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Does the 401(k) deserve an F?

By Barbara Whelehan ·
Friday, February 25, 2011
Posted: 3 pm ET

The 401(k) is under siege lately, and it's not the first time. During the financial crisis, Congressional committees held hearings during which all the pimples and warts of the 401(k) plan were exposed.

A few days ago, the Wall Street Journal ran an article called, "Retiring Boomers Find 401(k) Plans Fall Short." It cited the results of an analysis conducted for the Journal by the Center for Retirement Research at Boston College. Its conclusion: Americans suffer a savings shortfall which will hamper their ability to maintain their standard of living during retirement. The problems cited in the piece include:

  • A too-low deferral rate over the years, resulting in not enough savings.
  • Too much exposure to stock during the market collapse.
  • Too little or bad advice.

The median 401(k) plan held $149,400 in assets in 2009, and the median income of households was $87,700 that year, according to the Journal. Just eyeballing those two numbers reveals the nest egg won't suffice to carry someone through retirement, even factoring in Social Security.

A liberal perspective

In the current issue of The American Prospect, Teresa Ghilarducci, an economics professor, says 401(k)-type retirement plans are a failure for six reasons. In her words:

  • Only half of the work force has access to a retirement account or pension plan.
  • The plans are voluntary, making retirement savings rates too low and too inconsistent.
  • 401(k) and individual retirement account management fees are too high.
  • Financial markets are too volatile.
  • Many people cash out their accounts to meet immediate needs.
  • And lopsided tax breaks go mainly to the richest taxpayers.

Her solution would be Guaranteed Retirement Account plans funded by workers, employers and the government with built-in provisions that would protect the accounts from greedy brokers, wild markets and the workers themselves.

Wisdom to know the difference

Some of the 401(k) flaws Ghilarducci cites are beyond our control. Plan fees, for instance, have been shrouded in secrecy for many years. A couple of years ago, I attended a conference of retirement industry professionals where there was much hand-wringing over this issue. Panel speakers wondered aloud how in the world they'd be able to explain the complicated fee structures to plan sponsors, let alone plan participants. But beginning next year, at long last, they'll have to disclose fees in terms everyone can understand -- in dollars.

Financial markets are beyond our control, as are unfair taxation policies. Most politicians, no matter their leanings, appear to believe that raising taxes is a crazy idea, regardless of an imminent government shutdown or looming national debt crisis.

But certain things are within our control: the amount we invest for retirement, the types of investments we choose and the discipline to avoid raiding our retirement plans before we actually retire.

I asked Ted Benna if the 401(k) plan can be the main pillar on which Americans can depend for a successful retirement. Ted Benna is known as the "Father of the 401(k) plan" because he discovered back in 1981 the loophole in legislation that enabled businesses to offer these retirement plans for their workers. They were never intended to be a complete retirement solution, but rather one leg of the proverbial three-legged stool.

Benna says there's nothing inherently good or evil about 401(k) plans -- or old-fashioned pension plans, for that matter. "Both have positives and negatives," he says.

"That said, yes, 401(k) plans could provide a sufficient level of retirement income when combined with Social Security, provided each worker starts saving early, saves enough, achieves investment results that have matched historical long-term returns, avoids raiding this money for other purposes, doesn't retire too early, and either manages this nest egg wisely during the drawdown stage or converts all or a substantial portion to a guaranteed life annuity."

So, the 401(k) plan is not a failure. It's a valuable retirement planning tool that we can exploit to enhance our future lifestyles. No one promised it would be easy.


Check out Bankrate's Retirement Realities series. We'll be adding stories to it throughout the year.

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Left of Right
April 21, 2011 at 11:10 am

"Your an idiot if you think a government funded mandatory retirement will keep people in the standard of living they are used to during retirement. That is what social security was supposed to do and it failed"

Yes, anyone who believes that is an idiot. But anyone who believe that that Social Security was supposed to keep people at their current standard of living is an idiot. That was never what SS was designed to do, and to to say it failed because it didn't accomplish something it wasn't designed to do is just dishonest. SS was designed to do exactly what the name implies, provide a minimum level of security. Basically just enough money to keep a roof over your head, cloths on your back and food in your stomach.

Anything more is the responsibility of the individual through retirement vehicles like IRA's, 401k's, pensions, and the free market.

The concept of SS is actually exactly aligned with what every smart investor wants. Diversification.

April 21, 2011 at 10:40 am

Actually, what I found interesting was that the original intent of the 401K was to be part of a "three legged stool" for retirement: social security, pension and 401K. Unfortunately, industry (with lawmakers tacit if not full support) have essentially negated the pension and most Americans don't fund their 401Ks. This leaves social security as the only available retirement option for most. However, even if Americans fully funded their 401Ks, it likely wouldn't be enough for a comfortable retirement (about 80% of pre-retirement income) even if you waited for your full social security benefit.

I am curious what our lawmaker in washington plan to do to fix that?

Angry Taxpayer
April 18, 2011 at 5:41 pm

The government is setting the stage for a confiscation of your retirement accounts to pay off the national debt. They will not call it a confiscation. They will say they're doing it to save us from the volatile stock market. They will replace your savings with long term government bonds that yield 5-7% while inflation rises to 14% like in the 1970s. They will continue to cook the books to say inflation is only 2-3%.

Bend over, here comes the government.

April 14, 2011 at 5:02 pm

ghostcommander-how much of the lost value in 401(k)s was bogus to begin with? What I mean is that the market probably shouldn't have been so good to inflate the accounts to such highs. Same goes for the housing market.

The 'liberal perspective' has maybe one good point - the management fees. I don't know too much about them. Otherwise, how does the lack of access to 401(k)s make the accounts themselves a failure? The volunatry part and cash out for immediate needs reflect a problem with the account holders' dicipline and planning. As for market volatility, assets need not be kept in volatile investments. The reason that they are done so long term is because such investments generally provide a better return than the safer ones, even considering the downturns. Further, there are contribution limits to 401(k) plans. I believe it is $15,000 per year but $22,000 per year for those nearing retirement (similar to the extra that is allowed for IRA's after a certain age). You can max out that contribution on a $80,000/year salary if you want to.

Just one other point - how is something 'discovered' in the tax code? New galaxies are discovered, previously unknown species of life are discovered; the tax code was written by people in the first place!

March 24, 2011 at 3:02 pm

Because of the "almost financial" collapse, 401K's lost over 25% of their value. People 55 and over will not have that loss made up before they retire. Adding to the demise is those excessive fees charged for management of 401K's.

The American worker would be better off to buy antiques, land, jewelry or homes that would appreciate in value. The citizens should join together in groups and pool their resources and make their own financial decisions.

There is no guarantee that there will not be another "almost financial collapse" in the near future.
Many developers/home buuilders, real estate brokers, mortgage companies, banks, and even the Wall Streeters are still operating in the 2007 mode of "Greed."

Our economy is not going to recover for a long time because the business entrepreneurs are increasing their prices for commodities, wages are stagnant or lower, and our exports have not increased.

In summation, there are very few stewards of our society. Those in powerful corporate/business positions do no know much about economics, nor do they care.

We will probably continue struggling for years because there is not much objective leadership in the business/corporate world and in the political world.

March 22, 2011 at 8:44 pm

Giving more money to the government is never the answer. They are more irresponsible than any individual. Your an idiot if you think a government funded mandatory retirement will keep people in the standard of living they are used to during retirement. That is what social security was supposed to do and it failed. Same goes for medicare and government funded health care. It's just another government jobs program that does not contribute to GDP, only to debt. FYI, politicians are more greedy and deceitful than wall street. Perhaps education is a better way. I have been saving everything I can in a 401K since I started working. I am 20 years from retirement, have withstood 2 major market crashes, I am expecting a third, but I will still be able to retire when I want to. I realize now that the government will try and take that money away because it's not fair that I worked hard and saved money. Open your eyes, your life is your responsibility, not the governments. That is what freedom means.

March 21, 2011 at 5:06 pm

Okay, we DO have a government-managed retirement plan. HELLO! It's called Social Security, and last I heard, it'll be broke long before I retire. And you want to give them MORE of our money?

Yes, hipshot charley is a savvy investor. And no, not everyone is. But everyone should be. Not taking responsibility for your money is just plain dumb, and we can't afford to bail out everyone who's dumb. Should we just grab some of hipshot charley's monthly check, because someone else didn't have time to think about it when they were younger?

Don't get me wrong, I think the investment industry is full of criminals who probably would have been lynched in an earlier era. Their lobbyists own our government, and the average citizen probably can't get a fair deal these days. But I think the way out is through education and empowerment, not socialism.

P.S., my own retirement account is woefully underfunded for my age, but at least I'm aware of it and blame no one but myself.

M.L. Carle
March 15, 2011 at 10:58 am

It is nice that Hipshot Charlie was able to negotiate himself a reasonable pension, but it is clear that he is a savvy investor, educated and dedicated to managing his money. Unfortunately most people are not, and government investment might work better to protect them, especially if there were a minimum guarantee.

March 04, 2011 at 7:27 am

The problem is that we were stripped of our pensions because the companies sold us the line that the 401K would be enough to cover our retirements. My company still has both, and that's wonderful, but the growing cynic within doubts that it will still be there when I need it in 30 years.

hipshot charley
February 26, 2011 at 6:00 pm

We have been retired for about 17 years and have invested for about 30 years. We have invested mostly in equities. We feel full service brokerages charge outrageous prices to buy and sell and their investment advice should be carefully evaluated. They are reluctant to reveal their charges. We have taken some awful hits on our investments, sometimes from greed and sometimes from ignorance. Having said this we feel we are way ahead of simply taking retirement.
From their current track record of handling money I would be nervous about government investing for me.