Retirement: Was the 401(k) a big mistake?
Some early champions of the 401(k) are coming to regret the retirement revolution they ushered in, said Timothy Martin in The Wall Street Journal. Less than four decades ago, a handful of pioneering human resources executives, consultants, and policy wonks jumped on changes to an obscure line in the tax code—line 401(k)—initially intended to give executives a tax-free way to defer some compensation from bonuses and stock options. What emerged—a taxdeferred savings tool for millions of ordinary investors—has become “the dominant way most Americans save” for their golden years. But what many of the 401(k)’s creators didn’t anticipate was that it would end up largely replacing pensions, which guarantee payouts for life. “We weren’t social visionaries,” says Herbert Whitehouse, a former Johnson & Johnson executive who helped popularize the 401(k)s in the early 1980s as a supplement to traditional pensions. Today, just 13 percent of all private-sector workers have a traditional pension, compared with 38 percent in 1979. Meanwhile, some 52 percent of households are at risk of not having enough money during retirement.
“Oopsies don’t get any bigger than this,” said Dante Ramos in The Boston Globe. Early 401(k) backers are lamenting what millions of families already know all too well—“that 401(k)s aren’t enough.” With the decline of private pensions, individual workers are now exposed to market risks once shouldered by large companies, while investment fees chip away at their returns. Others are done in by the voluntary nature of the program. Many workers make bad investments or don’t join at all. “In retirement planning, as in electrical wiring, not everyone is cut out to be a do-it-yourselfer.”
“The truth is that there are good and bad aspects to both old-style pensions and 401(k) plans,” said Kevin Drum in MotherJones.com. Most old-fashioned pensions were far more modest than most people remember. And while 401(k) plans are more vulnerable to the ups and downs of the stock market, that’s improving, with new rules encouraging employers to offer “lifecycle” funds that become less volatile as workers age. And don’t forget, there are other ways to save. “As housing prices have risen over the past several decades, so has total personal wealth.” In the meantime, you can’t afford to wait around for someone to design the perfect retirement plan, said Tom Anderson in CNBC.com. Investors who have been in their company’s 401(k) plan for 15 years saw their average balance grow from $43,900 in 2001 to $331,200, according to a recent analysis by Fidelity Investments. If you weren’t automatically enrolled, “you should sign up—immediately.”