[disneysteve]

Jim, I've posted about this before after having read a couple of major articles on the topic. While I understand your points, I have to agree that overall, 401k plans are not the panacea that folks have been led to believe. In fact, they were never really intended to serve the purpose they now do.

What's the problem with 401k plans? You have to realize that you and I and others who hang out here are represent a very small minority of American workers. We are interested and educated and even passionate about saving and investing and asset allocation and fund-picking and everything that goes with it. The vast majority of people are not. They don't have the interest, the background, the education or the inclination to do what we do. Forcing them into it doesn't make them any more likely to do it well if at all.

Look at what 401k plans have replaced - traditional pension plans. Under a pension plan, the employee did nothing. He just went to work every day while behind the scenes his employer made regular contributions to an investment plan managed by a team of financial professionals. When retirement arrived, the employee started collecting a regular monthly check for the rest of his life. It was simple, hands-off and foolproof. Nothing the employee did or didn't do could screw it up. His retirement was secure.

Along comes the 401k plan. Now, the employee has to go to the HR office and sign up to have part of his salary deposited into this investment account. Then, this guy with zero investment knowledge has to look at a list of a dozen or more investment options and pick the ones he wants to buy with his money. He also needs to figure out how to pay the bills with the reduced take home pay he then gets after diverting part of his income into this account. Considering that 70% of Americans live paycheck-to-paycheck, it is no wonder that 401k participation is so low.

If that same guy leaves his job after a couple of years, the plan may send him a lump sum payment. There will be some letter accompanying the check explaining that he can roll it over into an IRA, but who reads that stuff? He just cashes the check to help pay the bills.

Or maybe he hits some hard times or needs a new car or has to send his kid to college and learns that he can "borrow" the money in the plan and pay it back to himself. Sounds good. So he does that.

Another problem that I already alluded to is the choice of investment options. Some people go too conservative because they don't know enough about stocks or don't trust them, so they put all of their money into a money market earning maybe 3%. Others think they are hot shots and go 100% into some hot fund, maybe tech in the 90s or real estate a few years back or gold or whatever.

Even folks who take the time to do some research and invest in a target retirement fund get screwed. Many of those funds were (and still are) too aggressive. The 2010 funds lost 25-30% last year. So a guy who was counting the days until retirement suddenly found himself with 3/4 of the money he thought he'd have. There goes retirement.

I could go on and on. Bottom line is 401k plans have a ton of problems.