I’m getting exasperated. It seems like every time I turn around, there’s another article about “fixing the 401k.” Repeat after me: The 401k does NOT need to be fixed!
Don’t believe me?
Consider this recent article on CNN/Money, titled It’s time to fix the 401(k), by Penelope Wang,.
Ms. Wang details some of the things she views as the shortcomings of the 401k plan as it pertains to saving for retirement.
“Lots of people start saving too late, save too little or make missteps with their portfolio. And all of us are vulnerable to risks that we can’t control. … Or you may hit a market storm at precisely the wrong moment: the year you stop working.”
She also references the 10% penalty on early withdrawals. The problem here is not the 401k, it’s the investor! There will always be some who either cannot or choose not to learn proper money management. If these people were investing in an IRA or a general stock market (i.e. non- tax deferred) account, they’d have the same problems.
She goes on to say:
“Over the past 12 months, a 64-year-old investor in an age-tailored “target date” mutual fund has lost 26%. Savers with high balances can recover from that. But many lost more, and the typical near-retiree with a 401(k) has less than $50,000 stashed away in it. “
Again, this is not specific to the 401k, it’s the stock market in general. Many stock portfolios have dropped 26+% over the past 12 months, whether they were held in a 401k, IRA, Roth IRA or standard brokerage account.
So, she’s not happy with the 401k plan. What’s her proposed solution to this “problem”?
“Our current retirement system hasn’t broken – it was never really a working system to begin with. No law-makers designed the 401(k) to displace the traditional pension, although that’s what ultimately happened.”
I have a serious problem with the premise of this: namely that law-makers (i.e. bureaucrats in Washington) are knowledgeable enough to create a plan that solves the problems outlined above. Where is the evidence of this? The bankrupt Social Security system? The current bailout/tarp/spending fiasco taking place (and driving the market down) on a daily basis ? I don’t think so.
In fact, much of the article seems geared toward pushing the Ghilarducci plan that I wrote about here. In that plan, workers would forfeit the opportunity to earn higher returns on their retirement savings for a “guaranteed” return of 3% per year, inflation adjusted.
3% per year in the positive may sound great when you’re looking at your 401k balance down 30% over the past year, but when your balance is growing at a double digit clip (as it will again someday) it’s not looking so good.
The real problem isn’t the 401k, or the free markets – it’s education.
No retiree 5-10 years out from retirement should have 90% of his savings in stocks. That’s an insane amount of risk (unless he doesn’t need the money for 1st 20 years of retirement!). Ms. Wang does outline some actual problems with many 401k plans. For instance:
” Your employer might not offer a plan or might choose one with second-rate investments. “
Other potential problems might be high fees, and no employer match. I’m all for standardizing and expanding investment options in 401ks – just keep the Government out of my retirement thanks.
Great article. My 401k is definitely at the top of my radar at the moment. I am not at retirement age so I don’t have to worry about this current dip as it will eventually go up as you mentioned in the article. However, what can I do now to take advantage of this dip. Should I be increasing my 401k % at work? I would imagine that if I up my contribution with the reduced price of stocks my dollars would purchase more stock. then when the market does rebound my 401k will increase even more than before because of my increased amount of shares. I hope that made sense. Do you agree with this approach? or do you have any other suggestions?
Wow Danny! First let me say thanks for all the comments!
Now on to your 401K question…
I think there are 2 basic things you can do to take advantage of the recent drop in stock prices:
1). Evaluate your options. Take a look at what’s available to you in your 401k plan and see how each available option for each category has held up over the past year. I did this with my portfolio last night and was pleased to see that while it has taken a beating (down around 40% for the last year) the individual funds that I chose held up better than their peers and in some case better than the underlying index! If this were not the case, I’d take a long hard look for any reason to keep those funds and not switch to the others.
2). Up your contribution rate through work. If you can spare the cash, bump up your contributions. Eventually the stock market as a whole will rebound. It make take 4 months, 4 years or 10 years but your portfolio will rise that much quicker when it does!
[...] 401(k) when it isn’t broken. This bothered me enough to blog about it in that post as well as Fixing What Isn’t Broken and Why 401K Retirement Plans Really Don’t Work And How To Fix [...]