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The 401(k): A failed experiment?
Commentator and cancer-survivor Virginia McGuire says saving for retirement is always an act of optimism, no matter how healthy you are.
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Tess nearly wrote a letter this week to the New York Times! Why? She read Joe Nocera's column about his disappointment with this 401(k). He did take most of the blame for the issues he faced -- poor investment decisions, withdrawing money for a divorce. Sure, he made mistakes, but labor economist Teresa Ghilarducci says that the 401(k) is "a failed experiment."
She says that the 401(k) system does work for some people, the folks in the highest-earning bracket. But for society overall, it isn't an appropriate way to get people saving for their retirement. Most people are unaware how a 401(k) works, so they're slammed with fees and poor investing decisions. And all the investments made are short-term and the distribution is a lump sum.
Ghilarducci's ideal retirement plan would have Social Security income as a base with individual accounts where workers put money aside for every hour they work. And she says that latter should be a mandate, because without it, half the population will not save at all for their retirement. Also, disbursement should happen at the age retirement, so money stays in. But will this plan happen? We'll have to see.
Really? A mandate to contribute to social security just because half the population can't save for themselves? Talk about socialism. It's a fact that government agencies are least efficient at handling money. 401k is fine, most people who have basic financial knowledge will tell you 401k has done fine by them. You just have to try to match market returns, not beat them. Overall the trend to beat market returns is very low anyway and anyone who tries to do that is just risking their savings. In any case, why is an economist giving financial advice? Last time we listened to the best economists in the world, we got stuck with Greenspan. Thanks economists.
Yours truly, Veronica @ http://www.bluepelicanloans.com/
The problem I see with the 401k is that it pushes lay people into the hands Wall Street. I remember reading one of the Fidelity pamphlets I got on my first day at a new job and it said that the risk of putting my money in an insured bank account was that inflation would eat up the real (inflation adjusted) value of my savings. But who's fault is that!?!? It's the Fed and our dishonest money that forces the sheep into the teeth of the wolves.
And another kind of social sercurity isn't the answer, we can see badly the current one has gone. One thing the government can guarantee is how many dollars you will get when you retire, since they can print them and give them out. What they can't guarantee is what those dollars will be able to purchase.
Tess, you obviously do not have an open mind about what Ms. Ghilarducci said about 401K. The 401K started as a tax shelter for high level executives in the late 70's and now it is the main vehicle for retirement savings. I personally know people who retired when the market dropped in 2000 and 2008. Their retirement savings dropped by half in some cases, but they still needed income. I think you should explore how the 401K came to be versus traditional pensions. A good start is Ellen Shultz's book Retirement Heist. I have worked in finance for 25 years and most people are not equiped to run their own retirement accounts between working, taking care of their kids etc. I can remember the euphoria over 401K's and IRA's in the 90's and everyone thinking they will be millionaires by the time they retire. Social Security is needed because it is paid whether the economy and Wall Street is down or up; it is a continuous stream of money. A 401K plan is very much subject to the ups and downs of the market. I don't know about Ms. Ghilarducci's alternative, but I think one is needed.
It would be interesting to see the data to back up her assertion that 401Ks benefit higher income earners, but honestly, it doesn't take a lot of imagination to guess that she's right. Would't people with higher income have more income to set aside? I'd also think it a safe bet that middle and low income earners would generally have less knowledge of how to invest and manage a 401K than higher earners.
I am a professional in a field for which I have a master's degree - not finance, obviously! - and I have never had an employer who matched 401K contributions. By retirement age (targeting 70) I will have 20 years at work. (I stayed home to raise children. Yes, it was a choice I made...but hardly along the lines of overspending on a house.) Even before the economic meltdown my retirement savings would have barely been sufficient in addition to Social Security. Now, it stands at less than I actually contributed -- no earnings on investment in sight for a long time.
I don't know if an extra SS type plan is the answer, but I know that, at least for those of us in the mid/low income brackets, trying to stash enough to safely live on after retirement is a fantasy - especially if we're 50 or older.
Ms. Ghilarducci's outrageous comments and ideas are so far removed from reality, I would be really shocked if she had any experience outside the sterile walls of academia. While obviously a failing system, government mandated paycheck reductions for retirement "savings" are already in place by way of Social Security. I would like to hear Ms. Ghilarducci's argument as to how 401Ks are a failed experiment, but Social Security is not, but let's save that for another time. Why would her suggestion of an additional "easy(!)" government mandated retirement system fix anything? Basically, this "expert" is suggesting not one, but two Social Security taxes per paycheck. Yes, Ms. Ghilarducci will argue that she's proposing creating individual retirement accounts in the name of the taxpayer, not a new tax. But, if you break it down, she is proposing that money should be involuntarily taken from a citizen's paycheck by the government in order to use it for a purpose designated specifically by the government. You know what that's called? A tax.
Putting money away for retirement is an important part of life, but citizens should have the freedom to do what they want with their own money. If a low income worker is having a hard time putting food on the table and paying for shelter, the logical choice for them is to use their paycheck to pay for their immediate needs. Forcing more money from their net pay in order to comply with an additional government mandated Social Security tax would create a very likely scenario of taking money from their baby's mouth or a roof from their family's heads.
For the writer of the cited article, losing 401K money for a divorce is one thing, buying a house that he couldn't afford was his own stupid decision. As a citizen of a free country, I support his ability to make a poor decision and live with those consequences. While they certainly aren't always easy, there actually are other options he could have taken in order to rebuild his retirement nest, mainly taking a second job. Ms. Ghilarducci is the expert here, and she seems to think that only the very highest wage earners have 401Ks. Given this theory proposed by our favorite economist, Mr. Nocera should fortunately be able to save up his retirement money in no time.
Low income workers may end up working later in life than high income workers in order to make ends meet. I have close family members in that situation right now. It's a shame, but the decisions they made earlier in life have led them down this path. As responsible members of this society, they have made the decision to prolong retirement and continue working. Unfortunately, in this great country, responsibility is a dying art form.
I don't know what agenda Ghilarducci was pushing but saying 401-Ks have failed is nonsense. What is nonsense is suggesting we need to build a retirement system around Social Security. Social Security has failed. The only good idea Ghilarducci had was to make 401-K fees transparent.
I grew up poor in a household where the only retirement either parent had to look forward to was my father's military pension because he had served 20 years in the service as an enlisted man. I also learned nothing about money.
As a wage earner I have worked for 4 companies which have provided 401-Ks or 403-Bs. At each company I have set aside at least 6% (always to get a match) and sometimes more. My wife has done the same. When we have left companies we've rolled the 401-Ks into self-directed IRAs. We've never borrowed against them nor taken money out of them. As a result, my wife was able to retire 6 years ago and I'll be able to retire within the next 5 years. We expect to have retirment income equivalent to the average of the last 5 years.
We were able to make effective use of the 401-K by saving, learning how to invest (including listening to "Sound Money") and living below our means. This is most people get wealthy, got wealthy in previous generations and will do so in future generations; the 401-K just makes it easier.
Mx. Ghilarducci needs to quit bashing people who have succeeded through hard work and sacrifice and start encouraging more people to do the same.
I sometimes wonder how much of what I hear in these parts is even a little bit useful but this was the straw that smushed me flat. Ghilarducci’s opinions are so far removed from the truth that they boarder on madness. She speaks of the millions given up in lost government revenue and then of those who cash out. Any of those penalties counted as countering that revenue loss. Those millions we have been exempted from are or will soon be paid back while a host of boomers continue to pay taxes on the withdrawals long after we stop earning money. Was that included in the revenues lost? “Liars figure but figures don’t lie”. Sure let us build on SSS and how well our government has planned for us with more of their planning. This could be gibberish since I took little time to say it but I’ll bet it rings truer than most of what was said here today.
And this mandated account, would it be run and accessible by the government? Would it earn interest? Would the individual have a choice as to where the money was invested?
I am not in the "highest bracket" and my 401k is doing fine. How do you justify the statement that it works best only for the highest earners? Please, keep your hands (and the governments) off my retirement savings.
