Are 401(k) Plans a Failed Experiment?

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Over the last few decades, there has been a fundamental shift in Americans' options for retirement plans. We are increasingly forced to take responsibility for our non-Social Security retirement investments, and yet evidence shows most of us don't know how. One-third of Americans reach retirement age with only Social Security to fund it. For low-income people, that number is 75%. The result is that the majority of Americans cannot afford to retire.

Labor economist Teresa Ghilarducci describes 401(k)s and related plans as a failed experiment. Fortunately, there are some things you can do individually to improve your own situation.

What has changed?
When it came to retirement, it used to be that many Americans were heavily reliant -- apart from Social Security, which we address in another article -- on an employer-sponsored pension or similar vehicle. These "defined-benefit plans" promised a predetermined monthly benefit for the retiree based on factors such as the employee's age, salary, and length of tenure.

Since 1980, the landscape has shifted heavily in favor of defined-contribution plans such as 401(k)s and 403(b)s. Within these plans, employers usually pay a fixed amount into an employee-directed investment account. The fundamental difference is in the nature of the promise: With many defined-benefit plans, the guarantee is in the pay-out; with defined-contribution plans, the guarantee is in the pay-in.

Simple factors for a fabulous retirement
Let's look at the factors for success in 401(k) management.

Know your number. Your planning should begin with a fundamental question: How much money do I need to retire? The general rule is that you need about 20 times your annual salary. With an average salary of $56,715 a year, a teacher in Ohio would need to save $1,134,300 in order to retire without compromising her standard of living. This is in addition to what she would get from Social Security. Now consider that "60 percent of workers report that the total value of their household's savings and investments, excluding the value of their primary home and any defined benefit plans, is less than $25,000," according to the Employee Benefit Research Institute. That is a devastating shortfall.

Accurately determine when you will die. I'm shuddering just thinking about this. If you die before you predicted, no harm, no foul. If you live longer, then your blessing of longevity could come with a curse of abject poverty. Did you catch that? You could be a year or two away from death and literally be penniless. What are you going to do then? Go get a job at the Quick-E-Mart? I'm being sarcastic, but a lot of people believe just that. What a way to spend your golden years. Then there is the unpredictable prospect of illness, either your own or your spouse's. So are you the betting type?

Competently manage your investment account. Well, folks, here's where the rubber meets the road. When you have a 401(k), when and how you invest your money is entirely up to you. That's part of the attraction, of course. You just need to be the kind of private investor who makes consistently smart decisions, such that your account grows into the cushion you need it to be. Simple, right?

So how are we doing?

Reality check
You should probably sit down for this part.

  • Only about half of American workers have access to a 401(k) plan, and only about 30% of American workers actually take advantage of that plan.
  • According to the UC Berkeley Center for Labor Research and Education, about 75% of 401(k) account holders have balances below the frequently cited average of $60,000. The median account balance is less than $20,000.
  • More than a third of U.S. households end up at retirement with only Social Security.

Now why would this be? Why do those 401(k) plans look so dismal, when they were so heralded? It turns out that most people are terrible investors, and worse still, few are even interested in learning to do better.

The Dodd-Frank Wall Street Reform and Consumer Protection Act required the SEC to study financial literacy among retail investors. The SEC published the results of that study this August. It makes for dire reading. Consider the key finding: "Investors have a weak grasp of elementary financial concepts and lack critical knowledge of ways to avoid investment fraud."

To put this more clearly, most investors do not understand such fundamental notions as compound interest and inflation. Notice that we're talking here about investors, not the general public. These folks are already market participants, and they don't have even the most basic comprehension of the abyss into which they're tossing their cash.

But what about other assets, you ask? People have home equity, don't they? Well, the bursting of the housing bubble fundamentally compromised the security we once derived from home-ownership. A Sept. 16, 2012, New York Times editorial revealed that the housing collapse had "erased nearly $6 trillion in equity, and left nearly 13 million people owing a total of $660 billion more on their mortgages than their homes are worth, according to Moody's Analytics." I almost can't get my head around that, but I know it's ugly.

Right, so relying on your home equity is out. "But I'll just work longer," you protest. Really? This falls into the realm of magical thinking. It's all well and good if it works out, but think it through. If you're in a labor-intensive job, how long are you willing to bet on your body's resilience? What happens if you have an accident, or fall ill? What will you do if a 22-year-old gets hired to do your job for half your salary? Again, maybe you're the betting type, but I don't like those odds.

The road forward
Now that I've left you wallowing in misery, let me shine a ray of hope onto your forlorn countenance. All is not lost. We'll take a look at the macro level first, and then we'll zoom in to you.

I recently interviewed Jean Setzfand, AARP's vice president for financial security. She said most people are trying their very best, but the system is set up for failure. As a result, Setzfand said, "people end up taking the ostrich approach of getting to it later." She thinks the blame shouldn't fall exclusively on individuals.

Part of the solution could be a policy one. We could consider the system failed and seek to change it. This is precisely what many influential people promote, including Ghilarducci, the labor economist. She advocates strongly for such measures as mandatory, professionally managed retirement accounts.

I have no interest in wading into a policy debate here, but I do have one initial reaction to this. While Ghilarducci's proposal no doubt helps to address the problems of the world as it actually is, I still dream of the world as it could be.

Setzfand at the AARP argues that we need to aim for financial capability, not just literacy. The distinction she draws is that literacy alone is not enough if it does not lead to sound actions with positive outcomes. In order to achieve a common foundation of financial capability among Americans, she argues that we need to introduce financial education into the K-12 school system, and carry that education through to universities, workplaces, professional organizations, and other areas of our lives where we naturally interact.

We share Setzfand's dream of a more financially capable public, and we have faith that you can seize control of your financial future. Here are four things you can do right now to begin getting your retirement savings in order.

  1. Calculate your number. Don't worry, you don't have to pull your old algebra notes out of the attic. Other kind souls have done the heavy lifting for you, and published free retirement calculators like this one online. If you want something more heavy-duty and you don't mind paying for it, try Putnam's Lifetime Income Analysis Tool which, starting next year, will integrate detailed health factors into its calculations.
  2. Read and understand your statements. You pay fees for the management of your 401(k). If you're like most people, you probably don't know what those fees are, and how they compare with other fund options. That's because, ever since the inception of 401(k) plans, fees have not been disclosed in a manner that the average investor could understand. In the Department of Labor's sweeping set of new disclosure rules, that is about to change. You will receive a statement in the mail sometime this fall with full information about exactly what fees you're paying. Read it, take it seriously, and shop around to see if you're getting a good deal.
  3. Schedule an appointment with human resources. Find out what plans your employer provides for your retirement and enroll immediately if you haven't already. If your employer offers matching contributions, max them out, or you are literally giving away free money. If you're already invested, see if your HR representative has any tips to help you get more out of your money. Those new disclosure rules also require your employer to assess whether its 401(k) plans are really performing as well as they should.
  4. Optimize your asset allocation. Decisions about how much cash you need readily available and what percentage of your investments should be in stocks, bonds, and other vehicles depend on such factors as your age, lifestyle, health, and more. Further, the optimal balance changes over time with your life circumstances. Take a look at the Fool's Rules for Asset Allocation to see if you're on the right track.

No matter the state of your retirement planning, these four steps will set you on the right path. You deserve a happy retirement!

For additional articles in this series, click on the following links:

Sara Murphy does not own shares in any of the companies mentioned in this article. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (48) | Recommend This Article (59)

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  • Report this Comment On October 15, 2012, at 1:58 PM, dakeyras wrote:

    According to the UC Berkeley Center for Labor Research and Education, about 75% of 401(k) account holders have balances below the frequently cited average of $60,000. The median account balance is less than $20,000.


    If this is strictly measuring 401(k) plans, it could be underestimating the amount that has actually been invested for retirement.

    In my case, I have changed jobs several times and rolled my various 401(k)s into an IRA. Because of this, my current 401(k) balance is below the median value. But, the value of what I have invested in 401(k)s is above the average value if I count the rollovers.

  • Report this Comment On October 15, 2012, at 3:20 PM, kthor wrote:

    if 401k are a Failed Experiment, how would you classify Social Security?

  • Report this Comment On October 15, 2012, at 4:01 PM, StopPrintinMoney wrote:

    @kthor good point.

  • Report this Comment On October 15, 2012, at 6:44 PM, 48ozhalfgallons wrote:

    So, if a person makes an average of 50k/yr for 40 years, (2mil) he would need to save 1mil for retirement and live on 1mil spread over the 40 years he is working while he is saving.

    Hmmm.... that would compute to living on $25k/yr during his working years. Assuming no losses nor gains on savings, he then can retire @ $65k/yr including SS.

    What the hell are you selling?

  • Report this Comment On October 15, 2012, at 6:50 PM, PeakOilBill wrote:

    There was nothing experimental about it. It was created to force money into the stock market and help the big banks and brokers get richer.

    ANY private business can go broke. The United States can never go broke because it can print money that you MUST use for all your transactions. The dollar can become worth less, but it will NEVER be worthless, because the USA is WAY too big with WAY too many natural resources and workers who go to their jobs every day. The USA has the power to tax. No business will ever be able to do that. The USA has sovereign immunity. No business will ever have that either.

    Social Security can easily be fixed by means testing and raising the retirement age a little. Also, by taking the limit off, so that all income is taxed. The rich in the USA are richer than they have ever been, since the robber baron era.

    You government haters are free to move to any other English speaking country with a lower rate of tax. Let me know where that is. Just remember, you may not be as secure, or free over there. Hardly any allow private ownership of firearms.

  • Report this Comment On October 15, 2012, at 7:03 PM, billmichael wrote:

    My number one concern about 401k's is that one cannot own tangible assets like real estate or bullion. No matter how much you have saved, it can be wiped out by a government economic policy that spurs inflation. My aunt retired after 31 years with 75,000 saved in a 401k back in the 1970's. That seemed like a lot then but within a few double digit inflation years her nest-egg shrank considerably. Fortunately she passed away from cancer in 1992.

  • Report this Comment On October 15, 2012, at 7:17 PM, eldetorre wrote:

    A couple of comments

    "No matter how much you have saved, it can be wiped out by a government economic policy that spurs inflation."

    Why not "No matter how much you have saved, it can be wiped out by a stupid corporate policy tanks the company." How many retirees once had Kodak Stock?

    Social security fundamentally works. The employee contribution cap limit should be eliminated. It should be converted to a defined contribution system except for financial hardship. And means tested for the wealthy.

    Forcing people to retire later doesn't help the employment picture.

  • Report this Comment On October 15, 2012, at 8:20 PM, MFddunaier wrote:

    Think it through first which you clearly did not, I suspect this is why you do not have enough retirement savings. The goal was to have $1M by retirement and the point of investing early and every month is the get the value of time, most likely only $300k will be invested to get $1M at retirement. Worry and plan now, not later!

  • Report this Comment On October 15, 2012, at 8:21 PM, neocolonialist wrote:

    These kinds of articles always do a good job of hitting one end up the spectrum, but not the other. What about those of us that DO no how to manage our own and take care of our responsibilities?

    I would like to opt out of Social Security so that I can better fund my retirement. Given the current trajectory, I count on nothing from Social Security, but the taxes are heinous. Let me have my money back, and I will even kick in some for those currently drawing out and I will still be better off.

    Freedom doesn't mean everyone ends up okay. Freedom implies risk. I'm good with that, just wish I could get ole uncle Sam out of my pocket.

  • Report this Comment On October 15, 2012, at 8:23 PM, MFddunaier wrote:

    You can buy bullion and gold/silver coins using a 401k. I have almost 30 ounces in my 401k I've bought over the past 15 years. You can do it, easier when it is controlled by 3rd party but you can take posession if you want.

  • Report this Comment On October 16, 2012, at 12:21 AM, sliderw wrote:

    They say you need X times your annual salary to retire. That's bogus. It doesn't matter how much you earn. It matters how much you (will) spend.

  • Report this Comment On October 16, 2012, at 6:44 AM, BMFPitt wrote:

    "If you're already invested, see if your HR representative has any tips to help you get more out of your money."

    Yes, definitely talk to those brilliant financial minds in HR about major investment decisions.

    If I sat here ripping the rest of the article to shreds, I'd be late for work. But it really seems as this was written by someone while Occupying something.

  • Report this Comment On October 16, 2012, at 12:09 PM, ScubaStClaire wrote:

    " Read and understand your statements.... ...In the Department of Labor's sweeping set of new disclosure rules, that is about to change"

    Because of these new DOL rules - my employer is eliminating my ability to have a brokerage account under my 401K and I will be limited to ONLY the sparse set of mutual funds they offer. The DOL rules would require my employer to report on fees associated to each transaction type under the brokerage account - which was a responsibility my employer did not want to manage.

    I’m now in the process of liquidating all my stock holdings and shifting the proceeds into the available mutual funds offered by me employer before December 12, 2012 or it will be done for me automatically based on the closing price that day.

  • Report this Comment On October 16, 2012, at 12:12 PM, kthor wrote:

    @ ScubaStClaire transfer them into a self manage IRA?

  • Report this Comment On October 16, 2012, at 12:27 PM, rd80 wrote:

    For whatever faults it may have, the 401k offers two huge advantages over defined benefit plans.

    1) Portability. Change jobs or lose your job before being vested in a defined benefit plan and you've got nothing. With the 401k, you at least get your contributions and many companies vest the company match sooner than defined benefit plans did.

    2) The assets don't go away when you pass. With defined benefit, once you and your spouse have passed, there's nothing left. With a 401(k), any assets left remain in your estate.

  • Report this Comment On October 16, 2012, at 12:37 PM, sheldonross wrote:

    "You government haters are free to move"

    Wow, we came, we usurped, and now we want you to move. Read the constitution, this country was founded on the idea of limiting government.

  • Report this Comment On October 16, 2012, at 12:44 PM, Tarantoga wrote:

    I'm wondering how useful these stats on 401(k) accounts are.

    Most people I know are changing jobs every few years, and that usually means rolling your 401(k) into a rollover IRA or having a new additional 401(k) with the new employer. In either case, these people are saving but not all in one account - contributing to the small average 401(k) balance.

    Statistics per person or household would be much more meaningful to capture the state of retirement preparation.

  • Report this Comment On October 16, 2012, at 1:32 PM, Lucaskasan wrote:

    More bullet points for reality check:

    Studies show that most 401(k)s offer low quality investment options.

    The first rule of investing is never invest money you cannot afford to lose, yet 401(k) do precisely that.

    Two many people conflate investing with saving.

    Perhaps people are not contributing to their 401(k)s because their 401(k)s are crummy, not because they are imprudent.

  • Report this Comment On October 16, 2012, at 3:00 PM, gourils wrote:

    "The general rule is that you need about 20 times your annual salary. "


    Hummm.. wondering, how long will I have to work to save 20 times of the annual salary, when one can save about only 10% to 20% of the salary. Yes, compounding of interest etc would add.. but there are losses from stock market as well.. In general with 6% of annual return on 10% of savings, it will take virtually forever to save 20 times of annual salary.

    And do I consider annual salary at the start of the career or at the end of the career.. generally there would be huge difference just because of the inflation.

  • Report this Comment On October 16, 2012, at 3:39 PM, cyclelogical wrote:

    Several commenters mentioned "means testing".

    So you are diligently saving and investing in your 401k, IRAs, etc.

    Your neighbor, who had a similar income, squanders his money living high on the hog.

    Upon retirement, means testing says you have too much in your 401k & IRAs so... you get nothing.

    Your neighbor gets to collect.

    What message does this send to the next generation?

    Why does gov't so often punish the responsible and reward the irresponsible! Is it so easy to buy the votes of irresponsible people because there are so many of them?

  • Report this Comment On October 17, 2012, at 5:21 AM, scottlogic wrote:

    The 2 biggest problems w/ 401k's are that they are controlled by both the government and Wall Street, and they both have a hand in the cookie jar:

    1) Government control: "401(k)" is a section of the Internal Revenue Code and the government can change the rules of the game at ANY time. They can "increase" the age of distribution if they need us to pay into the Social Security system longer, they can increase the taxes that we pay on distributions in retirement.

    QUESTION: Do you believe that future tax rates will be higher, lower or the same? Most people believe that they will be higher... if so, then why do we defer our taxes into the future, by saving the majority of our $$ in tax-deferred retirement plans such as, IRA's, 401k's, 403b's, etc.

    It's just as important to diversify one's $$ from a tax perspective (taxable, tax-deferred, tax-free) as it is to diversify asset classes. I only put up to my company match in my 401k and redirect any other savings/investments into other areas where I have more control.

    2) Wall Street: Wall Street tells us to "Buy and Hold" and weather the storm, so that they continue to earn fees on our $$, but "Buy and Hold" hasn't worked over the past 10 years. Wall Street and "High Frequency" traders account for 70% or more of the trading volume on any given day and they are using technology to move their $$ in and out of the market, while the average investor (you and I) are left holding the bag and taking the major losses during market corrections.

    I've been utilizing a service ( that puts me on the same page with these high-frequency traders and helps me avoid the major corrections that are inherent in a "buy and hold" approach.

    Diversify from a tax-perspective (don't put ALL of your $$in your 401k) and protect your $$ from the major market corrections to provide a better retirement for you and your loved ones!

  • Report this Comment On October 17, 2012, at 8:54 AM, BMFPitt wrote:

    "1) Government control: '401(k)' is a section of the Internal Revenue Code and the government can change the rules of the game at ANY time. They can 'increase' the age of distribution if they need us to pay into the Social Security system longer, they can increase the taxes that we pay on distributions in retirement."

    The government does lots of illigical things, but I don't see how that particular scenario would make sense. If SS hasn't been abolished by the time I retire, then who is getting it since eveyone is still apparently working?

    "QUESTION: Do you believe that future tax rates will be higher, lower or the same? Most people believe that they will be higher... if so, then why do we defer our taxes into the future, by saving the majority of our $$ in tax-deferred retirement plans such as, IRA's, 401k's, 403b's, etc."

    Because there are no capital gains taxes when you move your money around inside a tax deferred account. If you're going to hold something for 40 years, then go for the Roth, but if you want to rebalance every few years then tax-deferred is going to save you a lot in the end, even if rates are slightly higher in the future (also, you're likely to be in a lower bracket when you start pulling from your 401k.).

    "2) Wall Street: Wall Street tells us to 'Buy and Hold' and weather the storm, so that they continue to earn fees on our $$"

    Wait, you think "Wall Street" actively discourages active trading that pays them big comissions?

    "but 'Buy and Hold' hasn't worked over the past 10 years. Wall Street and 'High Frequency' traders account for 70% or more of the trading volume on any given day and they are using technology to move their $$ in and out of the market, while the average investor (you and I) are left holding the bag and taking the major losses during market corrections."

    Make up your mind, either you are buying and holding, and you don't care about corrections at all, or you're actively trading and you want to blame HFT for your own bad decisions.

    "I've been utilizing a service ( that puts me on the same page with these high-frequency traders and helps me avoid the major corrections that are inherent in a "buy and hold" approach."

    Ah, you're just spamming, OK.

  • Report this Comment On October 17, 2012, at 11:43 AM, TMFDarwood11 wrote:

    I disagree.

    I think the 401(k) and the 403(b) are successful.

    My spouse, who works and contributes to her's each payday with NO MATCHING payment by her employer is THRILLED each year, when we run her personal financial statement via Quicken.

    I suspect those who are unhappy with the current arrangement assume 1) the 401(k) is free money, 2) don't save enough.

  • Report this Comment On October 17, 2012, at 2:45 PM, TMFDarwood11 wrote:


    I agree, the government can change the rules at any time.

    Under the Clinton administration, Pres. Clinton got a ruling on the SS "fees" collected via employee wages and employer contributions. It was defined that the fees paid were a "tax." As such the government can do anything they wish with that money. In other words, the government owes nothing to SS payers. It can alter SS benefits at any time.

    I think a lot of people in this country are aware of this reality and it feeds into the general concern we all have about finances. To paraphrase:

    We can't trust Social Security.

    We can't trust the big banks and Wall Street.

    We can't trust those in the financial industry.

    We can't trust the Fed.

    We can't trust Congress.

    We can't trust the President.

    So "should we be concerned?" Or, to flip this, "why shouldn't we be concerned?"

  • Report this Comment On October 17, 2012, at 4:12 PM, truman1987 wrote:

    As a small business owner I find that the 401k adds an expense that could easily be covered if we just passed the money directly into someone's IRA. We pay $3000 a year for a service that monitors our 401k, another $3000 for fees. Our employees paid giant fees on the funds they bought until we got competitive quotes and saved them a bundle. A stock broker would charge $30 a year for an IRA. Plus unless you work for a company large enough to afford a 401k you can't save the amounts required to retire in an IRA. I say bump up the limits on the IRA and do away with the 401k.

  • Report this Comment On October 18, 2012, at 1:32 PM, scottlogic wrote:


    If you're in a lower tax bracket at retirement, then you failed to plan for retirement. I don't know many people who want to have LESS income (= lower tax bracket) at retirement. I personally want to enjoy my retirement and do lots of things that I didn't have the time and $ to do during my working years.

    As far as Wall Street and the mutual fund industry, they want you to keep your money invested. However, when most people let their emotions determine their investment decisions, they tend to pull their money out of the market, which results in lost revenue for Wall Street, thus the heavy mantra of "buy and hold", weather the storm", "stay the course" from both Wall Street and their financial advisors.

    I used to prescribe to the diversify and "buy and hold" approach, but kept taking a beating during major market corrections and was repeatedly giving back my gains, until my cousin shared that 401k Beacon service with me in early 2008 and it has helped me be fully invested during market uptrends and in cash during market downtrends. It's allowed me to almost double my returns in the last 4 years with less risk versus the typical buy and hold approach, which I now feel leaves the average investor at risk to the market manipulation from the HFT (high frequency traders). I hope that adds more clarity to my previous post :).

  • Report this Comment On October 18, 2012, at 10:45 PM, chkNYC wrote:

    The suggestion that "with an average salary of $56,715 a year, a teacher in Ohio would need to save $1,134,300 in order to retire without compromising her standard of living" is ridiculous.

    The teacher was supposedly saving some percentage of that $56,715 and paying taxes, etc. So her actual costs to maintain her standard of living was a lot less than $56,715 a year (which apparently was her gross salary).

    Each of us needs to know how much we spend to maintain our standard of living and then also consider what expenses we won't have once we retire and what additional expenses we might have, e.g. additional entertainment or travel expenses. And you have to take inflation into consideration as well.

    But merely multipying your gross salary by 20x is ridiculous.


  • Report this Comment On October 19, 2012, at 1:51 PM, fabrice002 wrote:

    Failed, not failed, it comes down to how one sees human frailty.

    1) Even if we remember taxes will eventually be paid (or else lawyers and accountants, who will cost more), we're still too easily distracted by looking at pre-tax-inflated account values.

    2) Employers used the existence of 401ks to eliminate defined benefit plans, dangling, instead, current contributions that are a pittance of what would have been required to fund the defined-benefit plans they revoked. A long-term Bait-and-switch; they should be called out for it.

    3) The original premise of retiring to a lower income tax bracket has morphed into oblivion. If the nation indeed gets serious about budget deficits, tax rates will have to rise relative to current, and the need to pay for rising health care costs in retirement make it even less likely to be possible.

    4) Significantly, 401k's will have converted earnings that may otherwise have been taxed as capital gains to being taxed as regular income. A 401k withdrawal rate for a tax bracket equivalent to capital gains rates would produce far less income than what most will need to take. Those 'wise' enough to save at rates suggested in this article, and fortunate enough to withdraw into such a low tax bracket, will eventually find that Required Minimum Distributions will kick in, forcing withdrawals into the higher tax rates.

  • Report this Comment On October 19, 2012, at 3:12 PM, NoOracleHere wrote:

    I learned a long time ago - nobody out there is paid to see that I get a fair shake. I have to do this for myself. I find myself at the tail end of the baby boom. I figure I'll probably end up with the tailings of everything. So if you're like me, you plan to work longer, compromise expectations, over-save and under-consume. It's not as dismal as you might think.

    Employers move to defined contribution plans for one reason - to save money. Don't get taken in; adjust for it in your planning.

    Even when everything seems to be going your way and you've got a nice nest egg, be wary of the wolves. This might be anything from a bank collapse, to a wall street embezzlement, to an offer on an off-shore investment that in your alzheimer'd state, seems to good to refuse. Don't put all your eggs in one basket. Spread your investments around. Get additional help in your later years. But be careful here too - some wolves go around offering help and advice.

    Life's a game - enjoy the ride! Take Sigmund's advice (MASH) pull down your pants and slide on the ice!

  • Report this Comment On October 19, 2012, at 4:40 PM, Erbjl wrote:

    My 401k's and IRA's (I have 2 of each) have grown handsomely over the years. I am a buy and hold type of investor in these plans. I don't see how Wall St. gains by encouraging "buy and hold" since thley collect almost all of their commissions from the day traders, Whenever one day trader doubles his income one year, some other day trader looses half his income. This is just one rung above the lottery! "Buy and holders" may pay a nominal account fee once a year. In the case of my 401K's, my conpany actually pays those costs.

    One question, When are we goiing to get back to getting a reasonable interest rate for our savings or money market accounts? Ultra low interest rates discourage saving for the future.. There is no reward for the cash saver any more.

  • Report this Comment On October 19, 2012, at 7:01 PM, The1MAGE wrote:

    If it is working for some, and not for others, then we need to look at why this is.

    Actually the answer was practically spelled out in the article. Our financial education is crap.

    But another problem is people think of today, and not tomorrow. If the 401k is available, but the person isn't taking advantage of it, did the 401k fail, or the person?

    I have sat down and talked to people about how to improve their finances, and they have been very interested in what I have to say, but to date nobody has ever taken my advice.

  • Report this Comment On October 19, 2012, at 10:20 PM, Sunny7039 wrote:

    A retirement vehicle that has existed for a couple of decades and that has left nearly 90% without even close to sufficient funds to retire IS a failure.

    WHY it's a failure, who or what is responsible for the failure, and so forth, are separate issues. But yes, this has been a failure.

    You can easily find data from the Federal Reserve Board on household net financial worth, including all accounts, retirement and non. It is abysmal.

    Retirement has to provide for everyone. If it only provides for the top 10% or 20% -- and even if those retirees achieved their success based purely on virtue -- then it is still not good enough.

    Even smokers and drinkers have to be allowed into a hospital. So why do you imagine low wage earners shouldn't be allowed to live past 65?

  • Report this Comment On October 19, 2012, at 10:26 PM, Sunny7039 wrote:

    Also, considering all the debt the typical college graduate has now -- and this is a new phenomenon -- how do you expect them to save? Their parents, who didn't face significant student debt, didn't save. Their parents, who usually had a better background in mathematics, and faced fewer distractions and a less consumer-driven culture, didn't save.

    I wonder how anyone expects this to work. It's like expecting everyone to convert to a new religion, instantly and simultaneously.

    We really need to hear some new ideas. All I ever hear out of any politician is self-serving cant.

  • Report this Comment On October 20, 2012, at 8:19 AM, CPRouse wrote:

    I would fall into the category of "under $20,000" in a 401k but that would be due to changing jobs a year ago. My previous 401k was over $20k and rolled over into an IRA. I believe it would be more honest to include IRA's in these numbers.

    That having been said, I believe part of the problem is that many younger people eat the 10% penalty and spend their 401k when they change employers, particularly if it was not their choice.

  • Report this Comment On October 20, 2012, at 1:38 PM, cfravel wrote:

    This is a good article. A lot of the critical comments here make incorrect assumptions about the content of the article.

    I'm definitely against "defined benefit" plans, because there is absolutely no way to guarantee growth. Everyone should share risk equally. The people who currently have defined benefit plans do so at the expense of those who do not, mostly through taxation. That is not a fair system, by any means.

    I'm generally against socialization, but if retirement could be planned through a truly sustainable model, and the public had the ability to demand amendments, then I would support it. However, both of those things are untrue today.

    If we made a financially sustainable system, which apportioned retirement funds according to a sustainability model instead of defined benefit model, the pricing on retirement products would adjust to what is affordable to the average person.

  • Report this Comment On October 20, 2012, at 8:06 PM, littlewingAXV wrote:

    The hypothetical "teacher in Ohio" would not be relying on social security at all if she was a career teacher. Rather, she would be a beneficiary of the typically more generous (compared to the typical private company pension) public employee pension. In Ohio, that would be STRS; she won't need to worry if she has a reasonably long tenure.

  • Report this Comment On October 23, 2012, at 10:04 PM, Spw225 wrote:

    401ks are better than nothing because of the tax deferral and the employer matching, in some cases. I think if average investors use a mix of low cost index funds its about the best they can do overall. Especially for unsophisticatd investors. I think 401ks should be more like IRAs where people have more control over what they invest in. The Canadian system, tax free savings account for life seems like a good idea. The money deposited doesn't have to be solely from wage/earnings. For example, inheritance, gift from grandma, parents, capital gain can all be deposited. I would like US to have similar account which starts at birth. Sort of like a Roth IRA for all citizens. You can also buy any type of security for the account, stocks, bonds, mutual funds, etf that you could buy for an IRA, but overall current 401ks have limited offerings, many funds charge a lot of fees. If Romney proposal to make dividends and capital gains, interest income tax free, then these accounts would be moot.

  • Report this Comment On October 23, 2012, at 10:36 PM, NickD wrote:

    KO IBM WFC./ Buffet it's that easy

  • Report this Comment On October 25, 2012, at 4:57 PM, jholbrook2 wrote:

    Lots of interesting comments... Actually, there is better and more information in the comments than the article itself. This article has spun so many principles incorrectly, it's completely misleading. And it appears to be just so much regurgitated rhetoric.

    Can we really conclude that that 401Ks are failing simply because statistically 401K balances are low?

    Or should we maybe conclude that people simply aren't funding them? Wouldn't that be much simpler to explain since "most Americans don't understand investing"... which is easy to believe...

    And if so, how is that a failure of the 401K? How does one conclude that because people don't understand the need to save, the blame should go to the vehicle used for saving? My guess is someone wants to change the rules so they can put their thumb in a new piece of pie...

    401Ks have limitations:

    -They are limited by the investment choices given by the employer.

    -The money is there until retirement (unless you want the 10% penalty). So if you feel like it's burning a hole in your pocket (just waiting to be spent), yeah... it's a pain. But at retirement? It's a good pain.

    On the plus side:

    Roth 401Ks are available. The money is taxed now (same as if the money was given to you), not later, including growth. And matching!!!! If the money is truly for retirement, how can you beat that?!?!?

    And regular 401Ks still allow tax deferred growth, even if the money is taxed when you withdraw it. Awesome.

    Want to hedge your bet on where taxes are going? Contribute some money to the Roth 401k, and some to the traditional 401k....

    Now this 20x your yearly salary business for retirement; One thing people keep forgetting is that if you are living off savings (retirement) then you aren't using part of your income for... savings! So you can lop off that "expense" (paying yourself) right off the top of whatever you need. Your home should also be paid for by then (whether you were "upside down" in the house at any time or not), so the MAJOR chunk of your living expenses is gone.

    So would somebody explain to me why we need to calculate our retirement as if we are going to spend 80% of what we are spending now? Are we going on a spending spree?

    My advice?

    Fund your retirement.

    Pay for your house before your retire.

    If 80% of Americans did that, this article would have to be re-written to mislead us in some other way...

    Why would anyone write such a misleading article? Either the author is stupid, or manipulative. Either way it's a scary thought...

  • Report this Comment On October 25, 2012, at 5:02 PM, Telsaar wrote:

    When I was in school, by far the most benificial class I had was business math. I think there are several worthless classes that can be abandoned to teach student personal finance to cover saving, investing, borrowing, banking, taxes, etc. that could of prevented the housing bust we've just gone through all by itself.

    For those who want to know what it takes to get 20x your salary. This should help:

    salary growth rate, rate of investment (percent of salary), rate of return, years

    0%, 10%, 10%, 30years

    3%, 10%, 10%, 40years



    I used 10% growth rate because this has been published as a longterm S&P500 growth rate.

    The bottom line, I think its a stupid rule of thumb and should not be recommended. What I would recommend is to estimate your sources of incomes, Social Security, Pensions, etc. Then estimate your desired retirement salary. You should base this on the salary you make and subract your savings rate, your cost to support your employment, and taxes that will no longer affect you like social security.

    Determine the amount of money you need to make up the difference from your desired income and your resources. Assume that you can draw 3%to 5% from your savings and determine what those savings need to be to such that 3%to 5% is equal to the disired additional income.

    If you retire before 62 or if the incomes are staggard it becomes more difficult but the approach is similiar.

    If you want to retire before your 59. Do not put all your nest eggs in the 401K basket. Invest outside to the extent you can withdraw money to support your lifestyle without paying the tax penalty.

  • Report this Comment On October 27, 2012, at 1:54 AM, spindlelady wrote:

    This is my first time doing this. Wish me luck! I spent my life in non-profit jobs, and when I started, straight out of college I made $5600 the first year.

    My husband and I wanted to save for a house, so we banked my salary and lived in a rented apartment. When our oldest child was 16 , we bought our first and only house. Morgage rates were so high that although we has a sizable down payment, we couldn't afford the 9% interest on a morgage.

    I worked in a library for 20 years before I retired and I had a 403b. I also had a Roth IRA and several mutual funds.

    You may have guessed that we are not rolling in money, but we are very comfortable. Its not impossible. You take it one day at a time, and you keep plugging..


  • Report this Comment On November 03, 2012, at 6:11 PM, FutureMonkey wrote:

    To solve the personal savings equation - good idea to diversify your vehicles as well as your investments. Spend less, save more, own a business, own some income generating property, have a 401k, have savings outside a 401k. Flexibility is valuable.

    To solve the national savings equation - education is critical. We are for the most part financially illiterate. There is no basic finance taught at any level. Probably should start in the 3rd grade. Otherwise children only learn from their parents and the cycle of poverty continues.

    Final thought - Social Security Insurance IS NOT A RETIREMENT PLAN. People screw that concept up all the time. It is an insurance pool that collects from all wage earners and pays out to our fellow Americans that are unable to work. If you can work, delay benefits as long as possible. If you can't work it keeps you out of poverty and in that regard is working perfectly as intended.


  • Report this Comment On November 03, 2012, at 10:00 PM, indexkid wrote:

    Even if you understand your 401k, how are you supposed to navigate years like 2001 and 2008? I lost over half my money during those two periods. With our government not willing to live within their means, I'll be lucky to have any means to retire with in twenty years. How do we avoid the potholes in front of us till we retire? -


  • Report this Comment On November 07, 2012, at 7:17 PM, pomdter wrote:

    Teresa Ghilarducci is just your typical "spread the wealth" socialist.

  • Report this Comment On November 07, 2012, at 11:16 PM, retireewannabee wrote:

    So many interesting comments.

    Problem is with the workers, not the 401k (well, now that they've opened up allowing the 401k sponsor to actually recommend courses of action). I've had one for 20 years, several different employers, sometimes no match. I have always contributed. And I find that only 1/4 of it was money from Me. That is the value of a 401k. Most wasn't My Money. I GOT FREE MONEY JUST FOR SAVING!!

    I have the nest egg in a rollover IRA that I actively manage and have done well. I am buy and hold, a dividend hunter. People that talk about all these losses don't seem to understand that it is only a loss if you sell. Otherwise, it's normal ebb and flow. Go to sleep and let your money make money for you vs freaking out at the Dow numbers of the day.

    If you understand your 401k, then you presumably understand the options in it, including fees and expenses. Asset classes behave differently in different market conditions. If you cannot stomach corrections, perhaps you are invested too aggressively. I am very aggressive, never less than 90 stock / equity funds. Sure, the balance in my account dropped, but, there was no change to the number of shares I held, AND, that good ole Dollar Cost Averaging bought me MORE SHARES when the price was down, resulting in GREATER WEALTH when the price is high.

    Either re-distribute your holdings, or don't look at your balance when the market is down, but be sure to peak at it when the market is up. Just remember, stocks and bonds usually react oppositely, so your portfolio makeup will determine how much of "a high" you get on those up days.

    Stay the course. I have doubled my money so many times, and it is exciting!!! Now that I am over the 6 digit hurdle, I am sooo gunning for the 7 digit hurdle.

    I am happy that the 401k came to be as there is no job I have had that offered pension, and I doubt I would have been vested if there had been, so, aside from anything I had squirrelled away on my own, I would have Nothing.

    My dad, on the other hand, worked for the same company from age 18 to retirement, with pension. The world is different now, and trusting that a company will pay the pension is, imo, a bigger risk than putting the employees in charge of their future.

    Do not blame the 401k for a person having low or no savings. Yes, some options are dismal (why the bulk of mine remains IRA), some have high fees, etc etc., BUT, it is Pay Yourself First on autopilot, and it seems that most people cannot leave saving to discipline, they need autopilot.

    20x salary ridiculous. Rules of Thumb are for people too lazy to educate themselves on their true financial situation and future. True, some people simply are bad at math. I also have attempted to help the investly-clueless and the numberly-confused and, like a previous poster, they were interested, excited even, and Did Nothing.

    Who do you blame? I blame the individual that is somehow not spurred into action by the very thought of being old and poor. Social Security was never meant to be Your Retirement Plan. Rather, it was to prevent SERIOUS poverty for the old and sick. Those without the other '2 prongs' of the 3 pronged retirement stool.

    If you have access to the other 2 prongs, yet ignore them, that is a failure of personal responsibility. it is not a failure of Wall Street, the 401k, your employer, nor your banker or the President.

    If you think SS will be good enough for you to live on and decide to not save, well, good luck with that. I will be travelling the world on 40 years of dollar cost averaging and compounding dividends. And hopefully using SS for autopaying monthly utility bills and property taxes and banking the rest as "fun money".

    If you don't have a plan, what are you waiting for? Make a plan and get started. It is never too late to start.

  • Report this Comment On November 09, 2012, at 6:06 AM, JacksonInVA wrote:

    401(k)s are a failure for me because when I needed my money to support my family, I had to pay a penalty. Further, as the politicians continue to spend spend and spend out taxes are only going one way, up. Hence, you will pay more taxes when you withdraw your money. I am back at investing but will not put my money into a 401(k) or other tax deferred plan. I may need my money, I don't trust the politicians so I will pay my tax now.

  • Report this Comment On December 16, 2013, at 3:47 PM, salaryuser3 wrote:

    So many people boosting the 401(k) and investing on these boards. I wonder what your household incomes have been over the years? I've read several people saying things like "have investment property, a private business, multiple investment accounts, IRA, and 401(k)" as if this was some kind of normal path for a human being in the US. It's a pipe dream for most people. I also wonder how many of you people posting are under 35 years old. The world is a completely different dimension from what it was when you baby-boomers were 35.

    Those of us who are in gen-Y and gen-Z aren't exactly able to just up and start a small business. Big business is demolishing small business. Give another 20 years, and the entire country will look like the South where you have a Walmart, McDonalds, Applebees, Home Depot, Lowes, and AMC with desolation surrounding them. The cost of living has skyrocketed in the last 15 years while salaries have basically stagnated. Even after the so-called housing collapse (which was really just a correction from the over-inflated bubble), house prices combined with property taxes (specifically in the North East) still do not line up with median incomes. Buying a home has never been less attractive.

    To pile up on top of the future retirees' woes, bringing up a child has never been more expensive even if accounting for inflation. Figure in savings for college, healthcare (also costing more now than ever before), and inflation, you show me someone who can afford to contribute 10% of their income to ANY investment scheme without sacrificing their (and their children's) quality of life and future education. God forbid, someone wants to have 3 kids that aren't separated by 5 years each, you're looking at nearly $2000 a month just for child care (so the household can have 2 incomes required for all the expenses).

    In addition to all these problems, any investment scheme is at the mercy of the market. My father-in-law is almost 70 and saw 40% of his sizable retirement wiped away in the '08-'09 crash. Maybe he should have invested half of his money on short-selling. Ridiculous! I'm just glad my wife has a guaranteed pension from her teaching career.

    The saddest thing is seeing all these baby-boomer comments saying things that amount to "It worked for me! Not my fault if you're not a savvy investor!" You may find a few hundred million future retirees severely disagreeing with that statement.

  • Report this Comment On April 09, 2014, at 10:42 PM, vaferalyk wrote:

    One of the smartest things I ever did...ditching the whole life insurance I was paying $400 a month for for a $15 term policy from LifeAnt for the same death benefit, and saving the difference to my retirement accounts. I was told to put the money in my roth though before my 401k, because I was already contributing the maximum that would get a match for my company (5% for a 4% match). I do have to say that with a match, when you put money away, get some advise about a conservative but GOOD allocation, and just keep at it, it adds up really fast. After 5 years I have over 100k in mine.

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