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401(k)s Not Working for People?
I work as a “retirement plan administrator” and am credentialed as an “expert” in the non-investment-side of 401(k)s and older-style pension plans. As such, my antennae always twitch any time I see a story regarding my industry. This story got me shaking my head at the framing of the issue.
I see companies’ payroll, deferral, and contribution figures every day, so I know that folks are not utilizing their 401(k) plans enough. Such a huge percentage of employees don’t defer anything, while others are deferring only, say, 2 percent; not even enough to earn all of their company’s matching contribution available to them.
Now, I am not credentialed as a financial planner, so I’m certainly not going to advise at what percentage or amount that you should invest; however, regarding the article: just because folks aren’t taking advantage of their 401(k) doesn’t mean that “their 401(k) isn’t working for them.” We live in a society that relies more and more on someone somewhere else taking care of us because we can’t be bothered to take care of ourselves; income / cost coverage in our golden years is chief among them.
I’m afraid to say that there’s going to be a huge problem in the coming years as the Boomers, the last ones with any meaningful pension incomes (and, even then, not as numerous or as generous as The Greatest and The Silent Generations had), pass the retirement torch to we Gen Xers. Our generation doesn’t have retirement savings, but we do have iPhone 11s, car payments, and trips to Disneyland / The Caribbean, on top of the student loans for the college degree we were told we needed (but didn’t / don’t). We’re living well now, instead of living ok now with the aim of living at least ok later.
Published in Economics
Working for me. I’m 70, still working full-time, and putting away 27% of my earnings. 19% pre-tax and 8% post-tax. I have about one year before I retire.
My personal hope is to be able to retire at 72…twenty-five more years. Oy…
I did put money in company-matching pre-tax savings programs, but since working as a contractor, I have not had the opportunity. Now I could put money into an IRA now, but I am reluctant to do that. The Democrats are talking about seizing individual IRAs to pay for government retirement programs. Instead, I invest the money I cold have put into an IRA through other instruments.
Just invest in Bitcoin, now while it’s cheap, and you’ll be fine. ;)
We save about 30% of our pretax income (including matches). Still, I feel like I’m barely on track for the $5,000,000 I want to have saved by the time I retire. On the other hand. I think people tend to overestimate how much money they are going to need in retirement. We have all these grand plans in our head, but we’re unlikely to have the same amount of energy to spend all that money when the time comes. Though I hope I’m wrong about that.
Some version of that same article seems to pop up every month or so. While the overall message is more than a bit scary, the way the data is presented just drives me nuts. Lumping ages 32-61 together makes no sense to me. Break it down into meaningful age brackets and maybe we start to see a clearer story. While sad, it would not surprise me if 90% of 32 year-olds have <$10K, but I would like to see a more accurate representation of the median savings of 56-61 year-olds (for example). But that’s just me…
I remember these same sorts of stories coming out thirty years ago about how Boomers weren’t saving enough. (They were in the 25-43 year-old age bracket then.) Guess what? As they got older, they put more and more away, in general.
I really don’t see that happening; there’d be a revolution.
Also, as an independent company owner, you can open your own 401(k), which would increase your allowable deferral limit each year & you’d be able to make company-paid contributions (match, profit-sharing), which would lower your taxable income.
From working in the industry for 15+ years, I disagree; most people I speak with underestimate the amount required for a comfortable retirement….
Mike H (View Comment):
We have all these grand plans in our head, but we’re unlikely to have the same amount of energy to spend all that money when the time comes.
Yes, but medical needs & costs explode, requiring more assets to cover them.
If younger folks would follow Dave Ramsey’s approach to debt and keep “necessary” expenses to a minimum, they’ll have plenty of money to invest in their “prime” years of 40 – 60+. The 401K pre-tax matching amount is recommended, and the company contribution isn’t taxed until withdrawal.
Some companies offer Roth 401K’s, which is useful after maximizing personal Roth limits of 6,000/7,000. The limit on Roth 401K contributions is about 19,000, and they can be later rotated into a personal Roth, with no Minimum Required Distributions (RMD) when 70.5 year old. If the company offers both types of 401K’s, consider matching the company contributions in the traditional 401K to keep the accounting simpler, avoiding the tax when withdrawing the contributions from the Roth 401K.
Except for specialized areas such as Engineering, Medicine, etc., college expenses are too high for any return on investment. Both present students and future parents need to avoid college unless there is such a return. You can always learn more after starting a good paying job.
Yeah, about that……
Thats the median amount. So 50% of Boomers have less then 150k saved for retirement.
It won’t last that long….
Very true, but folks are also working longer. My mother just turned 80, and she’s still working full time.
And you’ve got a lot more free time to spend money.
The fundamental problem with 401ks/IRA/personal retirement saving as opposed to Traditional Pensions is that you don’t know how long you’re going to live, so have to worry about outliving your money.
What I’d like to see is a system where Social Security pays *very* little (basically enough to keep you in generic cat food for your main meal every day) from age 65 to say, 85. You live on your own savings in that time, but can feel free to spend it down. If you didn’t bother to save for yourself, that’s your problem, not the governments.
Then at age 85, after many/most people have died off anyway, Social Security can get much more generous so you can keep going after you’ve blown through your own savings.
I know it’ll never happen, but a guy can dream.
A factor that keeps bugging me in the debate is that so many people assume the old-fashioned company pension is a failsafe retirement plan.
But, with the longevity of companies shorter than ever now (out there somewhere are data showing that the median or average age of large companies is much lower than it was 40 years ago), the probability is high that the company responsible for your pension will go out of business or be restructured in a manner that results in your pension not to be there in the form you expected. My pension from a large company I worked for in the late 1980s through the 1990s is now the responsibility of a former division of that company that was later spun off as an independent company. I expected that my pension would disappear into the accounting noise, and was surprised to learn recently that apparently the pension had been adequately funded and might actually pay me real money in a couple of years when I turn 65.
So, while people complain about the unreliability of a 401(k), a company pension is no certain deal either. (Yes, there is insurance for pensions of defunct companies, but the payout is typically only a fraction of what the pension was supposed to be.)
People also forget the limitations that a traditional pension presented for people. An employee had to stay with the company for generally at least ten, and often twenty, years to become eligible for a pension. At one of my early jobs I saw many senior employees in their 50’s who didn’t like their jobs or otherwise wanted to change jobs, but didn’t because they’d lose the pension. I also saw there, and more recently as the largest employer in the city where I lived shrank to almost nothing as its market changed, employees laid off just before their pension was due to vest and therefore end up with nothing.
Watching those experiences I resolved to build up savings even before 401(k) accounts became common or available to me as an employee. Independent savings gave me independence to work at a job as long as I and the employer were both benefiting. So I didn’t panic the two times I was laid off. In fact, I had accumulated enough savings (retirement an otherwise) that at the second layoff, I just decided there were other things I wanted to do, and so I didn’t have to look for full time salaried work. I can do what work I want when I want for whatever pay I want and can get.
I understand that financial planning (and executing the plan) can be scary for many (most) people. But, setting up a savings and retirement program (401(k), IRA, whatever) can lead to a level of freedom and independence that is quite liberating.
Anyone in this boat should read Retirement Heist: How Companies Plunder and Profit from the Nest Eggs of American Workers by Ellen Schultz.
In the old days, I believe your children were your retirement plan. That may happen again. Who know what the future will bring.
Because she wants too, or has too?
Big difference.
Lots of seniors working because it’s that or poverty.
Good advice. When everyone knows that an asset is cheap, you can buy put options for basically nothing, so you have no risk, just a huge upside. Basically, bitcoin continues to be a very low-risk investment.
I am working because I want to. I changed careers in my forties, and since then have been laid off multiple times. I never worked at any one company long enough to build much in the way of retirement funds. I have worked at my present job for 12 years, and my 401(k) has over $300K today. I have other savings to support me when I retire, and no kids to leave it to. My company got bought out this year, but the retirement plan stays where it is through 2020. After that, I will re-assess my situation.
What I would like to see is, for every year I work past my normal retirement age, my and my employer’s contribution to Social Security decreases by 1%. That would make it more likely that I would continue working rather than being a drain on society’s resources, and both my employer and I would see more return on investment. Never happen, but I think it’s a good idea.
And if you work it right, your job will have an education promotion atmosphere and will help with some of the costs.
Amen. I work for a health and financial benefits administrator. It got to the point where now whenever a participating employer hires someone, they automatically enroll the person in the 401(k) deferral so the person has to opt out if they don’t want to contribute.
On another note, I enrolled all my children in a college savings plan as soon as they were born. If they choose to attend in-state colleges, they will all have enough to stay mostly out of debt. Especially if they work to earn scholarships or live at home to save money. I let them choose … but whatever doesn’t get covered by their account they have to pay themselves.
The Federal government needs to update all IRA’s to have the same limits as a 401K. And they need to double or triple all the allowable limits to 401K’s too. Provide some incentive to save more like converting regular 401K’s to Roth 401K’s with no penalties or taxes, in exchange for people not accepting Social Security. Throw in HSA accounts, if people save a certain levels they can receive Medicare money, instead of benefits, in their HSA’s. Get creative. People forget that these are savings vehicles and help boost the economy — government benefit programs don’t.
I completely disagree: unless an older style pension is set up differently, one can retire, receive a pension payment for a single month & pass away; that’s it, heirs receive nothing else, spouses may receive half-payments (again, depending upon pension set-up & elections made). Or, the pensioner can die before retirement; again, nothing for the heirs.
At least with 401(k)s, IRAs & personal savings, one has the opportunity to pass on anything over & above what’s been spent during/for retirement. The problem, certainly, is that someone’s life may outlive their money; I’d rather face that issue than not being able to leave anything behind.
There are failsafes in place which, though not perfect, ensure that retirees receive their pensions as they should have; my father, also, was an engineer for a now-defunct technology company that used to be one of the biggest & best in the world, beginning in the late ’70’s through ’86; though the company closed, the pension did, and does, still exist.
The laws have changed since the enactment of the Employee Retirement Income Security Act (ERISA) in the ’70s, the Pension Protection Act in the prior decade, etc; employees become fully vested in their pensions by no later than their seventh (7th) year of service.
More likely what your workmates were complaining of wasn’t that they weren’t fully vested; had they left they still would have received 100% of what they’d earned. What that 100% amount is depends upon total number years of service, up to a usual maximum of 20 years; the more years you give, the higher your monthly pension. If your workmates had left & joined another company with a defined benefit pension plan, they may have needed to wait/work another 7 years in order to become 100% vested in their new employer’s plan.
And there is the Pension Benefit Guaranty Corporation.
Let’s just say that it gives her a much better lifestyle.
For those outside the industry, the feature @Merrijane is discussing is an “Automatic Contribution Arrangement;” once employees have performed enough service to become eligible to begin deferring, instead of being given a piece of paper or URL to sign up to start, they’re told that deferrals will start automatically at a given rate (and the rate may escalate in succeeding years) unless they actively opt to not have deferrals taken. Some arrangements also allow the refunding of deferrals taken after this automatic-entry date.
Congress has oked the availability of this provision as a means to increase participant enrollment; the theory is that some won’t opt out and won’t bother to do so once deferrals start. The industry loves it because trust companies (American Funds, Fidelity, John Hancock, etc), financial agents and/or third-party administrators (one of which I work for) get their fees based on the plan’s assets; the higher the assets, the higher the fees collected.
All that being said, I’m actually personally against such arrangements; even though it benefits my industry, I’m a “personal responsibility” near-absolutist, and believe the individual participant must take personal responsibility to begin deferring if they so choose. I might open up a separate thread on here to ask others’ opinion as to their thoughts on this sort of paternalism vs individual choices.
I wanted to contribute to my company’s 401(k) from Day One, but I had to wait for three months. The reason is that my company’s 401(k) provider is Vanguard, where it just so happens that I already have the majority of my investments. I was 58 when I started, and I knew I didn’t have much time to build my account, so I started out at 18%, and have increased since then. In 2014 we were given the Roth alternative, so I split up my percentage and contribute both pre- and post-tax. We have a household income now that is too high for me to add to my existing Roth IRA, but that limit does not apply to my 401(k), which is a real benefit. And it’s very cool to be able to see everything in one place, and I can keep track easily. And we are lucky in the choice of funds offered, which when I started included a couple of funds that were closed to new investors at the time, but available in our plan. I was thrilled to be able to invest in funds that were so successful that they were closed to new retail investors, but not to us. Our new corporate parent agreed to keep our account at Vanguard through 2020, and we are lobbying really hard for them to move all their accounts there in a year. And they might just do it. If they do, I won’t retire unless I have to.