Bad facts, bad story
There are only two reasons you appear on the cover of Time magazine—either you are receiving plaudits from the media, or you’re about to be tarred and feathered. 401(k)s are featured on the cover of Time this week, and it’s not because they’ve been named “plan of the year.”
One phrase captures the spirit of the cover story: 401(k)s are a “lousy idea, a financial flop.” And that was perhaps the high moment of the article! I have read Time over the years and have enjoyed its presentation of national and world events. Yet this article is emblematic of the uneven, at times unfair, coverage of 401(k)s during the market decline.
Start with a persistent idea in the article—that there once was a world where most Americans retired with a secure and generous private pension. Even in their heyday, the mid-1970s, traditional pensions covered only 40% of private workers. Benefits varied widely—from meager plans paying little to very generous ones. Today, the median private pension payment per household is about $8,400 a year or $700 a month (source: Congressional Research Service). Only 3 in 10 older Americans receive a private pension.
A second criticism concerned the risks of 401(k)s, particularly for retirees. But there was no mention that retirees don’t have all of their life savings in the stock market (most have chunks in safer investments), and no mention that retirees also receive guaranteed Social Security income, which diversifies their risk. In keeping with a skewed view of the landscape, there was no mention of the inflation risk affecting pensions. At a low 3% inflation rate, their real value is cut in half in 20 years. In the high inflation of the late 1970s, the decline was worse. At least 401(k)s offer the opportunity to address inflation by maintaining some equity exposure.
A third problem: The article noted that 401(k) balances are low, and worried that many are under $10,000. Yet participants often roll assets out to an IRA when they change jobs or retire. So large accounts are often moving out of 401(k)s into IRAs, and job changers start with a zero balance.
The most recent statistics from the Federal Reserve, which try to pull together all of these pots of money, suggest pre-retirees with retirement accounts (about 6 in 10 Americans) had a median balance of nearly $100,000 in 2007. That value has dipped from market highs in late 2007, but has also begun a meaningful recovery from the lows of March 2009. These balances are expected to only grow in size and importance.
Another problem: The article implied that 40% of boomers are at risk of an insecure retirement due to 401(k) plans. Actually, somewhere between 20% and 40% of Americans are likely facing a problematic retirement (I gave testimony on this recently for a government panel). But one important reason is that many of these households have no retirement savings or benefits of any kind. Also, the Obama administration has proposed workplace savings accounts modeled on 401(k) plans to help this group.
A further irksome point: The article put forth the absolute nonsense that 401(k)s were a tax dodge for executives. (The magazine’s editor repeated this inaccuracy on MSNBC.) But the fact is, pre-tax 401(k)s were a tax provision introduced in the Revenue Act of 1978, signed by President Jimmy Carter, to settle a long-standing tax dispute between the IRS and plan sponsors over what were known as cash or deferred (CODA) plans. Far from being an executive tax dodge, the law specifically included a provision, known as nondiscrimination testing, to ensure that benefits were not used exclusively for higher-ups—completely at odds with the article’s claim.
One commentator in the article, economist James Poterba from MIT, made an important and sensible point. In retirement plan terms, 401(k)s have only been around for a relatively limited time—most people have been saving in them for only part of a working career. With more time, along with regular contributions and compound interest, their value and role in ensuring retirement security will become more apparent.
So perhaps what we need is less Time, and more time, to gauge the merits of 401(k) plans.
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You are correct. It should not be a question of either a traditional pension or a 401K.
401K’s are a very good idea whether or not a traditional pension is available. I know. I am one of the fortunate few that have both.
But a 401K should not be required unless professional, disinterested investment guidance is provided.
I started investing in my 401K in 1979. During the last years before I retired I was investing 16 % of my income with a match of 84 cents on the dollar on the first 6 % all tax deferred.
I retired at age 56. 401Ks are a no brainer !
I think the writer of this attack on Time may have missed a significant point. My view as holder of a 401K/IRA investment portfolio is that it has “trapped” my money in places controlled by persons whose basic objective is self serving rather than client serving. As a result, moves of money into/out of investments have been made, not for my benefit, but for the money (mis)managers enterusted to represent my interests. For this reason specifically, I believe and announce to the world that the 401K is a bad idea again brought to us by other interests.
“Professional, disinterested investment guidance” is an oxymoron. Do you want a disinterested advisor? Defined contribution plans can be a great way to provide underfunded promises that can boost bonuses and become a taxpayer liability when the company becomes uncompetitive. IRA and 401k plans defer taxes under the assumption that your income will diminish when you retire. Those who are careful with their assets will find that their income continues to increase and paying earlier could have been cheaper. The ROTH came too late and with too many eligibilty restrictions for many of us, but be thankful that you’re not one of the millions living on less than a dollar a day.
I’m more of a fan of individual IRAs with 401K like large contribution limits and company matching with the tax saving benefits of course, similar to SEPs. 401K plans are not the best but they are much better than having social security alone. The limits of 401K plans for me are the high fees and low selection of funds. Why should I be forced to contribute to a sub par actively managed fund with high expenses when I’m more comfortable contributing to an index fund having among the lowest expenses in the industry through an IRA.
I also disagree with the Time magazine article for the simple fact of younger people being scared off toward the “safe haven” of low return annuities or expensive whole life insurance policies while being more than 30 years away from retirement.
The problem with 401ks continues to misuse/misunderstanding on behalf of the consumer…and lack of education on behalf of all of us.
401(k) plans have plenty of problems, unfortunately it doesn’t sound like Time addressed any of them. How about extortionately high expense ratios and limited passively managed fund options? Or advice from plan administrators that generally seems to range between ignorant and evil. What about the fact that many people earning an hourly wage don’t have access to them, and instead can only put away a few thousand dollars a year in their IRA (which is likely not to be enough to retire on). And with respect to defined benefit plans, what about the undiversified risk inherent in trusting your employer to still exist at all when you retire (lest you get 50 cents on the dollar when the pension guarantee program takes over responsibility), or to have actually managed your retirement funds prudently? The market risk exists regardless of who is managing the funds, it’s just hidden in pensions. Or what about the injustice of teacher’s pensions being generally non-portable: work 20 years in one school district (or county, or state), or you won’t get anything at all. And who stays in one job for 20 years these days anyway?
Steve, this is to be expected from a liberal “news magazine” and MSNBC. I also have a 401 and traditional pension, and my 401 is worth more than my pension.
In addition to all the things you mentioned, the article was completely irrelevant because the whole 201(k) joke and calls for the end of the 401k got old about one year ago. Time was waaaaaayyyyyyyy behind the times on this one.
Nice how the article says nobody should have to shoulder the risk of losing 30% in a market downturn, but the solution is to put your cash into ONE insurance company instead! Great idea.
A well-managed 401K can provide the best financial outcome to more people than any other vehicle. I spent a career in the financial world and I know this to be a fact without any doubt.
This reminds me of the old adage about TIME and LIFE magazine - LIFE is for people who cannot read and TIME is for people who cannot think….and that was demonstrated here. TIME did not add anything to the body of knowledge here. I’m surprised TIME called for an insurance solution when it in other places has expressed its unhappiness with insurance companies in general. Also I saw little of the long-term nature of what 401(k)s are about. Gloom and doom can always be in order in the short term. TIME could have done a lot better.
The article also fails to mention that this is essentially a zero sum game. If you revert to a DB plan, thereby putting the investment risk on the employer, you run the risks that the company can fail because of the cash flow needed to fund the pension plan in a down market, or that wages are cut. I would think that employees, when presented with a choice, would rather have a job and the investment risk of a 401(k) plan than have the increased risks of no job, or substantial pay cuts.
I find it ironic that the-401k opposers keep talking about how we should mandate employees to save for retirement, and mandate employers to match it. Don’t they call that Social Security? My parents are living on SS. The wonderful pension plans of the past that my Dad had were all lost in the oil crash. Same stuff, different times. People who can and want to save for retirement yet claim they don’t know anything about investing need to stop whining and learn something about investing. Stop waiting for the government to do it for you. I have never worked for a company that offered less than a 4% match, most offering 6%. If you work for companies that don’t have a match, leave and work for one that cares about you. My 401k would be a joke had I not worked for companies that had the decency to match. I’ve been in the 401k industry for 25 years and see owners, with the assistance of industry professionals, design complex plans specifically intended to give as little as possible to the non-ownwer employees claiming the owners have less time to save. Why weren’t they saving when they did have time? It’s just self-servant and who wants to work for someone like that? Forget market loss! Until you cash out it’s not real loss. If you were invested in stocks at age 60 you were gambling with your retirement. You know better than to put your retirement savings into a slot machine, so why were you putting it in stocks? Gambling is gambling.
I recently retired with a 401(k) plan account well into seven figures. How did that happen? Generous employer contributions both before and after 401(k) contributions were allowed, substantial after-tax voluntary employee contributions before 401(k) contributions were allowed, maxing out on 401(k) contributions every year for over 25 years, good (but not great) investment decision making over the years, no withdrawals from the plan before retirement, and no borrowing from the plan. So, it worked fine for me. That having been said, I realize my experience is, and will be, atypical. (I also accumulated a six figure IRA.) I see fellow employees with careers parallel to mine, with balances not close to mine. They didn’t put away what I did, and many invested unwisely. The typical employee has little interest in saving for retirement, and little interest in learning about investing. It’s all about spending money today, not saving. So, as a “retirement plan” for the great majority of employees, 401(k) plans aren’t the answer.
The biggest problem with 401ks is lack of choice, high fees, and low contribution limits. If they are to be useful as retirement plans, then these issues have to be addressed. Why do some have acess to a 401k and others a
Roth 401k? Why not encourage employees who are willing to invest a greater % of their earnings in a lower risk investments by granting them a higher contribution limit. This would help people stay the course through market dives and give them confidence in their investments being there for them when they’re ready to retire. Perhaps 401ks have become the defacto standard for employee retirement but they don’t appear to have been constructed with that in mind. They can and should be improved.
I agree, Time magazine article was very wrong. A point not
brought up was that most plans hava a choice as the type of
investment (stock funds, bond funds, or money funds) In the final
analysis it is the person who has the responsibility for the
investment.
The biggest problem with 401(k) plans is a lack of investment education and advice for participants. Most people are not investment savvy and in the long-run their accounts suffer because of this. Pensions are a better way to provide a secure retirement for most Americans and too many companies have let them go because 401(k) plans are cheaper. Also, the 401(k) started when Ted Benna (known as the father of 401(k) plans) was looking for a way for his clients, who were bankers, to defer their cash bonuses; his interpretation 401(k) in the tax code allowed the employees to receive 1/2 of their bonus in cash or to defer the entire bonus for retirement. It was only later that it evolved into what it is today. As the admnistrator of a 457(b) plan that supplements a pension plan, I know that the majority of our participants know very little about investing. When the market tanked last year, we saw a mass exodus to stable value and short term fixed, and then they missed out on the rebound because they were chasing the returns. Unfortnately, employees do not attend our educational seminars nor do they seek advice on their own. Their managers don’t let them attend without taking vacation and most can’t afford to pay a financial advisor. Luckily for them, this is not their only retirement plan. This article had a lot of truth to it! And since when did Time become a “liberal” publicaation?
One thing I found surprising was that there was no mention of how (just like stocks) 401Ks inherently can go up or down. People think they’re the best thing in the world when it’s going up and they’re getting $$$ (let ‘er ride!), but when it goes down, they forget that they’ve only put in (let’s say) $50K and instead think “woe is me…I had up to $100K at one point and now I’m down to $70K!”.
BTW - I’m one of the select few who predicted the stock market crash and moved my 80/20 stock vs. bond 401K funds to 80/20 in Nov 2007.
401Ks are a great idea if we did not have such corrupt and manipulated markets (high speed trading, naked sales, dark pools, Plunge protection team, etc.). If there were real fundamentals, investment choices with low expenses, and better guidance for investment decisions, I would agree with this counterpoint against TIME. We should at least put in enough to get the company match and put the money in a money market or at the most bond funds. Since the markets are what they are, we should not allocate our “dumb money” to equities and quit feeding the “beast”.
TYPICAL DISTORTION BY THE ELITE MEDIA, NEEDED TO BE SET STRAIGHT BY A MUCH
MORE RESPONSIBLE AND IN THE KNOW ORGANIZATION.