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If you've been brave enough to open your 401(k) statement this year, you've probably noticed that there's a lot less money there than last year. In fact, at the trough of the market in October, The Wall Street Journal reported that workplace retirement plans -- e.g., 401(k)s -- suffered paper losses of $2 trillion.
The problem is, even when the stock market was up, you -- the saver/contributor -- were probably losing money then, too. Because of a combination of high fund fees, exorbitant plan costs, and poor asset allocation, even when your 401(k) isn't losing money, it's still costing you.
This year's more than 35% market haircut is the first major plunge since the landmark Pension Protection Act of 2006 was signed into law. That bill paved the way for 401(k)s to be the long-term solution for American retirement savings; the losses and volatility we've experienced since September have raised questions about the wisdom of that solution.
The market never goes up in a straight line, of course. But for most of the time since the IRS formally outlined 401(k) rules in 1981, the market experienced fantastic growth, and plan participants watched as their nest eggs swelled (despite Black Monday in 1987 and the dot-com bubble earlier this decade).
Some of those precipitous drops sounded the alarm bells of reform -- with the spectacular fall of Enron in particular raising the possibility of change -- but it wasn't until the credit crunch and market meltdown of '08 that calls for 401(k) reform intensified.
Some smart folks have gone further than merely "reform." New School professor Theresa Ghilarducci proposed a plan to Congress that would abolish 401(k)s entirely and replace them with government-run plans guaranteeing a post-inflation 3% per annum. Most other proposals are less radical (read about all of them here) and, therefore, more palatable.
Why, then, do we support the 401(k) system?
We believe the 401(k) system should remain intact. We also agree with critics -- the system has flaws. These plans put the onus of saving and investing on individuals who, in many cases, aren't up for the challenge. Many 401(k)s charge high fees and have little transparency as to what those fees actually are. As Daniel Solin points out in The Smartest 401(k) Book You'll Ever Read, the paradigm shift from pensions to 401(k)s benefited, in order:
- The securities industry
- The insurance industry
- You, the employee
Yes, you appear last. And yes, that's a major problem.
But that hierarchy need not be permanent. Along with some needed regulatory changes, there are some important steps you can take to seize control of your 401(k) future -- which is why we've presented (below) an article package detailing how you can save your 401(k) from high fees, indifferent or ignorant plan management, and the common blunders that plague many plans.
A sense of perspective
The 401(k) plan system is barely 30 years old. Think about that: The retirement vehicle to which all Americans are now hitched hasn't been around as long as a typical worker's career. With a plan so young, so unproven, it's no surprise that alarm bells have sounded now that the market has taken a nosedive.
And reform is what's needed -- not the abolition of the 401(k). Again: These plans put you in control. That's scary, yes, but you must control your destiny here -- because let's face it, the alternatives to 401(k)s are inadequate. Company-run pension plans are disappearing for a reason -- they've proven to be unrealistic. In recent years, more than a few businesses have been saddled with huge pension obligations: General Motors (NYSE: GM ) , Continental (NYSE: CAL ) , United Airline parent UAL (Nasdaq: UAUA ) , and Delta (NYSE: DAL ) , just to name a few.
The government-run leg of the retirement stool is Social Security, and anyone who's watched a presidential debate over the past two decades knows Social Security is in trouble. By its own estimate, the Social Security Administration will begin paying out more than it receives in 2017.
Reform large and reform small
Frankly, the "Americans aren't up to the challenge" excuse is bothersome. 401(k) reform is necessary -- with tweaks to the system in key places -- but it is absurd to think that we'd give up on 401(k)s even though the application process takes less effort than filling out a cell-phone rebate card. If we've never made a concerted effort to educate the players, is it really fair to give up on the game?
That's said with due respect to the smart folks asking that the entire 401(k) system be reevaluated -- or more.
Before the Industrial Revolution, the American retirement plan was to work (on a farm, for instance) until you were physically incapable, and then have your kids care for you in old age.
That broken model has been replaced by newer, but inadequate, solutions. Social Security isn't working. Pensions aren't working.
Your 401(k) may not be working, either (click the links below to do something about that) -- but it is the one thing over which you have the most control. It's the very best place you can begin pumping up your retirement, because -- and this may seem obvious, but it needs to be said -- no one will plan your retirement for you.
We've come quite a long way, but we have a lot further to go. The 401(k) is how Americans save, but we should demand better -- of the system, of the plan providers, of our employers, of ourselves.
To get you started down that path, we've assembled a special report that tackles the 401(k) issue from every angle -- click below to read on!
- Your plan may be inadequate -- here's what you can do about it: Dear Boss: Fix Our 401(k)
- How 401(k)s may be failing you: The 401(k) Crisis and What You Can Do About It
- Beware common pitfalls: Don't Make These 6 Big 401(k) Blunders
- What to do if your plan is so bad that the free match doesn't seem worth it: Should You Ditch Your 401(k)?
- Tally the hidden (and unhidden) costs of your plan: The Secret Downside of Your 401(k)
- What to do with your old 401(k)s: Don't Be a Pushover, Just Roll It Over
- Real-life tales of woe: 401(k) Horror Stories
- Is your plan sponsor among the best?: The Best 401(k) Plan Sponsors
- What does the government have planned?: Congressman George Miller on the Future of 401(k)s
- Chime in yourself: Fool Poll: Are You Happy With Your 401(k) Plan?