Recently, CNBC’s Kelly Holland wrote a commentary on the apparent failure of the 401K system. She explained that the typical family only had just less than $19,000 in their retirement accounts. How can anyone retire on that?
401Ks were supposed to be the new, better way to save for life after work… a replacement for the old, burdensome pension plan program that has faltered for many years now. With a 401K, you get your own retirement account and get to manage your own destiny!
More importantly, the 401K would take all the pressure off companies. Pensions were a great idea for companies and municipalities during good economic times. They were a draw card for workers. You could offer them good salaries today and pay the rest later. Sounds just like today’s QE policies, wouldn’t you agree?
But during bad economic times, the good ol’ pension plan turned out to be a very bad idea. As a defined-benefit plan, they became too heavy a burden for companies to shoulder, especially as investment returns became more volatile since 2000.
401Ks, on the other hand, put the market risk in the hands of the employee.
As a defined-contribution plan, companies would contribute a certain amount in a 401K, or match a certain amount of employee contributions, but it was up to the employee to invest the money tax-free and get the long-term benefits.
There are just several, glaring problems with this. For starters, 401Ks are mostly voluntary. You can choose to make the investment or not…
So what does Homer Simpson do? Go to Disneyland instead, or buy a new car. Worry about retirement? Please. That’s tomorrow’s problem.
The second problem is that most everyday people do not maximize their contributions. That’s why they have such low balances. You can’t blame that on the performance of the stock markets over the last few decades, or even safer bonds that have gone up in value.
The third problem is that people are bad investors. They pile into a trend in the late stages with the herd, and then pile out when there is a major correction or crash. If the stock market was averaging 10% before, they are lucky to get 4%.
Here is a graphic illustration of how bad this situation really is…
Today, only 11% of workers in the private sectors have a pension plan in place. There are another 7% or so in the public sectors that have that.
On the other hand, 31% of workers in the private sector just have a 410K.
But there’s an even bigger problem here: How will all of those people with 401K plans fare when most financial assets crash in the next and final bubble burst? If they’re doing so poorly now, the events I forecast for the next several years are going to blow them right out of the water.
There is no doubt that we need a better plan for retirement. Besides delaying retirement by several years — seriously, we live for 20 years longer than we did when retirement was introduced and we can’t sit and do nothing for that long — we need a savings plan that doesn’t leave it all to the employee or employer.
The best I have seen is in Australia. They require a mandatory contribution — not voluntary — to a superannuation fund, that you own and manage, not the government.
Because of that their average citizen has three times the net worth of the average American (they also have the advantage of high housing prices that are continuing to climb).
So I say make retirement plans compulsory, not voluntary. Otherwise our natural inclination to value the present over the future will make them fail as 401Ks have already.
And then implement some guidelines for how participants invest if they are going to get the tax advantages.
For now, do yourself a favor:
Don’t lose what little, or a lot, you have in your 401K retirement plans. Cash out of any passive investments and get more defensive now!