THE FAILURE OF THE 401(k)

By Tim Rutten - 1/10/09

As President-elect Barack Obama and lawmakers attempt to reach agreement on what sort of stimulus package has the best chance of arresting America's economic free fall, the enormity of the immediate crisis naturally pushes any issue that can be deferred to the margin.

As a consequence, there's been little discussion of the way in which this economic implosion has exposed the utter failure of the now-ubiquitous 401(k) retirement accounts. In fact, the entire 401(k) system loks increasingly like the sort of bait-and-switch con relished by the Bernie Madoff's of the world.

Here's the problem: In 1978, when Congress amended the Internal Revenue Code to include Section 401(k), it envisioned the provision mainly as a way for workers to supplement their companies' traditional defined-benefit pension plans and Social Security. (Secondarily, it also was a nifty hideaway where highly paid executives could shelter income from taxes.)

Nobody at the time envisioned the 401(k)as something on which people would rely for their retirement.

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www.latimes.com/entertainment/news/la-columnist-rutten,0,826043.columnist

can throw into one large fund? I know we have ss, but its not much money. AND now that we are losing large corporations, we will see a lot of smaller businesses stepping in.. they cannot afford big plans.. Also, people don't stay at the same job, but if they were able to always contribute into a fund and their employers could match and the govt would invest, I'd say we'd have a more stable Retirement Plan sollution, and we'd still have a ss for that stable bit.. and the Retirement Fund, something that all 3 players could contribute to.. this way there could be more return at the end. I'm not a financial whizz.. but would something like this make any sense. Something that doesn't risk SS, but allows for Retirement plan that Employers would contribute to.

have thought so for a long time. lower wage workers could contribute up to the max, either on their own, or with the help of their employers. families with a stay at home parent could cover that parent, although that is something that we, as a government, ought to do.
parents could endow their children, especially those that have disabilities that will prevent them from supporting themselves.
people who max out could make an additional contribution. i think fairness would dictate that this would buy a payout at a lower level than those who are at less than max wages, but it should be a reasonable return, and guaranteed.

a full link would be helpful.

www.latimes.com/entertainment/news/la-columnist-rutten,0,826043.columnist

Those that do participate are not forced to put everything in volatile investments like stocks.

what about Rutten's point that AARP has found 1/5 of American workers can no longer afford to contribute to their 401(k)s and individual retirement accounts?

I just reduced the withholding rate on mine from 18% to 12%, because I haven't had a significant pay increase in five years and am concerned about a lack of cash on hand.

We are all in the same boat. If employers can't afford to give out raises, they can't afford to fund a "traditional" type of retirement account (e.g. Defined Benefit plan).

Wonder how many other people have done what you have? I well recall my mother-in-law's advice: "Stick to teaching for salary, benefits, pension." How right she was.

you didn't hear about people complaining about the failure of 401k's when the returns were positive (and using the S&P 500 index as a benchmark that would have been 24 of the 31 years) since 401k's came into being.

Also, I have a question:

where do you think the funds that funded defined benefit plans invest their monies?

2008 Comprehensive Annual Financial Report (CAFR)

http://calstrs.com/Newsroom/What%27s%20New/2008_cafr_released.aspx

yours, the majority is in the stock market

No it never should have become a replacement for a pension. W is sorry he didn't get Social Security into stocks. Geez he just doesn't get it.

The stock-market rout has ignited a crisis of confidence for millions of Americans who manage their own retirement savings through 401(k) plans.

After watching her account drop 44% last year, Kristine Gardner, a 35-year-old information-technology project manager in Longview, Wash., feels no sense of security. “There’s just no guarantee that when you’re ready to retire you’re going to have the money,” she says. “You either put it in a money market which pays 1%, which isn’t enough to retire, or you expose yourself to huge market risk and you can lose half your retirement in one year.”

Many retirement experts have come to a similar conclusion: The 401(k) system, which has turned countless amateurs like Ms. Gardner into their own pension-fund managers, has serious shortcomings.

“This is the biggest test that the 401(k) plan has seen to date, and it has failed,” says Robyn Credico, head of defined-contribution consulting at Watson Wyatt Worldwide, noting that many baby boomers are ready to retire. “We’ve put people close to retirement in a very challenging position.”

The most obvious pitfall is that 401(k) plans shift all retirement-planning risks — not saving enough, making poor investment choices, outliving savings — to untrained individuals, who often don’t have the time, inclination or know-how to manage them. But even when workers make good choices, a market meltdown near the end of their working careers can still blow their savings to smithereens.

http://online.wsj.com/article/SB123137714796462913.html

They continously go over the options provided, even if they haven't changed. We have around 9 different funds/plans to invest in, including a stable account that pays 6%. Anyone with five or less years left to retire should be in a stable account with no risk. Being an untrained investor is the investor's fault. It's foolish to put money in any investment that you know little or nothing about. No one is forced to invest in a 401K or purchase stocks.