The latest issue of Time Magazine featured an article that was very critical of the 401(k) system. In it, they argued that “the 401(k) is a lousy idea, a financial flop, a rotten repository for our retirement reserves.”
Why all the hate?
So just what is it that Time hates about 401(k) plans? For starters, 401(k) plans were never intended to replace traditional pensions. Rather, they were created as an executive perk. Over time, however, their existence allowed many employers to kill off their pension plans.
401(k) plans have also come under fire because:
- Not enough people participate in their employer’s 401(k) plan
- Of those who do participate, many don’t contribute enough
- Many participants invest too conservatively
- Others invest too aggressively
The problem here is that these things aren’t unique to 401(k) plans. Rather, criticisms such as a lack of participation, saving too little, and inappropriate allocations can be leveled at most investment vehicles, including traditional and Roth IRAs, taxable investment accounts, etc.
Beyond this, people choose whether or not they will participate, they choose how much they will set aside, and they choose their investments. If some people wind up making bad decisions, should everyone be forced to give up their 401(k)? Not in my book.
Don’t get me wrong, there are certainly a number of bad 401(k) plans out there. Some of these have very limited investment choices, others have exorbitant fees, and so on. But advocating that we should “retire the 401(k)” is throwing the baby out with the bathwater.
What are the alternatives?
Yes, it sucks that juicy pension plans have largely disappeared, but that’s the reality. With traditional, employer-run pension plans out of the picture, what other options do we have? Well…
The article advocates for guaranteed investment accounts that would essentially function as “retirement insurance.” Every pay period, you’d contribute a fixed percentage of your paycheck and, upon retirement, you’d collect a guaranteed monthly check based on your final salary.
An advantage of such plans, whether they are backed by the government or a private entity, is that they would follow you from job-to-job. You would also be free to invest in addition to these plans, though (presumably) things like tax-deferred 401(k) plans would be off the table.
Setting aside the possible disadvantages of such plans, it’s important to keep in mind that there’s nothing stopping private companies from introducing these sorts of things whether or not the 401(k) still exists. In fact, there are great many annuity products already out there that fill a similar need.
In the end, I’m trying to figure out why killing off the 401(k) is a good idea. Yes, I realize that not everyone has access to them, and that some people can afford to contribute more than others. Given all the challenges associated with saving enough for retirement, however, it seems to me that taking options off the table would be a step backward.
What do you think?