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

Chris Farrell May 4, 2012

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.

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