Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
Oh no, not another piece on Teresa Ghilarducci's prpopsals for a national retirement plan. One of her proposals may require discontinuing existing 401k/403b and folding them into the grand national plan. Good luck with that. We and the Government have enough problems with Social Security.
401k/403b have issues that need fixing. The DB plans it replaced were also too burdensome for employers.
403b have existed for a long time. But tremendous growth came after an accidental discovery in 1978 by Ted Benna, often called the father of 401k (but the section existed already). He noted a short 869-word section (subtitled 401k) in the 1978 Revenue Act) that allowed pretax employer and employee contributions for retirements (unclear who slipped that in). Companies caught on to this quickly, and by 1983, there were already 7.1 million 401k accounts, and by 2023, 60 million accounts.
“Larry Fink, the chairman and chief executive of BlackRock, one of the world’s largest asset-management companies, wrote that the United States was facing a retirement crisis due in no small part to self-directed retirement financing. Fink said that for most Americans, replacing defined-benefit plans with defined-contribution plans had been “a shift from financial certainty to financial uncertainty” and suggested that it was time to abandon the “you’re on your own”approach.”
I’m sure Mr. Fink and BlackRock have a solution to remedy that uncertainty.
Many people long for the era when defined benefit plans were more prevalent. However, some estimates indicate that only ~50% of employees were eligible for pensions then. Pensions are costly for businesses to fund and administer. Moreover, a company could renege on its pension plan if it experiences significant financial distress. If the pension plan was insured by the Pension Benefit Guaranty Corporation (PBGC), participants would receive benefit payments subject to limits set by law. But these benefit payments could be significantly less than those initially "promised" by the company.
We act as if we are the only country in the world that has tried to deal with the general question of a reasonable and efficient retirement system. It seems to be beyond anyone's ability to evaluate systems used world-wide, eliminate those that would not work here for various structural reasons, select the best options from those that would work here, and get on with it.
Our systems seem to have square wheels, while I suspect that many better systems may have gone with round wheels.
Lack of good faith (or maybe even any faith) in our political arena (as usual).
I don’t have the answer. But it seems idiotic to expect every Tom, Dick & Harry to possess the foresight and financial discipline to save for something that may well be 30+ years away and to have enough stashed at that point to make it last another 30 years if necessary. Maybe the guy’s a great construction worker, or reliable mechanic or metal worker or whatever. That doesn’t endow him with the financial know how or discipline to make the 401K viable. Many don’t save enough, raid the money when younger or in their first few years of retirement or make bad investment decisions. Now, if they did all of the preceding correctly, they still wouldn’t know when they would die and how to make their assets last precisely the right length of time. Albeit - buying an annuity would partially solve the latter issue,
There are two primary problems with self-directed retirement plans. First, the old grasshopper and the ant fable. Some people save for the future, others live for today. The other big problem is how to live off your savings. It seems to me that many people would be better off buying an annuity with at least some of their savings, providing guaranteed income for the rest of their lives. My wife and I both have pensions, but in reality they are just annuities. We treat our IRAs (formerly 401Ks) as the inflation adjustment for our pensions, which lack that feature.
Finally, there is always Social Security. I am a big fan because it provides a base of income that isn’t affected by the stock and bond markets. It is also inflation adjusted.
"But it seems idiotic to expect every Tom, Dick & Harry to possess the foresight and financial discipline to save for something that may well be 30+ years away and to have enough stashed at that point to make it last another 30 years if necessary. Maybe the guy’s a great construction worker, or reliable mechanic or metal worker or whatever. That doesn’t endow him with the financial know how or discipline to make the 401K viable."
Yup. And is financial literacy even YET taught at all in schools? I see the logic of Tarwheel's comparison of pensions with annuities. But annuities come with hefty fees. Pensions are just simply provided each month, eh? I looked into a deferredcharitableannuity, but the outfit I was in contact with was just making it too hard, offering info on some specifics which were incorrect. She was answering the wrong questions. So, I'll just do the charitable thing on my own. Lastly, am I among the super-lucky? My pension grows a bit each year; not matched to inflation, but to the former employer's portfolio performance. It's very well balanced with stocks, bonds, alternatives. Even in bad Market years, we get at least a minimal bump-up.
Basic SPIA are OK & some can be bought online without agents. But annuity costs go up when one adds bells and whistles.
With any charitable annuity (immediate or deferred), there are also the donation and tax deduction aspects, so they won't be competitive with commercial annuities, but may be good enough.
Only way to win with annuities is to live forever (-:). Otherwise, it's just risk transfer to an insurance company with some costs involved (nothing is free).
There has to be a happy medium. allocations in defined benefit plans are too risk averse for the young worker. (this is changing I read where allocations to stocks in many state plans is growing. what was once the norm (a 30/70 stock/bond allocation) is not in some places 50/50 (IL is considering 60/40).
But it solves the "me" problem lots of people face. I don't know how much to save, have the where with all to save it and don't have any idea how to pay myself.
the 401k introduces a ton of freedoms and is probably responsible for more millionaires than ever before which is great but I think the roll out of the 401k was awful and still to this day pretty rough for most providers.
I think automatic opt-in rule is fantastic and I think there needs to be more of that stuff.
the 401k programs have come a long way but its taken too long. There is a friend of my father who put money in his 401k for almost a decade during the 90's before he realized that none of it was invested in anything. just sitting in the account. there was no training not anything.
but even today at my old job they would have meetings every 6 months on how to participate once enrolled. it was the most convoluted hour on the planet. In my dept, people know that I pay attention to this stuff (the type of guy to have an account on a website like this) and I usually get "hey can you help me?" I'm also older and they are usually in their 20's and so I say "if you were my child, this is what I'd recommend" I give them "if you can" and call it a day. they are like this is much more helpful than anything in that meeting.
Hi @mskursh Welcome to MFO. I think you'll find this forum of value. And 'hats off to you' for helping co-workers have a better understanding of investing. 401k's and/or 403b's are surely not perfect depending on the plan sponsor and the amount of support by the employer; but I saw too many over many years who wouldn't have saved a dime if not for having a 401k/403b plan available. And, of course; some will never learn or have prudent spending/saving habits. I operated an investment club within a small office and convinced 15 of 25 people to place $100/month into the account and I would manage the money. I also provided a monthly report of all values and totals; and where and why the money was invested. The club operated from 1985 to about 1992, until disbanded by vote. But, the $100/month formed good habits for many; and this helped them later when a 401k plan became available. Remain curious, Catch
The 401k is responsible for more millionaires than any other way of investing IMO. how companies manage their offerings is so different. Prior to the aforementioned gig, I along with the business owners son was tasked with finding a new plan as we were growing tired of our SIMPLE IRA's custodians neglect and then eventual pivot to most of us at the small company desperately "needing" whole life insurance.
We found a great 401k option and acted on it. but we were an office of 30 and appalled at the number of people opting out of it all together. most manager/tenured people saw the value but the base workers were all like nah. We decided to auto-enroll and match 3% of the salary regardless of contribution.
That company, after I left, was sold and I remain great friends with the owners son who said there are still many who's accounts still reside at the 401k.
So there is a ton of behavioral issues that need to be addressed. Sometimes i feel like we could begin to take a % of peoples SS deductions and auto-enroll them in the TSP plan.
@mskursh, you have done your fellow employees a great favor to find a decent 401(k) provider, especially form smaller companies with limited resources.
Last company I worked for has a pension plan but it was poorly managed so that the $ grew very slowly even in the 90’s bull market. Whereas the 401(k) plan was much better in terms of choices (anctive annd passive managed funds) and company matching. Through the years we managed to obtain respectable returns. Near the end of our tenure with the company, they eliminated their contribution to the pension plan and increased their company matching %. Fortunately, it worked out in our favor. Today, there are few pension plan in the private sector unless you work for the state or federal government.
Is 401(k) worth it? Absolutely, one can do well navigating their future and investment. If you are fortunate to have a good pension, congratulations! AlsoI agree with you that 401k is responsible for more millionaires today.
Promised are "great" until you realize someone else must pay for it, and why businesses stopped offering pensions. IMO, all State/Gov/Education pensions should be eliminated over several years If a private company offers a pension, it's the company's problem. No one should save any pension(Gov,State,Eduaction,Private) that can't support itself. The less money it has, the less they should pay.
401K is a good idea. You need to take care of yourself. A small monthly amount grows substantially over 3-4 decades. It's called compounding
Comments
401k/403b have issues that need fixing. The DB plans it replaced were also too burdensome for employers.
403b have existed for a long time. But tremendous growth came after an accidental discovery in 1978 by Ted Benna, often called the father of 401k (but the section existed already). He noted a short 869-word section (subtitled 401k) in the 1978 Revenue Act) that allowed pretax employer and employee contributions for retirements (unclear who slipped that in). Companies caught on to this quickly, and by 1983, there were already 7.1 million 401k accounts, and by 2023, 60 million accounts.
I’m sure Mr. Fink and BlackRock have a solution to remedy that uncertainty.
However, some estimates indicate that only ~50% of employees were eligible for pensions then.
Pensions are costly for businesses to fund and administer.
Moreover, a company could renege on its pension plan if it experiences significant financial distress.
If the pension plan was insured by the Pension Benefit Guaranty Corporation (PBGC),
participants would receive benefit payments subject to limits set by law.
But these benefit payments could be significantly less than those initially "promised" by the company.
Our systems seem to have square wheels, while I suspect that many better systems may have gone with round wheels.
Lack of good faith (or maybe even any faith) in our political arena (as usual).
Gore Vidal:
"Politics" comes from:
1) the Greek, poly, meaning many; and
2) tics, which are blood-sucking insects.
Finally, there is always Social Security. I am a big fan because it provides a base of income that isn’t affected by the stock and bond markets. It is also inflation adjusted.
+1
With any charitable annuity (immediate or deferred), there are also the donation and tax deduction aspects, so they won't be competitive with commercial annuities, but may be good enough.
Only way to win with annuities is to live forever (-:). Otherwise, it's just risk transfer to an insurance company with some costs involved (nothing is free).
But it solves the "me" problem lots of people face. I don't know how much to save, have the where with all to save it and don't have any idea how to pay myself.
the 401k introduces a ton of freedoms and is probably responsible for more millionaires than ever before which is great but I think the roll out of the 401k was awful and still to this day pretty rough for most providers.
I think automatic opt-in rule is fantastic and I think there needs to be more of that stuff.
the 401k programs have come a long way but its taken too long. There is a friend of my father who put money in his 401k for almost a decade during the 90's before he realized that none of it was invested in anything. just sitting in the account. there was no training not anything.
but even today at my old job they would have meetings every 6 months on how to participate once enrolled. it was the most convoluted hour on the planet. In my dept, people know that I pay attention to this stuff (the type of guy to have an account on a website like this) and I usually get "hey can you help me?" I'm also older and they are usually in their 20's and so I say "if you were my child, this is what I'd recommend" I give them "if you can" and call it a day. they are like this is much more helpful than anything in that meeting.
And 'hats off to you' for helping co-workers have a better understanding of investing.
401k's and/or 403b's are surely not perfect depending on the plan sponsor and the amount of support by the employer; but I saw too many over many years who wouldn't have saved a dime if not for having a 401k/403b plan available. And, of course; some will never learn or have prudent spending/saving habits.
I operated an investment club within a small office and convinced 15 of 25 people to place $100/month into the account and I would manage the money. I also provided a monthly report of all values and totals; and where and why the money was invested. The club operated from 1985 to about 1992, until disbanded by vote. But, the $100/month formed good habits for many; and this helped them later when a 401k plan became available.
Remain curious,
Catch
We found a great 401k option and acted on it. but we were an office of 30 and appalled at the number of people opting out of it all together. most manager/tenured people saw the value but the base workers were all like nah. We decided to auto-enroll and match 3% of the salary regardless of contribution.
That company, after I left, was sold and I remain great friends with the owners son who said there are still many who's accounts still reside at the 401k.
So there is a ton of behavioral issues that need to be addressed. Sometimes i feel like we could begin to take a % of peoples SS deductions and auto-enroll them in the TSP plan.
Last company I worked for has a pension plan but it was poorly managed so that the $ grew very slowly even in the 90’s bull market. Whereas the 401(k) plan was much better in terms of choices (anctive annd passive managed funds) and company matching. Through the years we managed to obtain respectable returns. Near the end of our tenure with the company, they eliminated their contribution to the pension plan and increased their company matching %. Fortunately, it worked out in our favor. Today, there are few pension plan in the private sector unless you work for the state or federal government.
Is 401(k) worth it? Absolutely, one can do well navigating their future and investment. If you are fortunate to have a good pension, congratulations! AlsoI agree with you that 401k is responsible for more millionaires today.
IMO, all State/Gov/Education pensions should be eliminated over several years
If a private company offers a pension, it's the company's problem.
No one should save any pension(Gov,State,Eduaction,Private) that can't support itself. The less money it has, the less they should pay.
401K is a good idea. You need to take care of yourself. A small monthly amount grows substantially over 3-4 decades. It's called compounding