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I recently read – again – that 401k plans are a scam. You can’t save enough, you can lose money, etc.
Consider these words of wisdom. “It is a scam. When I worked in corporate America I contributed the max amount each year. At the time it was $19k per year. It took 5+ years to hit $100k. When I stopped contributing it barely grew.”
We don’t know the years involved, but nevertheless it’s nonsense. Investing the $19,000 a year even in a GIC would get you over $100,000 in less than five years.
It’s a long term investment folks! Not to be borrowed from or used for hardship expenses. Think of it as a lockbox for your future security.
That’s not how many, I dare say most, participants view the 401k.
Somehow we have been convinced the 401k is a poor replacement for the pension which was never universal, was designed to hold workers to a job for decades and was dependent on the financial state of the employer – think Studebaker – defunct in 1968 after being in business since 1852 and leaving retirees high and dry with no funded pensions – helping to precipitate ERISA which in itself unintentionally accelerated the demise of many pension plans.
[Note for history buffs, Studebaker made most of the wagons for the migration West and made the carriage taking Lincoln to the theater] my Dad sold Studebaker and Packard. I learned to drive on a Studebaker Lark and even drove an Avanti – once the fastest production car in the world at the time – 170 mph.
Although I enjoy a good pension – plan was started in 1911 – and would not trade it, linking your financial fate to the fortunes of one employer or even union has its risks. Unfortunately, the transfer of risk to the worker via 401k has not gone well either with too many workers taking only a month to month view of investments or poorly allocating funds.
Outside IRS rules, there is a lack of uniformity in 401k plan design and certainly regarding employer contributions and investment options. They are clearly underused, misused and not fully understood by workers, but they are not a scam.
They can provide a valuable component of financial security. I first contributed to our 401k when I implemented it in1982 at the urging of the Board of Directors. It seemed to be the thing to do even with a pension plan. I always contributed something until the day I retired in Jan 2010, at times just enough to get the company match. Today after nearly 15 years retired and ten RMDs closely links to 4%, my balance has grown considerable and easily exceeds the balance on December 31, 2009.
The US needs a better universal retirement system, more user friendly, more uniform, guaranteed employer participation, but that’s something for the next generation to solve.
For now, we better focus on making Social Security sustainable.
401Ks/403Bs are excellent replacement for pension. The so-called golden handcuff is broken. No one wants to work at a miserable company for the rest of his/her life. Also, the employer has always used the “golden handcuff” to threat/cajol the employees to stay. During time of business contraction (read: recession), employers find ways to reduce/eliminate the vested pension from the laid-off employees. Now, a laid-off employees can roll over their hard-earned 401k/403b account to IRA or to the next employer’s 401k plan.
We’ve been fortunate in this regard. We both used to work for the state of California, which started offering a self-directed option for 403Bs/401Ks through Schwab. We moved our accounts there and were able to select our own funds (we use Vanguard funds). When we each changed jobs, we rolled our accounts into IRAs, still at Schwab.
As it happened, our next jobs both used Fidelity for retirement accounts, which is where we’re both saving now (in Fidelity funds). My husband is now in the private sector and gets a company match on his 401K. When I retire next year, I will likely roll my 403B and 457 accounts into my Schwab IRA. In short, we’ve had good options and a fair amount of control, and it’s worked out really well for our net worth.
I really enjoy Dick’s posts reflecting on his experience as a benefits manager–so thank you again, Dick. I do also agree with some of the posts that fees matter, and are often buried or at least undisclosed. Some 401k’s and 403b’s (for non-profits) are much better than others, especially regarding fees, some of which may be buried in the investment options. A switch in employers is a great moment to transfer balances into the lowest fee IRA’s. The emergence of Roth options in these plans has also enhanced their value, as the people who use them the most are most likely to have higher tax rates later in life. I have refused to use a custodian because of a bad plan, and I know that it is very hard for most users to evaluate the quality of a plan. [Hint: the difference between theoretical return and actual return is being diverted somewhere, and often the administrator (but not always or in every plan) will tell me if I ask specifically.]