More on the 401(k) Problem

We talked a little bit about why the 401(k) is problematic in my conversation with Helaine Olen yesterday. That conversation is also happening in other places, like at Counterparties:

The first generation of 401(k) holders is retiring. Duncan Black, in USA Today, reports just how bad things are looking: “According to the Center for Retirement Research at Boston College, the median household retirement account balance in 2010 for workers between the ages of 55-64 was just $120,000. For people expecting to retire at around age 65, and to live for another 15 years or more, this will provide for only a trivial supplement to Social Security benefits… And that’s for people who actually have a retirement account of some kind. A third of households do not.”

Americans have had more than 30 years to learn the ins and outs of this massive experiment in tax-deferred investing, but as Alicia Munnell, the director the Center for Retirement Research says, “we just don’t know how to do it”. What money people do save, they tend to manage poorly. They think they can do better than the market, or tend to choose financial professionals that are bad at beating it. More education isn’t going to fix the problem. As the Economist points out, financial education can actually lead to worse decision-making. And although the 401(k) costs $240 billion a year in tax deductions, research shows it doesn’t make people save any more than they otherwise would.

When David submitted an early draft of his essay on how young people are reframing the idea of retirement, I pointed out to him that there is a large population of people out there who are about ready to retire and would like to retire, but do not have the funds to do so. My father, who is in his early 60s, is in this boat. When the market crash occurred a few years ago, he about fell over when he looked at his 401(k) and saw the amount of money his account had lost. And he’s part of a generation who managed to stay at the same job for 40+ years, and tried to play things by the book, diligently setting aside a certain amount of his paycheck into his retirement account. He’d lose a lot more sleep worrying about what he and my mother would have to do if he didn’t come from a culture where parents can rely on their children to support them in their old age. I’ve got my dad’s back, but since I’m not as traditional, I’m wondering who will have mine.


32 Comments / Post A Comment

deepomega (#22)

This was sort of my point about how pensions are bad. Anything that is guaranteed by some tax-levying institution is going to be at the mercy of both markets and the person who owns it, and people just aren’t good enough at managing those risks.

@deepomega Wait so do we actually agree on expanded social security as the only retirement option (for normal people)? Or did you have something else in mind?

deepomega (#22)

@stuffisthings Yes. I think that for all its insolvency, Social Security is the only reliable way to keep old people from starving (so to speak). Long-term planning is a place where both individuals and capitalism completely fail. So we codify it, we promise a reliable income even if we have to redistribute wealth to do it, we means test it.

kellyography (#250)

I have a 401(k) and pay into it every paycheck, but my employer doesn’t match, and I know very little else about it. I also need someone to teach me personally about stocks and how to make money investing in them. Otherwise (another recurring topic here on the Billfold), I really am going to have to work forever, because I won’t be able to retire.

ccq (#1,175)

@kellyography don’t mean to shill but just some helpful places to start: has some good stuff on investing from a while back (dude is mostly selling career development courses now), but he published a book that’s well worth picking up, cleverly titled “i will teach you to be rich” that covers a lot of the investment basics. also check out “smart women finish rich”, because of its alluring title, you smart pre-rich lady you. it’s a little slanted towards women, but more in the long-term family planning view, not like “omg you need shoez and makeup amirite?”. and it goes over investment options and different overall financial strategies and explains what all the different retirement vehicles (401k, ira, roth ia, sep, reits, mutual funds, index funds, lifecycle funds, etc) are, what they do, advantages/disadvantages, etc, so it’s handy to keep around as reference. it’s also got some really informative charts that display how investing early, as a young person, can be drastically to your advantage- it really kicked my butt into saving early. anyway, good luck :)

@kellyography For most people the two most important things are fees and re-balancing. The fee part is simple: you want to find the investment with the lowest possible fee, so when the market goes up the money goes to you and not the fund managers.

As for re-balancing: you should always have a certain portion of your money in higher-risk, higher-return categories (like stocks) and another portion in safer, lower-return categories (like bonds). The exact mix will vary depending on your risk tolerance and how far you are from retirement — most plan providers have an automated tool to help you pick the rick fund.

Let’s say you do this and the stock market goes up a lot. Pretty soon the percentage of your money in stocks will be higher and the percentage in bonds will be lower. Then it’s time to sell some of the stocks and buy more bonds to get back in balance (and reduce your risk exposure in case the market goes down, which it will eventually). I think most funds now do this automatically, but there may be higher fees associated with it.

At my workplace the company that provides our 401(k) funds sends an adviser around every few months, if yours does the same you should try to make an appointment with them.

@stuffisthings Also, I keep my money in the 401(k) plan offered by my work, because I get a match from tehm. I understand that rolling it over into an IRA can save on fees and give me more choices, but does anyone know if the match still applies? Or should I just accumulate money in the 401(k) with the match and roll it over every so often?

Beaks (#3,488)

@stuffisthings Generally, rolling over implies taking money from a 401k that you’ve already contributed and moving it into an IRA. It shouldn’t affect matching, since your employer is matching the money you put INTO the 401k, not the money you HAVE in a 401k. Especially if you work at a small company, your 401k choices can be pretty limited (and very high fee), whereas you can open an IRA all sorts of places that offer a wider variety of options with lower fees (Vanguard is probably the most famous low-fee provider, but Fidelity and Charles Shwab are also supposed to be decent)

I think usually people roll over their 401ks when they change jobs? At least, that’s when I rolled over mine. Not sure how rollovers work if the 401k is active. I bet if you called someone at Vanguard they could answer that question though- they are generally pretty helpful.

Beaks (#3,488)

@kellyography I really liked Enough: True Measures of Money, Business, and Life by John Bogle. He founded Vanguard (okay, now I sound like a saleperson, but really I just like being able to own the entire US stock market with one mutual fund…), and his reasons for doing it had a lot to do with some of what Helaine Olen was talking about- we’re not financial experts, and we shouldn’t expect ourselves to be. It’s also a good explanation of the concept of an index fund, since he basically invented them.

I think about this a lot. I fully intend to care for my mom when she gets old. Not because it’s cultural tradition for us, but because I think she deserves it, because she’s worked hard and been dealt a horrible hand in life and still managed to do a kickass job raising my siblings and me, and I think that it’s our turn to take care of her.

But retirement? Not something I can afford to save for or really even think about right now, and I get queasy even thinking about what that point in my life is going to look like financially.

Sloane (#675)

I think it’s awesome that you’re willing to help your parents out, and I’m really sorry that the stock market was down when they needed it to be up – that truly is unfortunate. And I would love to think that someone would help me if I were struggling in retirement. With that in mind, however, I question your reliance on someone having your back like you’re doing for your father. If your statement was just an exaggeration or a cultural difference, I understand somewhat, but I still err on the side of taking responsibility for my future and not relying on others (because they’ve got their own shit!).

Mike Dang (#2)

@Sloane Yes, I’m taking responsibility for my own future and I don’t plan on having to rely on anyone ever. But I think you’re missing the point that my father also took responsibility for his own future by diligently putting away money for so many years. We can take responsibility for our own futures all we want but we cannot predict the stock market, or have control over things like the banks creating a derivatives meltdown that takes down the global economy.

julebsorry (#1,572)

@Mike Dang Has their 401k not bounced back at all? My father’s 401k took a massive hit a few years ago, but now it’s basically back where it was…the only thing he’s missing is what the interest from those funds would have been during the crash years. He’s roughly over the standard retirement age (67) and doesn’t really do any fancy investing…is this not the case for your parents as well?

Mike Dang (#2)

@julebsorry There’s been some bounce back, but not enough where he’ll be able to retire. He’s also a blue collar worker for the automotive industry, and his workplace in particular was very mismanaged. He also got severely injured on the job, and had to go to court to sue for disability payments. Basically, he tried to do everything right, but just because you try doesn’t mean things will work out in your favor.

Sloane (#675)

@Mike Dang Sorry, I came on a little strong. I did not mean that you or your parents have been irresponsible. I simply meant that I don’t rely on people to provide for my future.

However, like you said, I can be responsible and do the right thing and still have my plan fail because of actions by bad people. That’s the way the cookie crumbles sometimes, and it definitely sucks. Setting aside for the moment going after the bad guys (which is a worthwhile endeavor, and I don’t have a problem with it), my disagreement with you is what happens after the cookie crumbles – do you clean up the mess, or do you rely on someone else to?

Mike Dang (#2)

@Sloane Thanks for clarifying. I think here we have a cultural difference. Asian American families consider filial piety (supporting and respecting parents, including financially) highly important, regardless of the crumble.

EM (#1,012)

@Sloane What is your plan if you don’t rely on anyone, and then you can no longer work (say because of cancer, or injury, or Parkinsons) and you don’t have enough in savings? What will you do? How would you hypothetically clean up the mess?

Morbo (#1,236)

The problem here is that a lot of young folks think that the Financial Advice Megaplex is aimed at them. It isn’t. Twenty-somethings have one of the best savings rate since Depression-era adults. That is something to be proud of.

The F.A.M. came to be because Boomers decided they needed a therapist for their checkbooks. Someone to tell them what they can do to improve, with the caveat that why you are in this situation might stem from something else (your parents money habits, your job).

Olen has found a great niche – she gets to be the practitioner-turned-heretic that tells people that they have been misled. Drawing a paycheck from Forbes, while biting the hand that feed her – what a great gig.

It is very hard for me to have sympathy for Baby Boomers that find it hard to retire. I’ve watched years of expenditures on SUV’s, McMansions, second homes, divorces, second spouses – all are net wealth destroyers.

Now we get to hear a whole bunch of them say “I don’t want to retire”, screwing over the generation behind them by holding on to their jobs, feathering those 401(k)’s, getting that one last year to bump the pension.

After watching them systemically inflate equity investments, and then housing, and now bonds, I wonder if they ever will learn. The Federal Reserve is keeping savings rates artificially low, in part, to give the Boomers one last chance at putting a nest egg together through the stock market.

@Morbo Baby Boomers were not the first generation of Americans to make disastrously stupid financial decisions, and won’t be the last.

I mean, my great-great grandparents thought owning a farm in what would later become the Dust Bowl was a really smart idea. My great granddad thought working for Standard Oil would be cool — he got paid in stock certificates because they didn’t have much cash at the time, which really helped when they became the first mega-corporation and the dirt farming idea didn’t work out for the rest of the family — but an oil derrick crushed him to death when he was 33. Etc.

That’s exactly my grandfather’s generation invented social programs…

@Morbo Also I spent many tens of thousands of dollars on an education that qualifies me for a job making about as much as a fast food regional manager. Which I love, but financially, not the greatest of decisions.

Morbo (#1,236)

Yep, and the Depression-era folks learned from their mistakes, took action, and improved their lot. Fast-forward to nowadays, where the biggest domestic industry (other than ED pills) is Blame.

You can compare granular stories, but on the aggregate, the Depression Era people created economic wealth. On an inflation-adjusted basis, there is pretty good evidence that Boomers will have been the first generation since the 1830’s rail/bank speculators to destroy wealth.

And, they will probably be the generation that destroys the social programs, both through their short-sighted political actions (Tea Party), and their actuarial stubbornness.

Mike Dang (#2)

@Morbo @stuffisthings Reminds me of this discussion.

@Morbo I still don’t know if I buy it, but the way the argument is framed pretty interesting (i.e. blaming Boomers as individuals for creating the institutions which hurt them/us as a group). I don’t have time to run the numbers right now but from the unadjusted wealth numbers I found it looks like Boomers “only” managed to destroy about a decade’s worth of wealth. That said, it’s true that Gen Y may be the first generation in this century in America to enjoy a lower standard of living than their parents.

Abe (#3,483)

@Morbo Agree with all except for the Tea Party statement. I don’t agree with all that they say but how exactly are they destroying social programs? Advocating for fiscal responsibility is not a bad thing.

Now cities that pay out crushing pensions to thousands of their workers at age 55? THAT will destroy social programs (and a whole lot more)!

Trilby (#191)

I am finally making significant deposits to my 401K, at an advanced age, but hell, I’m glad I didn’t “save” a bunch of money before the crash only to lose it. Since I am near the age when I can withdraw if I need to, I consider it my better-than-savings acct. It’s growing at about 14%, as opposed the interest Chase pays on savings, 0.049% or something crazy like that! But it was not easy learning it. I already have a job! And I couldn’t afford to fund a 401k till I got into my present job and started making decent money finally, and left a husband who had always wasted everything we made….

Trilby (#191)

PS- I think it’s dumb to expect the same standard of living after you retire as when you were employed and making money. I am already frugal and I fully expect to be a penny-pinching old lady, but why should it be otherwise? I’m not that wedded to luxury so I’m ok with that.

@Trilby Why not expect the same? If I ever get to retire, I’d like to think that I can keep my house (haha, I’ll never have a house), and still eat out occasionally and go on trips to see family or just for fun or whatever.

And for some people (maybe like you, it sounds like?), their current standard of living isn’t that luxurious, and cutting back would be actual hardship.

Mirch (#228)

I got your back Mike!

yesterday’s article and this one has pretty much convinced me to cash out my 401k and use it to buy land instead. it wasn’t matched and i’m not with the employer anymore. my new employer doesn’t offer a 401k currently, and roth iras make you wait 5 years to take the money out. so, cash out. my fiance and i plan on living in a trailer or something on the land while we build a house, thereby reducing our monthly bills considerably so we can reduce debt faster. we live in one of the top 5 most expensive rental markets, so reducing rent would help a lot. i just don’t feel like i can rely on a 401k to plan for my retirement, so i’m researching other ways to plan that don’t involve the stock market.

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