401ks weren't a "mistake" they were designed to give wallstreet traders more money and for that task they have succeeded extremely well.
e: To the tune of $7trillion according to the article.
this post was submitted on 09 May 2024
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I like how you got downvoted. This is 1000% true.
How do you think pension plans make money? They are managed by fiduciaries responsible for investing. Guess where they invest. 20% of the stock market is owned by pension funds :https://retiregenz.com/what-percentage-of-the-stock-market-is-owned-by-pension-funds/
So my employer did this thing where new hires automatically got enrolled in a 401k. If you did absolutely nothing to your 401k, each year it would automatically up your percentage to a max of Y. Is that common or uncommon? And in this world of 401k over pension, should that be more of a norm to help protect people that don't know better build retirement savings. It doesn't solve the problem of folks not having enough money and needing to use 401k for emergency funds...
It's common among good employers, but unfortunately a lot of companies don't do it. We should be encouraging more of this because people tend to suck at preparing for retirement.
And while it doesn't solve the emergency fund issue, people tend to adjust their spending based on how much lands in their account. This is called the hedonic treadmill, where people adjust they lifestyle to fit their means on the way up, but they struggle to adjust it back down. Automatically increasing investments just reduces the impact of a raise, it doesn't actually reduce your actually income since it just pulls 1% out of your normal raise (probably 3%).
The proper solution is for people to learn to properly budget and cut out things that don't provide enough value, but that's a much harder problem to solve than automatically increasing investments.
But isn't the point of this article highlighting personal responsibility can't solve the larger social issue we are facing.
Maybe. But the article is mostly highlighting the fact that we do a poor job of educating people about investing and budgeting. For example:
She also knows that markets don’t always go up. During the 2008 global financial crisis, her 401(k) lost a third of its value, which was a scarring experience.
I'm guessing she sold when the market went down and locked in losses, and then didn't buy again until stocks rebounded. So the classic "buy high, sell low" strategy.
The proper approach is to buy and hold until retirement. See the story of Bob, the world's worst market timer for an example of how buying and holding will work even if you buy at all the wrong times. Bob was fine in retirement because he never sold.
larger social issue
The proper solution here isn't to go back to pensions, it's to provide sane defaults and simplify the programs so everyone can understand it will enough to use it properly.
There are lots of retirement account types
Do you know how many retirement account types there are (not investments, not plans, but account types)? Here's a few off the top of my head (not exhaustive):
- 401k - most common employer plan
- IRA - universal option
- 403(b) - government/education plans
- 457 - government/military plan
- SIMPLE IRA - small company plan
Each has a different set of features and caveats, as well as (in)compatibility with other plans. If you change sectors (e.g. you go from public school to private school), you may have completely different retirement options. Some employers can offer multiple of the above as well, and each employer has different rules for their plan.
Add to that three different contribution options (pretax, Roth, and after tax), and the average person is rightfully confused. It's the same problem as the tax system generally, it's too complicated.
My proposal to unify retirement accounts
- Consolidate all of those plans into the IRA and Roth IRA, increasing limits as needed
- Allow employers to contribute to and create IRAs, just like they already do with HSAs
- Require employers to contribute a certain amount by default into an account, unless the employee opts out; perhaps start at 5% and increase by 1% every year up to a cap of 15% of salary, or the max employer portion, whichever is lower
- Create a standard for brokerages to inform employers about plan limits so they don't over-contribute
- Require brokerages to invest customer funds by default into a low-cost target date index fund, unless the customer opts out
- Disallow account closure or transfer fees, though free transfers can be capped at one/year/account - customers should always be able to move funds without penalty
- Consider preventing withdrawals of gains for 10 years from account opening; contributions can be withdrawn whenever (life happens)
This:
- preserves choice
- provides reasonable defaults
- gives most people a good outcome, unless they opt into poor choices
I'm very much against pensions because, as an insurance product, they'll provide worse value vs a defined contribution plan, assuming the defined contribution is invested according to best practices (aggressive early on, then more conservative as you get closer to retirement; i.e. a target date fund).
In fact, I'm convinced we should replace Social Security with a Negative Income Tax (essentially means-tested universal basic income) to ensure that everyone stays out of poverty. Social Security doesn't do that, but that's kind of how many think of it. I don't understand why we're giving benefits to wealthy people, we should be concentrating those on the poor. In fact, this safety net shouldn't be just for retirees, but anyone below a certain income threshold, though we can certainly start with an age limit that reduces as people move out of the current SS system.
But the point is we can't trust personal responsibility. If a significant volume of the population is basically guaranteed to not invest and save voluntarily for retirement that is always going to be a social problem. Also, there's the problem of employers voluntarily providing retirement programs. Sure, I think there's a question of what or how that savings is invested for retirement (pension, 401k, etc), but it seems there needs to be more mandate to require employer's of a certain size to support retirement plans. And possibly even more mandate to require contributions to retirement plans. The article describes this in Australia: "Australia’s Superannuation Guarantee requires companies to contribute the equivalent of 11 percent of an employee’s monthly pay to an investment account that is controlled by the worker, who can also put in additional money. The “Super,” as it is known, includes full-time and part-time workers and has proved to be enormously successful. With its relatively small population — just 27 million — Australia now has the world’s fourth-highest per capita contributions to a pension system, and almost 80 percent of its work force is covered."
it seems there needs to be more mandate to require employer’s of a certain size to support retirement plans
Pretty much all companies over a certain size support retirement plans, that's not really the issue. The issues are:
- employees don't enroll: solution - enroll by default
- small companies can't afford the nice plans: solution - allow them to use the IRA, which have better funds anyway
- employees don't understand the plans they have: solution - simplify retirement plans
The reason the 401k is so complicated is because brokerages want to keep it that way. They literally get paid to "customize" a plan for the company, but what that really means is charge a ton for compliance paperwork nonsense and limit options. A lot of the crappier plans have super expensive funds and are almost worse than forgoing the tax break and just investing in a regular brokerage account.
Australia’s Superannuation Guarantee requires companies to contribute the equivalent of 11 percent of an employee’s monthly pay to an investment account that is controlled by the worker, who can also put in additional money.
Yeah, that's pretty much what I'm talking about. Extend the IRA (already exists) to allow employer contributions (like the HSA) and increase the limit to match 401k limits. Then eliminate the 401k, 403(b), and a handful of others to just use the IRA that employees already control. This does lose some features, such as loans, and I suppose those could be supported by IRA plans if wanted (ideally, loans against retirement plans wouldn't be allowed to prevent people from shooting themselves in the foot).
The big retirement firms are going to fight tooth and nail though, just like Turbo Tax fights against tax simplification. But that would get us 80% of the way to what Australia has. The last 20% is a minimum contribution, which I think isn't needed, and instead we should try using defaults (e.g. contribute 5% for new hires, 1% for existing hires minimum by default, and increase 1% per year until 10% or whatever). A lot of companies already have a matching program that works well, and it's honestly not worth fighting companies over what the minimum should be.
It's getting more common; which I think is a good thing.
I aways assumed a 401k was what americans called pensions, like gas and petrol. What is a 401K if not a pension?
They're similar in that you use it for retirement.
But, 401ks you contribute to and the value depends on the stock market.
Pensions you don't contribute to and the amount you get is fixed.
More here: https://www.forbes.com/advisor/retirement/pension-vs-401k/
Oh interesting, where I am both of those are pensions but one is called defined benefit pension and the other a defined contribution. Mt wife has a defined benefit whereas I have contribution.
Benefit is definitelt better, knowing what you will definitely have is ideal and you can still take full advantage of a DC scheme if you want.
I think the "Pensions you don’t contribute to and the amount you get is fixed." is a bit murky. If you have a pension that probably means you have a lower salary compared to an equivalent non pension job, because part of your labor value goes into funding the pension. But the main thing is 401(k) puts a lot of responsibility on the individual. And as this article points out, if you put a lot put retirement financial planning on the individual, that creates a larger social problem since many people can't sufficiently do that themselves, even if they are being responsible with what they earn.
Yeah see the only different here is if the benefit is defined or the contribution is. Employers still give decently toward the DC and they manage the scheme. They have group schemes that all empkoyees are a part of and you cant leave it unless you leave the job or decide not to contribute.
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Maybe giving a percentage of your income to legal gambling is a bad idea???
What else do I do? Put that money under my mattress?
No, put it under my mattress
No, the article is actually saying that people have not done this enough. Workers were better off when their employees did so for them and mandatorily (a pension system), and allowing folks to self manage how much they put away is what has led to 49% of folks within 10 years of retirement having nothing to retire on.
There are very safe ways to invest. Doing it poorly and a lot is a gamble; taking a little time to understand different investment vehicles and portfolios and the risks associated with each allows you to earn interest at literally any level of risk. An example, money market funds earned 5%-8% on 2023, and it is literally impossible for MMFs to go negative. Certified deposits offered up to 5.5% guaranteed returns. The benefit of pensions is that employees don't need to learn all that and make those choices in order to benefit from them.
A highly diversified portfolio is the opposite of gambling. Don't let the "traders" and crypto bros sour you on the power of conservative investing.
So what I'm saying is: the money you put into a 401k goes to an investment company, that investment company gambles in the stock market.
Regardless of how you spin it, regardless of how safe you think it is, when you give money to someone to use in the stock market you are gambling.
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Putting a percentage of your income in the stock market is a very good idea. Even if you're a conspiracy person and you think a mysterious "them" controls the world, "them" are rich people who own stocks. They will make sure the value of stocks go up.
If you're not a conspiracy person, just look at history. The value of stocks always goes up in the long term, and you hold retirement accounts for the long term.
Maybe don't encourage people to save in a currency that's purposely depreciating throughout their entire lives?
Is there a currency that doesn't depreciate?
Even if there was, there's no currency that is guaranteed to not depreciate in the future.
Apple stock
Ammo
Land
Lentils
Beanie babies
Bitcoin
Beets, beans, Battlestar Galactica
A lentil based economy...you sonofabitch, I'm in!
Lentconomy if you will.
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Pensions worked the same way. The difference is personal responsibility and inequity of employment and wage. But who's 401k deprecates in value over the long term anyways? If you select a target fund that should be fine.
Yeah the comment treats 401ks like they are checking accounts rather than investment accounts. Outside of a major recession, a 401k should outperform inflation. And if it grows at 5% (conservatively) during a 30-year career and then you happen to have to retire during a 2008-scale recession, you'll still have way more than your principal investment in there.
Is it possible that commenter is putting money into retirement accounts but not putting that money into any funds, etfs, or bonds? But even then, I would hope it's in a money market type core position where they are getting some return. But I rolled over all my stuff into a target fund at my new employer 9 years ago. I'm up 21% on my cost basis.
I mean maybe, but 401ks almost always require you to set a target fund or indicate a preferred risk level just to set an account up. So unless the commenter went out of their way to not allow their 401k to be invested, it would almost certainly be invested in, at least/lowest risk, an interest bearing cash equivalent, like a MMF as you mentioned. And MMFs were crazy last year, some earning like 7% with essentially no risk and great liquidity.
Yeah, it's a bit of a stretch. I know folks forget to do this when setting up IRAs, but kind of hard to do with 401k. Who knows.
This is the best summary I could come up with:
From the extensive research that she has done, Forbus has become a fairly savvy investor; she’s familiar with all of the major funds and has 60 percent of her money in stocks and the rest in fixed income, which is generally the recommended ratio for people who are some years away from retiring.
With Americans now aging out of the work force in record numbers — according to the Alliance for Lifetime Income, a nonprofit founded by a group of financial-services companies, 4.1 million people will turn 65 this year, part of what the AARP and others have called the “silver tsunami” — the holes in the retirement system are becoming starkly apparent.
But he explained to me that the remorse he expressed had nothing to do with 401(k)s themselves, which he said had helped convert millions of Americans from “spenders into savers.” Rather, what he regretted was the complexity of many plans — he thought a lot of employees were overwhelmed by all the investment options — and the fact that the financial-services industry profited from them to the degree that it did.
A few years ago, Kevin Hassett, who was chairman of the White House’s Council of Economic Advisers for a portion of Donald Trump’s presidency, became familiar with Ghilarducci’s work and sent her, unsolicited, the draft of a paper he was writing about the retirement-savings gap.
This past January, another bipartisan collaboration — between Alicia Munnell, who was an economist in the Clinton administration and who now serves as the director of Boston College’s Center for Retirement Research, and Andrew Biggs, a senior fellow at the American Enterprise Institute, a conservative think tank — published a paper calling for a reduction or an end to the 401(k) tax benefit.
Hassett has been concerned for some time that the country is drifting toward socialism — the subject of his most recent book — and part of the reason is that too many Americans are economically marginalized and have come to feel that the system doesn’t work to their benefit.
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