves investment risks and longevity risks with the employee.

 

[Big_Hitter]

One major benefit of 401k is that any remaining funds can be inherited by the next generation, while with db plans, the benefit ends with the person or their spouse. Am I missing something here?

If this is indeed the case, then you could argue that db plans have actually worked against multi-generational upward mobility, since any plan benefits cease with the generation that earned them.

If I am misreading this, please comment.

That's not the purpose of a DB plan. The purpose of a DB plan is to work with personal savings and SS to provide a comfortable retirement for a career employee, not his/her progeny.

If you have money left in a DC plan when you die then you either died before you were expected to or didn't spend enough.

Also, lump sum distributions (from either DC or DB plans) are positively correlated with poverty among the aged. Annuity payments from DB plans prevent poverty.

401K plans work great to supplement retirement income from SS and DB pensions, they were never meant to replace DB plans.

 

[jazz4cash]

That's not the purpose of a DB plan. The purpose of a DB plan is to work with personal savings and SS to provide a comfortable retirement for a career employee, not his/her progeny.

If you have money left in a DC plan when you die then you either died before you were expected to or didn't spend enough.

Also, lump sum distributions (from either DC or DB plans) are positively correlated with poverty among the aged. Annuity payments from DB plans prevent poverty.

401K plans work great to supplement retirement income from SS and DB pensions, they were never meant to replace DB plans.

+1
I was going to ask if you could document the comment that I bolded, but I found many confirmations when I googled the comment.

 

[JoeWras]

401K plans work great to supplement retirement income from SS and DB pensions, they were never meant to replace DB plans.

But they have for so many Americans.

Hey, I like my 401k. But I also see the other side of the erosion of the DB plans.

At my Megacorp1, I saw them chew away at their DB plan until it vaporized. They "added" to the 401k plan at first, to throw a bone to the employees trapped in the transition.

Then recently, they started chewing away at the 401k plan. They "match", but don't deposit it in the account until December of the year. If you quit or are laid off, you lose the yearly accumulated match.

Some of this is just downright wrong.

 

[athena53]

Then recently, they started chewing away at the 401k plan. They "match", but don't deposit it in the account until December of the year. If you quit or are laid off, you lose the yearly accumulated match.

Some of this is just downright wrong.

I worked in insurance and Chubb (although I never worked there) started this years ago. I'd thought of Chubb as a class act, but not after that. What impressed me with the employer that gave everyone not in the DB plan 6% (in addition to the match) was that when I left for another job in September, I got a pro-ration (so about 75%) of 6% of my salary added to my 401(k).

 

[RobbieB]

I think I worked for 2 companies early in my career that had pension plans. I never got a pension though, you had to be there for 20 years to get a pension. One job lasted 4.5 years and the other a whole 6 months.

The other interesting thing is neither of those Companies lasted 20 years after I left. Poof, gone are the pensions.

I'll take a 401K with profit sharing and 5 year vesting any day over a "smoke & mirror" pension.

 

[Big_Hitter]

I think I worked for 2 companies early in my career that had pension plans. I never got a pension though, you had to be there for 20 years to get a pension. One job lasted 4.5 years and the other a whole 6 months.

The other interesting thing is neither of those Companies lasted 20 years after I left. Poof, gone are the pensions.

I'll take a 401K with profit sharing and 5 year vesting any day over a "smoke & mirror" pension.

uh.....maximum statutory vesting is 5 years for a DB plan, not sure why you would have to wait 20, js

even if the companies went under the benefit is still guaranteed - I'd rather have a pension (which I do from my previous mega)

DC plans have a maximum vesting period of 3 years (or 6 year graded)

 

[Big_Hitter]

But they have for so many Americans.

hence why we have a private sector retirement crisis in this country

 

[Big_Hitter]

I worked in insurance and Chubb (although I never worked there) started this years ago. I'd thought of Chubb as a class act, but not after that. What impressed me with the employer that gave everyone not in the DB plan 6% (in addition to the match) was that when I left for another job in September, I got a pro-ration (so about 75%) of 6% of my salary added to my 401(k).

6% extra isn't bad, we have a match plus a PS contribution

DB plans are so much more valuable for older employees

 

[athena53]

I think I worked for 2 companies early in my career that had pension plans. I never got a pension though, you had to be there for 20 years to get a pension. One job lasted 4.5 years and the other a whole 6 months.

The other interesting thing is neither of those Companies lasted 20 years after I left. Poof, gone are the pensions.

I'll take a 401K with profit sharing and 5 year vesting any day over a "smoke & mirror" pension.

Pensions are not necessarily gone if the company is gone. It certainly happened before ERISA (happened to my grandfather) but if the plan was funded there would have been money to pay the beneficiaries. Vesting rules changed, too. I think it's now 5 or 7 years, depending on whether you have gradual vesting or "cliff" vesting (where you go from zero to 100% after X years).

I was fortunate; I get one pension from a GE sub for $933/month (was there 5 years before it was acquired in 2006 and pension accrual stopped) and another from a Prudential sub that downsized me outta there 25 years ago after 10 years, for about the same amount. No COLA so the buying power will erode over time, but annuities are good. We'd have a lot less in the budget for "wants" without personal savings, though.

 

[jazz4cash]

The TSP is an ideal setup IMO, moderate DB and DC components plus Soc Sec to provide three legs of income. Now that private companies have pretty much done away with DB pensions for new employees, I can't see them reversing. I good alternative would be some sort of cheap fixed income option (aka fixed deferred annuity) within the 401k plan.

DW had one of the worst plans I ever saw many years ago. The custodian collected payroll contributions, but they only invested when someone playing Investment God felt the time was right. That only occurred a few times a year so the contributions generally sat earning no interest with somebody else getting benefit of the float.

Maybe we need Ted Benna to come up with reforms to restore the 401k plan before it implodes on the millennial generation.

 

[2017ish]

This seems to be one of those areas that is heavily dependent upon the field in which you work. DW and I both have been solely with professional employers, predominantly small businesses. 401k has been fantastic for us, and it is unlikely that those employers would have been providing a DB plan in any event. (possible exception being my Big Law employer for 8-9 years right out of school)

Will grant that if you are with a solid Mega, or with Fed. or other viable Gov., it may be a different story. So too, several of my age-cohort relatives are benefited by relatively sound construction union DBs.

 

[jazz4cash]

This seems to be one of those areas that is heavily dependent upon the field in which you work. DW and I both have been solely with professional employers, predominantly small businesses. 401k has been fantastic for us, and it is unlikely that those employers would have been providing a DB plan in any event. (possible exception being my Big Law employer for 8-9 years right out of school)

Will grant that if you are with a solid Mega, or with Fed. or other viable Gov., it may be a different story. So too, several of my age-cohort relatives are benefited by relatively sound construction union DBs.

I don't agree it has much to do with the field in which you work except that some employers large and small seem to take their employees needs into account more than others. Unfortunately the trend is that more employers are taking the least expensive plans available and do not value long term relationships with employees. 401k has been great for me also largely because my employer set up a great plan with a decent match at Fido as a complement to the DB pension and I embraced the plan early on. In my early career I might not have embraced the plan so readily. Recent developments like auto enrollment and target date funds are good improvements

 

[Olbidness]

My Mega Corp 1.0 pension is a calculation of years of service and pay. The bad thing is the pay component is base pay no OT. Mega Corp 2.0 is a cash balance plan, 5% of pay OT included goes into an account at Fidelity. I can see what the balance is lump sum or its the monthly payment is at age 65. The kicker is that it has a minimum guarantee of 5% interest on the balance.

IMO DB plans are a dinosaur that will eventually be phased out except for public employees.


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[rodi]

I'm a big fan of the 3 legged stool approach - (savings, 401k, pension as the 3 stools).

Unfortunately, too many employers decided DB was too expensive and eliminated them. I was fortunate that I was vested in 2 pensions prior to them being frozen... And I will start collecting a whopping $460/month (not COLA adjusted) on 10/1/16... I'd obviously have preferred that one or the other keep building/accruing past the freeze point.

Unfortunately, again, not all 401(k)s are good deals. DH's last employer is a case in point. Some of you may remember my post about his craptastic 401k. Fortunately, I had a good plan with low fees, no loads, etc. When I worked for a small private company I had a similar plan to DH's - lots of loads, small matches... the only benefit was the tax deferral... but the loads could eat up that benefit.

I definitely used 401ks to my advantage... But not all 401ks are good.

 

[Greencheese]

I find it ironic people are complaining about 401k plans on a website about retiring early. DB plans had/have much more ironclad rules regarding withdrawals that prevented the very goal of this website...