Today is National 401(k) Day. If you run out to buy a card, make it a sympathy card because the advent of the 401(k) as a primary retirement savings plan is nothing to celebrate.
The 401(k) will turn 30 in January 2011. It was devised as a way for workers to augment conventional, defined-benefit plan pensions. Since 1981, the number of people earning those conventional pensions has been halved. According to the Bureau of Labor Statistics, since 1980, the number of defined benefit plans has decreased from 148,096 plans covering some 38 percent of private-sector workers to less than 49,000 plans today, covering fewer than 20 percent of private sector workers. Government workers are luckier. In the public sector, 79 percent of workers still have defined benefit pensions, the BLS says.
The trouble with 401(k) plans, points out Michael Miles, a financial planner in Virginia and owner of Variplan Inc., which specializes in managing the retirement money of government employees, is that the switch from defined benefit plans to defined contribution plans was done without giving employees enough help managing their money to give them a fighting chance at saving enough to retire.
A conventional pension plan is almost always managed by a pension expert whose responsibilities include managing the money to prevent loss and reduce risk -- so it will be there when it is needed. They aren't stockbrokers. They are conservative money managers whose job is to preserve and protect.
Holders of 401(k) accounts don't have pension managers, even though the total responsibility for managing their retirement planning has been turned over to them. Their employers want no responsibility for offering advice because they might be wrong and liable for the resulting loss. And to some degree, even if they wanted to help, the law prevents them from doing it.
While employees might be smart people, they aren't pension experts. And so we get news clips of hapless-looking people throwing up their hands and saying, "I can't retire. I'm ruined."
Miles points to the federal government employees' Thrift Savings Plan, or TSP, as a source of ideas for improving how 401(k) plans are managed. For one thing, he recommends that employees urge their employers to keep 401(k) investment costs as low as they can. The TSP costs an average of 3 basis points or 3/100s of a percent annually. It's hard for holders of 401(k)s to know how much they are paying because there are so many layers of costs, but it isn't unheard of for a 401(k) saver to be paying 3 percent or 4 percent in charges. That takes a big bite out of savings. It can wipe out the employer match.