Is the 401(k) still the best retirement plan?

Traders work on the floor of the New York Stock Exchange on May 1, 2012 in New York City. Is there a better way to invest for retirement than the standard 401(k)?

Jeremy Hobson: The largest 401(k) administrator in the U.S., Fidelity, said this week that our retirement account balances were up 8 percent on average in the first quarter of this year. But the major stock market indexes were up even more than that. So are 401(k)s really the right ticket to a happy retirement?

Marketplace economics correspondent Chris Farrell joins us now with answers. Good morning.

Chris Farrell: Good morning Jeremy.

Hobson: So Chris, I was reading Joe Nocera -- in the New York Times, he says his 401(k) is not going to be good enough -- as he thought it was -- to retire on. He's going to need to work longer or find something else.

Farrell: Well, he's right -- and that's the story of all of us. I mean look, the 401(k) is a fundamentally flawed retirement savings plan. And the problem is, Jeremy -- here's the problem: it's you.

Hobson: Me?

Farrell: You are the problem. You are, and so am I; and so are most of the people listening to this broadcast. You know, we're just not very good at investing. And it's really striking to think that there was this Revenue Act of 1978, and there was some clause in there -- the 401(k) -- and some benefit consultants realized: you could turn this into a retirement savings plan. No one had any idea that this would become the largest retirement savings plan in the private sector.

Hobson: So we're just making the wrong decisions in terms of what we're investing in?

Farrell: We don't know if we're making the wrong decisions. Decisions you're making today in 30 years could turn out to be the difference between eating steak or corn chips for dinner. Many people don't even participate in their employers plan -- more and more people are doing it, but still. The yet thing is, we work really hard for our money; we have families; we have other responsibilities. And it's really too much for the average person.

Hobson: But it's not the only thing that you sometimes even counsel -- sometimes on our weekend program Marketplace Money -- that people should have for their retirement savings. There's also Social Security; some people have Roth IRA's in addition to a 401(k). So isn't it a good supplement?

Farrell: It's a good supplement, and that's what it was designed to be -- a supplement to the traditional, defined benefit pension plan. You'd work at a company, years of service, some sort of formula about final pay and you couldn't outlive that money. It's a great supplement, but what has happened? Corporate America has moved away from the defined benefit pension plan and it's embraced the 401(k) and there's too much responsibility for you, for me, and for everyone else investing with this kind of plan for our retirement.

Hobson: Marketplace economics correspondent Chris Farrell, thanks as always.

Farrell: Thank you.

About the author

Chris Farrell is the economics editor of Marketplace Money.
Log in to post4 Comments

There is nothing wrong with such plans, and it's not difficult to invest in mutual funds. What's wrong is the title of your story: "Is the 401(k) still the best retirment plan?"
It never was. If you measure "best" as the most efficient at delivering retirement dollars, the defined benefit pension plan is significantly better than the 401(k) plan.

Give me a break. You don't need some grand expertise to invest your 401k wisely. If you don't want to waste time picking funds or stocks put your money in an index fund. Is that really that complicated? Why is NPR on an anti-individual retirement savings kick? Please, leave my 401k and IRA alone. I trust them far more than I trust social security and yes, I've been in both long enough to see them go up and down and I'm still better off.

No... not too stupid but come on -- it takes a certain level of expertise to manage money for long term gains in order to produce income! Finally - some one ie, Hobson has admitted what has been known all along - IRAs, Roths, Def Comp Plans and yes 401Ks all were enthusiastically accepted by American companies just so they could eliminate defined pension programs. So now we have almost none of those, and the IRA et ceteras don't have enough money in them to retire on and now Soc Sec is being threatened! Welcome to the boomer - work till you drop - generation !

So, what are you saying? We're all too stupid?

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