One thing all the angst about the affordability of defined benefit pension plans – you know, those are the ones that promise a retired worker a certain monthly benefit for life – that seems to have registered amidst all the hype about government employee pensions is that most people believe these pension plans are unaffordable. The private sector has been phasing them out for 20-30 years now and in many cases offering 401K plans instead. There currently is quite a clamor for government to do the same thing.
Why? Well, the answer is in cutting costs for the employer, whether private sector or public sector, to a fixed and predictable amount each year. 401K’s bring that advantage to employers. The fact that many private sector employers have converted to that type of retirement plan is cited by those who want government to do the same thing. Government employees should not have a more secure retirement than private sector employees is the common theme.
From all this one might conclude that 401K’s are a solid plan for working people to have to save for their retirement and enjoy a modicum of retirement security. That would be an incorrect assumption. Here is a list of some of the weaknesses of 401k plans:
- The 401K option was established by Congress not as a primary retirement plan, but as a perk for high paid executives to defer some of their income.
- High and often hidden expenses and fees eroding 401k funds.
- Poor to non-existent company investment advice, and it is sometimes self-serving.
- Employees have little to no say over the investment options in the plan.
- Diversified investments options – commodities, metals, bonds, real estate – are often notoffered, thus limiting employees’ ability to hedge against stock market gyrations,inflation, etc.
- Few working adults are knowledgeable and prepared to manage their own retirement funds effectively.
- 401 (k) type funds experience leakage as their owners tap them or borrow against them overtheir life, thereby eroding retirement security.
The media has reported numerous situations in the current recession where people who had 401K’s and planned to retire by now find that they are unable to retire and will be working many more years than anticipated. Working into one’s 70’s is becoming a more common expectation, and some people think they will have to work until they drop, because the value of their 401k’s turned out to be less than forecast and inadequate to support them in retirement. The reality of delayed retirement is one factor feeding the nation’s unemployment rate, as senior employees keep on working rather than retiring and making their jobs available for younger people. This is the domino effect from a trend of delayed retirement. So, to some extent, all of us suffer from a trend of delayed retirement.
My advice – don’t buy into the premise that 401k’s are a viable path to a secure retirement for working people.
Some day in the not too distant future as legions of old folks face a meager future due to lack of retirement funding there will be a hue and cry asking how it could happen that nothing was done to assure an adequate retirement for our hard working populace. Some politician will seize that crisis and propose something like a defined benefit retirement plan for all. We are always better at trying to solve a crisis than to try and prevent it.
Here’s a novel thought: extend the working career of the public servant past the youthful age of 55 as it is at the County.
My advice- don’t buy in the premise that others are responsible for your own retirement.
Everyone should be taking responsibility for themselves. Become knowledgable about different investment options and be methodical in going about it. Don’t be too greedy in trying to aim for a 15% return (or any other # which is unobtainable without taking undue risk).
401K type plans allow a certain amount of investment diversification, but that should only be one type of an account in an overall retirement plan. An overall retirement plan should include not only a 401K (hopefully your employer offers one), but also IRA’s and taxable accounts as well as Social Security. The tax deferral or even tax free nature of qualified accounts can be quite beneficial over one’s lifetime. Even annuities, if done properly can be worthwhile.
My advice #2- start young…teach your kids about the wonders of compounding interest and the time value of money.
When getting ready to retire, have the house paid off. From my experience, that is a huge key in a successful retirement- no monthly mortgage payment. Pay off all debt and its amazing how one can really start to “live”.
Specifically on the original poster’s list:
1. Original Intention- So? Not sure why this would be a reason not to want to invest through a 401K. Not just for CEO’s anymore.
2. Expenses- Yes, these need to get under control. Transparency is getting better each year. Talk to your employer about it and then talk to the investment adviser. Normally everyone is open to a conversation.
3. Company Advice- Do you really want to take advise from your employer on investing? I personally do not. Get educated yourself. Employe the services of an independent investment adviser.
4. Options- Yes, often options are limited…again, just as with the fees, talk to your employer and investment adviser to try to get an expanded list. A lot of plans have a good group of options available that a lot of us invest in even through our non-retirement accounts. Traditionally, always mutual funds. The 401K is meant to be part of the equation with outside funds also coming into play to generate a diversified portfolio.
5. Diversification- Unless one is super educated, most would not be wise to invest in commodities. Most plans offer some fixed income bond options as well as some real estate exposure through a fund. Again, the 401K is meant to be part of the equation not the entire deal.
6. Knowledge- Take control of your own financial future and educate yourself. Alternatively, hire someone who is independent to help you. Just as with anything, if you are unable to do it yourself, either learn how or hire someone else who is.
7. Leakage- Not exactly sure how owners tap the 401K accounts of their employees…this generally is not legal and if it is happening, then there are really big issues that may even involve the authorities.
Good post. I think that the problem with 401(k)s is generally the one about knowledge. This isn’t like learning calculus, Spanish, or engineering: many, many people — backed up by an echo chamber of media and professional experts — are out to miseducate would-be students about their investment opportunities, so as to serve their own interests.
I think it was Richard Feynman who said of the stock market that in a flat market thee people who had no knowledge (and invested randomly) would be expected to break even, and the people with great knowledge would still be expected to win out, so it was the people with partial knowledge who must be the losers, whose reasonable-seeming choices provide profits for the winners.
That may be a bit harsh, but if it questions whether your advice for point #6, it did it’s job.
Thanks Greg…Re Knowledge- This is true regardless of whether you are investing through a 401K, IRA, annuity, or other vehicles including brokerage accounts…it is not targeted to just 401K’s. Those with the most knowledge will generally fare better than those who think they are knowledgeable but really are not. Those who are methodical and don’t try to time things generally will keep up with “the market”. Again, it is not a 401K issue but an overall investment issue. Those with the worst track record are generally those who are in and out of the market based upon feeling…they will buy high and sell low.
If one does not have the knowledge, then you should hire someone who does. There are plenty of advisers out there who do have the knowledge and even better they offer more than just investment advice. For me personally, I am wise enough to know that the market is a lot smarter than I am and as such I do not try to “beat” it but instead just keep up with it. Market tied exchange traded funds which are coming more and more into vogue.
The strange thing is that a lot of the original posters comments can also be said for defined benefit plans…fees- often very high, transparency- cloudy, advice- hardly any, funding- well, look at today’s underfunded plans…
As with most things, I am a believer in taking control of myown future. I trust myself more than others…if I doubt myself, then I will hire someone else who I trust more than myself- in any case, I am still in control.
How do you identify “someone who does.” I think that most “people who do” when it comes to investments are “faking it.” Everyone whose continued employment was dependent on the 2008 bailout of the financials industry was, in effect, faking it. People weren’t directly wiped out simply because they were indirectly being bled to death.
Now, people are being told to buy gold. Or to sell gold. By people who profess to know. How is the average citizen, even following your precepts know who is trying to rip them off and who actually “knows”?
Very difficult in deed, which is why you should become educated yourself and take control of your own finances. I for one, hope to be above average in the discernment of others. When all else fails, be very diversified and go with market index funds if you believe that over time the market will increase in value. There is no need to “beat the market”- most professionals even have a so-so record in doing so…keep up with the market. Use index funds…the expense rations are so stinking low and they track the market. If you don’t want to be in the market, well there are other options I guess. Whatever it is, educate yourself and be disciplined.
Good, common-sense advice. How would it have done, in the wake of the financial services industry shenanigans, in the absence of the government bailout?
When part of “common sense investment strategy ” is knowing who the government (and its operators) will and will not have to bail out, the system has become so badly perverted that “educating oneself” means buying into rooting for one side politically to save one’s own butt. That’s messing with democracy itself.
Our entire system is pretty perverted- financial, political, fiscal, etc…
Over the long run, yes- very very long run, the financial markets seem to always have an upward trend. One of the problems is when people are not dialing back risk levels that are commensurate with their future cash needs and think that the upward trend cannot have a correction or a down year or two or five.
There certainly are options (not the financial vehicle, but choice) that will benefit more if certain political views “win” which in turn have fans and detractors…the rooting goes both ways.
There were some who saw it coming and made out like bandits…while the rest of us saw our accounts sink. There are those who got out and have not gotten back in and are still down at those sunken levels. Others who stuck it out b/c it was for the long run have seen a great deal of recovery…(speaking of investment values). Still others saw opportunity in the sunken market and have made quite a bit of money. Apple anyone? I wish I was more of the financial visionary back then or even now…I for one am happy to just keep pace in that area of my financial life.
“Retirement Security? – Forget about it”…. Hmmmmm
Good!
“Every normal man must be tempted, at times, to spit upon his hands, hoist the black flag, and begin slitting throats.” H. L. Mencken
Four more years of Brown and Obama will normalize the most of the USA men.
And how do ye think ye’ll fare in th’ war of all against all ye so richly seem to desire, matey?
Honestly, Stanislav, sometimes you seem like our own local wannabe George Zimmerman.
OR
“Every abnormal man must be tempted, at times, to spit upon his hands, hoist the tent, and begin occupation.” S. Fiala
“Honestly, Stanislav, sometimes you seem like our own local wannabe George Zimmerman”…….. Hmmmmm
Unfortunately, I am not a son of JEW “Robert J. Zimmerman who served as a full-time magistrate from 2000-2006.
I’m touched that you think that your not being of Jewish lineage is unfortunate. Personally, I’m fine with it.
I am sure that further investigation will show that, same as you have admitted once to be, Zimmermans are members of JDL (or worse) with an objective to cleanse Jewish neighborhoods in Florida from the Black citizens.
I’ve never been a member of the JDL, Stanislaw, and have actively worked against them. So where are you coming out with that assertion?
If you’re trying to accuse me of supporting ethnic cleansing of Black citizens, then I will need your contact information.
Some days Vern’s keeping you around as an museum specimen of old-World anti-Semitism for us to bat around is harder to take than others.
Here we go again, anti-Semi, do you have better crapola you idiot!
Go to your prior posts where you have admitted to be once a member of JDL as response to my legation that you are a JDL agent in orangejuice.
Gröfaz has no standing among decent citizens because he has assumed name of mass-murderer Ernesto “Che” Guevara and proudly wares his T-shirt.
You are both leftist haters garbage.
Good part is that Obama hates Jews, and idiots like Gröfaz, and hopefully will get reelected.
Obama Leaks Israeli Strike Plan on Iran…….. Ha Ha Ha Ha Ha.
So do I know my international politics?
This is just a beginning based on Obama’s handshake with Medvedev (“Медведев”)…… Trust me!
I can read Slavic body language of Медведев.
I have never admitted to once being part of the JDL, you raving lunatic, mostly because I have never been part of the JDL. You have until the end of the weekend to find the comment where you claim that I “admitted” that and either admit error or face consequences such as being consigned to Pedroza-blog hell. Ready, go.
“I have never admitted to once being part of the JDL, you raving lunatic, mostly because I have never been part of the JDL. You have until the end of the weekend to find the comment where you claim that I “admitted” that and either admit error or face consequences such as being consigned to Pedroza-blog hell. Ready, go.”…….. Hmmmmm
January 4, 2012 at 2:08 pm You have stated:
@Stanley — Actually, I’ve had bad relations with the JDL types from the late ’70s, most strongly so in the early to mid-’80s. Irv Rubin disgusted me. The peace party within the Israeli parliament keeps on changing its name and shape, but when I was closet to it it was called Mapam, and later there was Yesh G’Vul, and that’s where my sympathies (still without the broad bounds of Zionism) have always been. So, if you’ve always thought that I was JDL, you’ve always been wrong.
Based on your ambiguous statement above, “I was closet to it” is sufficient for me to be informed and believe and therefore allege that you have been JDL sympathizer, if not its member.
I am not in opposition to your general denial above, however, you are submitting it as your affirmative defense by which you have shifted the burden of proof to you.
Furthermore, you are public figure by your bid for your candidacy so I am advising you, legally, to freshen up on the California Code – Section 425.16 for Lawyers, Law Students, etc. … and these pesky “unclean hands” of your’s.
Now, you have until the end of the weekend to find the comment where you claim that I am “raving lunatic” see “Witkin” and either admit error or face consequences such as being consigned to frivolous and malicious litigation hell. Ready, go…….. one minute and counting.
Stanislaw, you barely literate idiot, I was saying that I was close to the Israel’s “peace party” — meaning being supportive of it from the U.S. and occasionally talking to people here who were part of it. Israel’s peace movement was and is pretty much the opposite of the JDL. Your assertion is absolutely bonkers.
You’ve done the equivalent of taking someone’s assertion that they were part of the anti-Hitler “White Rose Society” and argued that they had claimed that they were a Nazi. If you had any shame, you’d be blushing hard enough to cause blisters.
I do not understand your ambiguous hateful crapola!
However, I am advising you, legally, to retain Esq. Geoff Willis for your attorney because what ever you are trying to promulgate is way above your legal and intellectual training.
Moron mongoloid, let me simplify for you: Esq Diamond has always been AGAINST the JDL.
He said “the closest I ever got.” that’s like you saying the closest YOU ever got to Stalin was standing on that tank in Prague – the high point of your life. Got it?
This is now declared off-topic on this thread, not to mention STOOPID.
Are you acting as the Esq. Door Knob’s attorney — Gröfaz?
His statement speaks for it self.
Beattie v. D.M. Collections, Inc., 754 F.Supp. 383, 392 (D.Del. 1991) (“The question is not whether the plaintiffs were deceived or misled, but rather whether an unsophisticated consumer would have been misled.”)
But you are much, much worse than “unsophisticated.” You are a moron mongoloid.
Good testimony Gröfaz, you knew or should have known.
That makes you and Diamond willful, wanton, capricious and intentional tortfeasors!
Au contraire, MM. You quoted a judgment regarding “whether an unsophisticated consumer would have been misled.” The judgment said nothing about “whether a moron mongoloid would have been misled.”
In addition, this is my second caveat by informing you that you are infringing on my copyrighted trademark “moron mongoloid”.
Your admission is in your statement: [But you are much, much worse than “unsophisticated”]
FYI, Beattie is case law or precedent [not] judgment.
TJ – good input. The issue of leakage is not about employers raiding the funds, but about the worker borrowing against the fund for other needs, thereby resulting in much less being avaible for retirement over time. I understand that happens quite a bit.
Much of your comment seems to argue for personal responsibility, which is a good premise. However, my observation of what is walking the streets in our communities is there are a lot of people that could not begin to balance their checkbooks, much less have the mental capacity and take the time to get educated on managing investments. I have even known of a couple of people who got those mailers from their credit card company that included checks they could use and they thought it was free money and spent a bundle, only to find out the truth when the bill arrived. A lot of dim bulbs in the chandelier out there.
Thanks for the clarification on leakage. Yes, most 401K’s allow for loans up to usually around $50K. This is often one of the worst financial decisions one can make unless they are self employed and have their own 401K. Not only is the future growth eroded since it is earning a fixed interest rate which in theory should be lower than the market increase, but even worse is the fact that the employee must repay the loan shortly after they leave service (i.e. quit or get fired) or it is taxable to them. This is a huge deal, but the 401K should not be blamed as the employee needs to understand this prior to taking the LOAN…yes, it is a loan and must be paid back.
I am absolutely a huge proponent of personal responsibility. I also believe that financial illiteracy is a major problem in this country. How someone can graduate HS yet along college without know how to balance a checkbook, how taxes work, how a loan works, how compounding interest works, how a budget works, how savings works, how a mortgage works, how a car loan works, the difference between a stock and a bond, etc….shows a lack of clear focus and goals for our education system. Yes, math, reading, writing, and geography are all important but I believe a financial education is also equally important- plus it often will pull aspects of the basic education all into one class. Even worse is how someone who can be a respected financial adviser with multiple licenses is not qualified to teach a public school class, even on a volunteer basis, on basic finance because they do not have a credential.
Unfortunately, a lot of those bulbs have the capacity to burn bright but have chosen not to or their families did not make it a focus around the dinner table. If the school system is not going to do it, families must.