FREE NEWSLETTER
Go to main Forum page »
An article in Commonweal Magazine is a bit unkind to 401k plans from the interesting perspective that asking people to save on their own takes away from other uses.
“But there’s increasing evidence that our current approach is not only economically inefficient but also a key contributor to the precarity and isolation unraveling the social fabric. “
“What was once a balanced system of collective and individual support has come to rely on a single, unreliable leg.”
The author also criticized the investment community and its influence on Congress. The basic argument is we need a better government run retirement system of some kind and it’s unfair to put the burden on individuals to save, invest and take the risk. I’m not sure how I feel about that.
A proposal by Sen Sanders would require employers to offer a pension plan. That is beyond unlikely.
I benefit from a good pension, but one based on decades of employment with the plan sponsor which is not and never was the norm. I also had a 401k beginning in 1982. Over many years I designed, negotiated and managed both plans.
I support increasing Social Security as a forced way to save, provided the program is always funded at necessary levels – meaning higher payroll taxes. I would not abandon 401k plans, but I would consolidate all current tax- advantaged programs into one design.
How do you feel about the 401k? Do you see a retirement crisis in America, especially among the lower 50% of earners.
The comments to this are very interesting, from CEO/CFO perspectives, all the way down to the “users” like me. My first employer instituted a 401(k) plan very soon after they began existence. But we had miserable investment choices, a small match, and as the company began to fail, the owner stopped making deposits into the plan (luckily this was resolved just before the company went out of business). At one point I was offered a job with a company that had a 8-year all-or-nothing vesting plan (didn’t take the job). I’m very fortunate. The three legs of my retirement stool include my 401(k) (now an IRA), Social Security, and my personal savings/investment accounts. The 401(k) plan is one of the reasons I am happily retired.
I do see a crisis ahead for younger earners. With more expensive homes, cars, and even groceries, some folks – even with decent earnings for their age – are living paycheck-to-paycheck. There’s nothing leftover for 401(k) contributions.
“we had miserable investment choices.” That was the challenge in 1978 when I began investing. With my initial 401(k), a Single K, the broker steered me into higher fee mutual funds, with loads. I got an education and by the time I began the company’s SEP I was able to steer us into appropriate investments.
I think we have to understand that everyone who responded and commented to this conversation is smart, educated, and affluent. I feel very much at home with all of you. What we’re missing in this conversation are comments and observations from poor people…single moms with 3 kids, parents with expensively handicapped children, adult children caring for parents and grandparents, Trappist monks, and ex cons to start with for perspective and insight.
As usual in the United States, the retirement system mostly benefits people who need the least help. The section 402(g) limit this year is a whopping $23,000. How can the median income taxpayer who makes $83,730 annually contribute 23% of their income to a retirement plan when they can’t afford rent and food? The billionaire political donors control the government. It is shameful.
There are other limits that prevent higher income from disproportionately benefit from qualified plans such as a limit on the compensation that can be used. Hardly billionaires or even millionaires.
Also, keep in mind that social security is designed to provide a higher benefit as percentage of earnings for lower income beneficiaries.
I don’t understand how this has gotten so complicated in the US. A simple personal pension account that belongs to the individual and is legally required to be funded by a portion of the employee’s wages, deducted at source by their current employer, along with a legally mandatory employer contribution seems like a straightforward solution. If the person changes jobs, they give their pension account number to the new employer, and the payroll department fulfills its legal obligation. What’s so difficult about that? What am I missing? It seems to work effectively and effortlessly in multiple countries like the UK, Australia, Ireland and large parts of mainland Europe.
You would think, right? We can’t even make sure what we have in our Social Security system remains sustainable.
All those countries have better organized health insurance systems too while we just passed legislation to make ours worse for millions of people.
We are obsessed with taxes whereas European’s for the most part understand the value of what they get for their taxes and what daily expenses they no longer have to worry about.
I have a friend in England now retired who pays no premiums and no out of pocket costs for healthcare. Of course, he paid like 12% of pay in dedicated taxes while working, but that trade off gives a lot of peace of mind in retirement.
Here, that approach has been labeled socialism, which, of course it is not.
Mark… the USA, we don’t like being told what to do. Employers will claim all sorts of hardships, savers will complain that the government is being too intrusive and finally the big money will scream bloody murder unless they can find a way to profit from this set up. The joys of capitalism. I’m probably jaded, but there is a modicum of truth here.
Agree with Mike. Here are my ruminations in re: 401k
I don’t agree SS or Medicare are disasters, actually they work quite well for tens of millions of Americans, despite Congresses failure to assure their solvency…yet. Part of that is because Americans can’t accept the need to increase revenue via taxes.
What about the millions and millions who don’t have a 401k, etc.? To say individuals should and assume they can manage their own retirement is at best unrealistic.
I suggest as desirable as it should be, the majority of Americans cannot do it for a variety of reasons.
So we need an alternative.
As a CFO, I’ve been involved in setting up and winding down pension plans. I’ve redesigned 401k’s to provide lower fees and faster vesting. Pension plans are an albatross around the employer’s neck. Too much investment risk, not portable, and mismatch of assets and liabilities. 401k’s can be good or mediocre, but it is still a Wild West of bad investment choices, high fees and lengthy vesting periods that don’t align with a mobile workforce. Some of our international folks may have seen superanuation plans that may be far superior to what the norm is in the US. May be worth a look.
I never saw a 401k with lengthy vesting periods, but your point certainly applies to DB.
We can’t even get people to understand we need to increase SS FICA even modestly let alone consider a superanuation, but clearly we need some stronger base for everyone.
You can forget the next three years for sure. We are in the age of empowering individuals and DIY. 🥵
What do you consider legnthy? 5 years was the standard until we went safe harbor, which required us to go to 3 years.
My goal was to have immediate vesting. 5 years is terrible and 3 years is poor.
I had a 401 K Plan on all my jobs except my first job, Ford Motor Company, from 1971 until 1981. They added one a few years after I left them. In all my other jobs, I had a 401k.
In two of my jobs, I also qualified for small pensions….Ford Motor Company and Mitsubishi Motors of America. Ford’s was $219/mo for a joint survivor annuity at 50% and Mitsubishi was $485/mo JSA 50%. Both former employers gave me the opportunity in 2012 to take a buyout, and I did. Those funds were rolled into my Traditional IRA at Vanguard, where they have done spectacularly since.
The biggest “mistake” I ever made financially occurred in 1987, when I left a job and did not roll over my 401(k) balance. Instead, I “cashed it out,” and it was spent…and I don’t remember on what. As I remember, the amount received was $13,000. My trusty HP 10bii tells me that had I left that $13,000 invested in the market, even as a traditional 401(k), without a Roth Election, earning the average rate of the S&P over the 37 years until I retired in 2024, it would have grown to approximately $488,150.
As it is, I retired in January 2014, with a total nest egg of @$1.3M. From 1987 until 2024, I am certain I made some smaller additional financial errors. mostly “dumb purchases,” but overall, I am happy about my 401(k)/403(b) experience. I added 403(b0 because over my last 15 working years, I was an academic, so I have a 403(b). It wasn’t until 2021/2022, however, that our provider began offering the Roth Election, so although I did take advantage of it for three years, over 65% of my 403(b) dollars were traditional, and the balance Roth Election.
So contrary to the article, which was obviously written by a biased author with an agenda, the retirement stool still has four legs, for my wife and me.
My Qualified Retirement Dollars…my non-qualified retirement dollars, our social security benefits, and our brokerage portfolio dollars.
It is not the tools, it is the craftsman who is responsible for the outcome. As my least favorite financial guru, Dave Ramsey says, and it is typical of his poor advice on investing, if you invest $100 a month from 25 until 65, you will have over $1.17M for retirement. He is obviously using an interest rate of 12%, much higher than the 10.5% average of the S&P, because my calculations say you will have $736,904.36.
Either way…ANY Investment plan, constantly applied, over an extended period, will result in a better result than failing to do so. I am glad I had the 401(k)/403(b) option available.
“He is obviously using an interest rate of 12%, much higher than the 10.5% average of the S&P, because my calculations say you will have $736,904.36.”
He also is most likely keeping the money 100% in stocks to reach his total over the entire timeframe until retirement. Not recommend!
Constantly applied is the key and not making big mistakes is another, but all too many people don’t do the former (or can’t) and too many do the latter. That is the essence of the problem.
You seem to be living on your accumulated assets plus SS and you did well, but you are assuming all the risk which may be fine for knowledgeable people, but surely not for the majority.
I have a question though. What are non-qualified retirement dollars compared to a brokerage account?
This article does not take an objective view of the problem. Suggesting that there is but one stool left, for example (personal savings), is absurd and misleading. Congress will do what they always do, wait for the last minute to add some reforms. Social Security as a leg is not going anywhere.
And statements like people being forced to ‘hoard’ in order to prepare for retirement is just a bit hyperbolic. Hoarding is what people in Stalingrad did when it was assaulted by the Nazis.
People make choices throughout their lifetimes on all sorts of matters: eating right, where to live, benefits of a lifetime of exercising, getting a good education, obtaining routine medical care, what to do for a living, spending within their means, etc, etc.
We do a rotten job in the U.S. on educating our people on all these matters. It’s inexcusable. People leave high school unprepared to make good decisions about all sorts of issues they will confront in life. And yes, some of this guidance should be supplemented from family, but in many cases they have not been educated on such matters.
Savings plans work. They are not perfect. Nothing is. But is the tool the problem here? Or is it the person wielding the tool? And if it’s the person, how do we help them more skillfully leverage savings plan?
And yes, Social Security can be improved. For one thing, tax all Social Security wages. Why stop when an individual’s income reaches an annual amount of $186,000 — or whatever the limit is this year? Medicare taxes apply to all income, why not Social Security?
Some of this stuff is hard, and some of it is not.
That was a really strange article. The author seems to be blaming alot of societal woes on 401(k)s with arguments that are not particularly compelling.
I like this post and appreciate Mr. Quinn for taking the time to write it. I spent most of my career selling retirement plans and investments to employers. Defined contribution plans can be every bit as effective as the defined benefit plans they have many times replaced. It all depends on the plan design and funding level. A generous profit-sharing plan with or without a match that provides an annuitization option can work great for employees. A DC plan also provides the plan sponsor with predictable funding costs. I like the idea of giving employees some responsibility for their own future.
A DC plan has the edge of portability and less need for job tenure.
But I suggest the real effectiveness rests with the individual- to maximize participation, to invest wisely, to not borrow from it and to always rollover distributions upon job change.
Many workers don’t to those things. And needless to say, there is market risk that does not exist for the employee in a DB plan.
Given reported account balances it seems clear workers on average are not using DC plans as they need to and that’s where theory hits reality.
Dick,
Regarding your second paragraph:
unfortunately many Americans are financially disinterested, or ignorant.
That’s why some form of the Australian system is the answer. I believe companies have to participate, so they can’t completely wash their hands of participation as some have done. One of Aussie contributors could clarify.
I agree. I have suggested that the employer’s portion of FICA social security taxes be significantly increased allowing for increased benefits in the future fully recognizing this may reduce any retirement plan benefit contributions and in the short term perhaps be reflected in wages.
I was involved with retirement benefits for a long time and I just don’t see a way that thousands of different programs among employers can get the job done for our society.
We need a more substantial income foundation universal for all workers. If we don’t, in the future, society will pay in other ways.
Over the years I have come to feel the same way about health insurance.
At the height of their popularity (roughly 1970s–early 1980s), about 45–50% of private-sector workers had a pension plan, compared to ~15% today. In some industries, typically heavily unionized, 80% or so of workers had a pension plan.
It would be nice to think everyone can save and invest and accumulate funds for a secure retirement on their own, especially at a time when retirement can be as long as working years, but reality says otherwise.
How different retirement would be for all of us without Social Security, even the financially savvy people on HD.
Pensions are not coming back and work patterns showing relatively short tenure with one employer means pensions would be of little value anyway.
So, we’re left with defined contribution plans and Social Security. And even employer DC plans don’t apply to all workers.
To even my conservative side that means to me that if we don’t want the next generation of retirees financially wanting and negatively affecting the economy in the process, we need to strengthen the social security system and spread the additional tax burden on workers and employers while recognizing the short-term consequences.
Let’s face it, we are likely never going back to employer sponsored pensions or a government sponsored plan. The best we can probably hope for is a better use of the system already in place. As the father of 2 recent college grads, I appreciate plan sponsors who default a contribution rate for new employees that will maximize the employee match and then default those contributions into a target date fund appropriate for their ages. I worry that a lot of people are not aware of the benefits of saving early for retirement and will fail to voluntarily take advantage of their employer plans simply because they are not properly informed. I wish there were more controls in place around early withdrawals of 401k balances, especially when young people change jobs. Far too often they take the payout and get a check larger than they have ever seen before, despite the penalties. I know we can’t control what people do with their money, but we can make it harder for them to make mistakes that will impact them (and society as a whole) down the road. Maybe a mandatory counseling session to discuss how the money is going to be used would discourage young adults from making bad choices.
I don’t disagree with your points here. I’d like to add the other piece of the equation is managing debt and not being stupid with spending. That then makes it so much more difficult for the worker to focus on savings when they are busy servicing a life riddled with stupid debt! I think I ranted…. sorry y’all 😞
“…managing debt and not being stupid with spending.” (emphasis mine)
Stupidity is an individual right and neither you nor the government can take that right from an individual. Best we can do is to educate.
Thanks for linking the article, Dick, I found it interesting. We really didn’t know more than a 401k since any pension we had contributed to was frozen after a few years. The 401k was really all we knew about saving for retirement other than our parents telling us to pay our house off before we retired. We made a lot of mistakes with the 401k but things turned out ok in the end.
I was interested in what the article said about the 401k lobby being a big one because the amount of $$ in 401ks is so large. Also the part about people having to save on their own so they miss out on community and generosity. I hadn’t thought about how a large 401k might mean you are more isolated because you don’t need to rely on your community. And you have to save for retirement in your 401k so you can’t be a generous giver. Personally, I don’t agree with the generous giver part b/c we haven’t experienced that. Chris
It seems odd to me that the major financial retirement vehicle is an originally obscure tax code provision.
I’d prefer zero inflation instead of purposefully trying for 2% inflation which cuts the value of savings in half over a working person’s career. So, we could earn while young and save for the future knowing our savings would have buying power equal to today, not just in things like technology, which improve but also in the basics like healthcare, housing, education, food, etc.
I don’t think the retirement crisis is necessarily widespread though. I’ve had many tenants whose only income is Social Security. They all have a nice place to live and a couple of them live where I used to live in properties that I bought, moved from, then rented. Their utilities are affordable and they don’t lack food. My eyes show me that the basics are covered in my area. So I should also be able to live solely on Social Security. HD readers probably know people who live only on Social Security and still save. Do I sometimes forgive rent and debts and help people? Yes. I don’t think I would’ve 100% had to though but there’s too much to say about that to address in a simple reply post.
Well, using other people’s money is not a new phenomenon. Want more disposable income? Tap other people’s funds.
I personally really liked the 401k when it became avaliable. When I left my employer at age 32 to start my business I took my profit sharing with me. When it became available I started a Single K. As the business grew i opened a traditional SEP for all employees. I still have my 401k at age 79.
Employees were each given statements which indicated their total benefits. A few weren’t thrilled with a savings plan. They were the same ones who argued for more, more, more. Some simply can’t live within their means and will kick the can down the road.
My approach rewarded all equally. How we flush our money is a personal issue.
Not sure what other people’s money you are referring to here.
“In place of collective, guaranteed payments to retired employees, retirement security came to hinge on the amount individuals invested and how well those investments performed….The conventional wisdom says the solution is simple: save more, save sooner.,,,,,Instead of buying coffee out or splurging on avocado toast, the advice goes, redirect that money into your retirement account. ” The author goes on to state: ” A retirement system that compels individual hoarding for the future distorts how we live and relate to each other here and now.”- The article.
So, personal savings are “bad” and someone else should do this for us, using funds from where?
Of course, personal savings are not bad, but for many they are not practical when you consider all that is required to save for. I agree virtually everyone could find more to save, but enough?
We all use someone else’s money, be it employer money or others via Social Security and Medicare.
In a 340 million person society made up of people with very different abilities, intelligence, backgrounds, etc. I do not see it remotely possible to simple say we will empower people, (the latest proposal was giving people money and let them negotiate for their own health insurance – brilliant) and let them use their money and fend for themselves. Or to say if you don’t plan for you financial future, too bad, you are on your own.
What better way to assure everyone pays toward necessities like retirement and health care and no-one becomes a burden on society than to guarantee such coverage through a universal system funded by everyone paying taxes based on their income level?
These concepts seem to be viable to one extent or another all over the world except in the US. I didn’t always feel this way. Back in the 1960s I even helped my employer lobby against Medicare. But experience dealing with people and their benefit programs from CEOs to laborers taught me a lot.
If there is a universal solution without universal action, I would sure like to hear about it.
I actually agree with much of that article. For example, concerns about outliving my money have caused me to be more stingy with my gifts. Regarding Social Security, raising income limits on payroll tax, a gentle increase to retirement age in order to keep people in the workplace longer are worthy of debate.
Defined Contribution (DC) plans work when ‘used as directed’. However, I am concerned about the workers at the bottom. We need the services they provide, we need their families. Working at or near the minimum wage and raising a family make it near impossible for them to even think about preparing for retirement.
But what to do? A national pension? Maybe, but if employers don’t want unfunded liability, I doubt that our lawmakers will either. And who would pay for it? Am we willing to help via income tax? Would this be another way that the federal government subsidizes employers that underpay their workers?
I have lots of questions. Please don’t ask me for answers.
Like Mr. Quinn, I’ve also benefited from a federal employee pension and a defined contribution plan (the federal TSP, effectively a 401k). For younger employees to get the advantage of long-term investing, they need to start early and contribute a sizeable percentage of their pay to a 401k plan. That’s tough for a lot of folks. And many people have difficulty wrapping their minds around issues like Roth v. traditional, employer matching programs, and how to allocate investments.
If we don’t have a paternal/parental system making decisions for people, I worry about folks mismanaging their future. Not all are at HD level of concern for their own finances.