401(k) Creators: “It Was Never Meant to Be Your Sole Support in Retirement”
Two men who, with the best of intentions, tried to create a backup plan for Americans on the road to retirement are now speaking up; saying the strategy they crafted in the 1980s hasn’t panned out the way they envisioned.
Recently these early champions of the 401(k) scheme told the Wall Street Journal the accounts were never intended to replace pensions, nor to serve as a retiree’s entire source of income once they left the workforce. More than thirty years later, these one-time advocates are coming clean about the shortcomings of your 401(k).
Herbert Whitehouse, a human resources executive at Johnson & Johnson, was one of the pioneering proponents of the 401(k). Now, however, he regrets what he helped to start.
“We weren’t social visionaries,” he says. In fact Whitehouse, now 65 years old, and having sustained significant losses during the 2008 financial crisis, says he’s unable to retire just yet. If he wants to maintain his current standard of living he’ll have to keep working at least until his mid-70s.
Ted Benna, the man credited with creating the 401(k) plan, has also spoken out against it. In 2011, he called it a monster and said it should be “blown up.” He doesn’t believe there’s currently any system in place in the United States which can assist workers adequately with their retirement savings needs.
A Flawed Solution to a Broken System
A few decades ago an American retiree’s future was secured by a company pension. For most workers it was simple; their employer put aside a certain amount of money for each employee based on his or her position, years with the company, and other criteria. The company would then pool those funds and invest them on their workers’ behalf. When an employee retired after many years’ service, he or she could live on the nest egg the employer had built up for them.
Unfortunately, this method proved unreliable in a number of instances. Over the years it’s been almost entirely replaced with the 401(k), which puts American workers in charge of their own savings.
Pension Deficiencies Give Rise to the 401(k)
Employer-provided pensions, technically known as defined benefit plans, had several issues that kept them from being entirely reliable. For one, they were difficult to transfer from one company to another in the event the employee went to a new job.
Even more disastrous were situations like what happened to Studebaker-Packard Corporation workers in the 1960s. Despite promising pensions to its employees, when the automaker declared bankruptcy in 1963 workers were denied payouts on which they were depending, and abruptly left with nothing to retire on.
In 1978 came the inception of a new kind of retirement savings—defined contribution plans. A change in the tax code at line 401(k) allowed employees to avoid taxes on a portion of their compensation by deferring payment to a later time. In 1981 the IRS began allowing workers to use that money as a retirement fund.
Deficiencies of the 401(k)
The problem is defined contribution plans were never intended to replace pensions, but rather to supplement them. In order to guard against an employer declaring bankruptcy without warning—leaving workers high and dry– employees could ensure they had a little extra put away.
Predictably, however, the growing popularity of the plans led to a sharp decline in pensions. Companies quickly realized they were better off shifting the financial, administrative and liability burdens onto their employees; and now employer-provided pensions are nearly extinct.
Today, 33% of private sector employees with retirement accounts rely on a 401(k) exclusively, while only 2% depend solely on a defined benefit pension. A mere 11% actually use both together, as originally intended.
Their Headache is Now Yours – Good Luck!
Unfortunately, as many Americans know all too well, the problem with depending on a 401(k) exclusively is the same as relying solely on a pension. If something unexpected happens, like a multi-year Great Recession for example, you could end up losing all your savings, or seeing them severely depleted.
Moreover, even under the best economic conditions few American workers are retirement experts. Nonetheless they now find themselves tasked with not only calculating the precise figure they’ll need to retire securely, but which investment mix, of the restrictive menu offered by their employer, will get them to that magic dollar amount. Viewed in this light, it’s easy to see how Americans feel the deck is stacked against them.
Balancing Today’s Money Needs with Tomorrow’s Demands
Only 46.2% of employees ages 25-34 have retirement accounts at all. By the time workers reach age sixty-four this number has increased to 59.3%, which is only slightly better. What’s more, even those who do save aren’t putting away as much as they’re going to need.
The Center for Retirement Research at Boston College estimates a worrying 52% of American households are in danger of depleting their retirement funds too early. In 1983, before pensions all but disappeared, that number was only 31%.
The Decline of Social Security
It could be argued 401(k) plans are still only supplemental, and they combine with your regular Social Security checks to provide you with enough to get by. However this strategy won’t work either.
The average Social Security check for American retirees in 2016 was a paltry $1,341 per month. Furthermore, the annual cost of living adjustment for 2017 is only 0.3%, an average of $3.92. Last year there was no increase at all.
Most importantly, the Social Security trust fund is running out. With more being paid out to retiring baby boomers than is coming in from today’s workers, the Social Security Administration admitted last June that by 2034 the trust will be tapped out. At that point monthly checks will shrink to 79% of their present totals for those receiving full benefits; still less for those who retire early.
Neither Social Security nor market-based 401(k) plans can be relied on to get you safely through your golden years. This is why it’s essential you take control of your own retirement plans immediately.
Investigate your options beyond the pre-planned investment menu offered by your employer or broker. Understand that true diversification isn’t holding a variety of different companies’ stocks, but holding stocks, bonds and physical assets. These can include real estate; though betting on the house you’ll need to live in is a risky strategy.
A more easily liquidated physical asset, precious metals offer a key counterweight in a portfolio, historically moving up when stocks sag, and resisting inflation far better than cash. Clients who do a Gold IRA rollover tell me they breathe easier, knowing they’ve taken a portion of their savings off the table and out of the path of roller coaster markets.