The problems with 401k statistics

[disneysteve]

I hear and read many stats related to 401k accounts. Often, those stats are being used to support the theory that 401k plans are failing as retirement vehicles. While I think that theory has a lot of merit, as we've discussed here before, I also think the statistics often get skewed and misinterpreted.

1. Workers, particularly those over 55, have too high of a stock allocation in their 401ks.

This assumes that the 401k is their only retirement account and they have no other assets. For a great many workers, this isn't true. People may also have an IRA/Roth. They may have rolled over a 401k from a previous job into an IRA. They may have taxable investment accounts. They may be married and have spouses who allocate their own accounts differently to balance out the joint assets.

Also, a worker's 401k may not represent a big portion of marital retirement assets. My wife allocates 100% of her 401k to stocks, but her 401k balance represents less than 5% of our retirement assets so that isn't an issue.

2. The average 401k balance today is about the same as it was 10 years ago.

This is misleading for many of the same reasons given above. Neither my wife nor I are at the same job today that we were at 10 years ago. We've both rolled over old retirement plan assets into IRAs. My wife also has a 403b account from a former job. So what she has in her 401k today really is irrelevant when compared to what she had 10 years ago.

3. Only about 50% of all workers even have access to a 401k plan.

As much buzz as we hear about 401k plans, the truth is that half of all workers don't have one. I don't and I know plenty of others who don't either. Using stats about 401k plans to comment on the overall state of retirement preparedness of Americans is deceiving. About 20-30% of workers still have traditional pensions - teachers, government workers, etc. There are also plenty of self-employed workers, small business owners, etc. who don't have a 401k.

[happygirl]

Good points. It does help put things into perspective. I have to admit, a thread a saw here recently about 401k's caused me to question our decision to start maxing out DH's 401k, but only briefly.

[LuxLiving]

Disneysteve said:

"This assumes that the 401k is their only retirement account and they have no other assets. For a great many workers, this isn't true. People may also have an IRA/Roth. They may have rolled over a 401k from a previous job into an IRA. They may have taxable investment accounts. They may be married and have spouses who allocate their own accounts differently to balance out the joint assets.

Also, a worker's 401k may not represent a big portion of marital retirement assets. My wife allocates 100% of her 401k to stocks, but her 401k balance represents less than 5% of our retirement assets so that isn't an issue."

All of the above is true in our case. I keep having to explain to financial service reps that we have 'those bases' covered in other retirement savings, and maybe they aren't held with them at their institution, but please don't keep confusing yourself w/your crafted scenario w/o considering that we do have other retirement assets.

Hubster and I - long married - in a May/December marriage, keep our TOTAL accounts allocated for a mid-range scenario at this time, across the wide spectrum, instead of each of us allocating for our individual actuarial (sp?) time-frames. Could this bite me in the butte as I'm the younger? Maybe, but I'm the one who also has a longer conceivable time frame for future earning potentials. We're a team - what's his is mine, what's mine is his. It's all ours.

As DisneySteve pointed out I don't think we've a long enough time span w/people actually investing for their own retirement in these relatively new products to gain a wide perspective of how well we're doing as a nation of retirement savers, and just taking 401-K's as the basis NOW is going to end up w/a false picture.

[disneysteve]

Originally Posted by LuxLiving

I don't think we've a long enough time span w/people actually investing for their own retirement in these relatively new products to gain a wide perspective of how well we're doing as a nation of retirement savers, and just taking 401-K's as the basis NOW is going to end up w/a false picture.

Another very good point. 401k plans have only been around for about 20 years and it has been less time than that that they've been widespread and popular. Most workers nearing retirement today have spent the bulk of their working years without a 401k plan to contribute to.

[disneysteve]

Personally, I have a Roth, a traditional IRA, a rollover IRA and numerous taxable investments earmarked for retirement. My wife has a 401k, an old 403b, a Roth and a rollover IRA. Obviously, the 401k is just one small piece of our retirement plan. Any stats looking only at her 401k would give a very distorted view of her retirement readiness.

[tripods68]

I think for those who have contributed regularly and committed towards successful retirement "nest eggs" should be congratulated. More specifically, those married couples who have stayed together and worked for their entire career benefit the most.

However, we all know many Americans end up in divorces where they end up splitting their assets significantly. One loses the house, or retirement account. What about single parents in this country who are trying to work while raising their kids. Do you think most of them live pay-to-paycheck? I think so too. I know quite a few people at work in this very situation or have gone through divorces and were just cleaned.

Here's some statistics I found very useful in this discussion and some of my thoughts as well.

The average (US workers) balance of 401(K) plans in 1998 was $47,004. For the sake of comparison, the 401K at the end of 2008 is $45,519. Americans have to work an extra 10 years just to make up the losses incurred in 2008. In 2007 the balance was around $65K. But c'mon do you really think anyone can retire at this level? Statistic show those who retire at age 65, 50% of them do comeback to work two years later due to lack of retirement savings.

But let's say, if you are age 55 and 64, you should have an average 401k balance at least $320K. Do you think American can live on $1200 a month comfortably @ 4% withdraw rate? If you are, I congratulate you!

The ugly truth is 401(k) is a lousy idea, a financial flop, a rotten repository for our retirement reserves. 401K plan was never intended to be American primary retirement system. Congress merely was trying to close a loop hole on executive bonuses when it created the 401k plan two decades ago.

With today's reality, many Americans still can afford to defer a portion of their paychecks or people simply just don't contribute as much as they should---essentially ignoring free money from company matches and tax relief. Additionally, to get the hypothetical higher returns over time and avoid investing disasters, you have to hold a diversified portfolio of stocks and bonds. Many of us don't---with few exceptions of course (and you know who you are if you are reading this). Some of you don't owe stocks, leading to weaker-than-average returns. On the opposite end, some are 100% stocks, exposing those accounts to big losses when the market dropped. Even if you draw 4% a year from your 401k and have ultraconservative portfolio of 80% bonds and 20% stocks you still have a chance of outliving your retirement account.

It's time to do away with 401K. Have some sort of Retirement Guaranteed Insurance Program instead whereas portion of your monthly retirement contributions anywhere from 5% or 10% goes directly towards this along with your normal social security contributions rate. Congress has to mandate this on everyone to make it successful. The best way to guarantee a replacement income for people's wages in retirement is by pooling risk and the way to do that is through insurance. In return, you get a lifetime pension after working 30 years even more after 40 years, anywhere from 30% of your final pay OR 30% of your total retirement account balance. This is on top of your social security benefit. Of course Defined benefit is nothing new in this country. If you currently work for the state like I do (I work for state of California), police department, or local school districts and governmental agency most likely you have a guaranteed pension.

For example a person average earning around $100K for the last 30 years would receive $30K a year of pension. This person also would qualify for social security benefit when minimum retirement age is reach.

This new pension (private or government run program) system is not the most popular because of the cost to run this program but it doesn't mean it isn't doable in the future. It should be part of national debate I think. And of course, consumer must demand for this type of program to exist and everyone must participate. I think there was poll done which finds; most people would be willing to drop their 401k flexibility for a guaranteed pension, only, if I can find the link.

Even if you don’t agree with me, continue to save more, rebalance your portfolio at least once a year, work longer, and be opportunistic. Most importantly, don’t give up not making your monthly contributions no matter what the market does.

[disneysteve]

Originally Posted by tripods68

if you are age 55 and 64, you should have an average 401k balance at least $320K.

I agree with everything you posted. I do think there are fundamental flaws with 401k plans. And I also read the cover story in Time magazine this week where I think some of your facts came from.

What I was pointing out, though, was the flaws in some of those numbers, like what I quoted above.

If you are 55-64, you should have RETIREMENT ASSETS of 320K. That is not the same as saying you should have a 401k balance of 320K. Perhaps you have only 80K in your 401k but you have a rollover IRA from a couple of previous jobs and you have another 200K in there. You've also been maxing out a Roth each year for the past few years and now have 45K in there. You also have a regular taxable brokerage account with some assorted individual stocks worth another 25K.

The fact that your 401k balance is below where it "should" be is irrelevant.

I totally agree that most people aren't saving enough for retirement. I just don't think looking strictly at 401k balances is an accurate way to measure that.

[disneysteve]

Another example of faulty statistics...

Money magazine has an article on risk tolerance this month (very good article despite what I'm about to say). One little sidebar gives 2 stats: 42% of 401k accounts have 80% or more in stocks; 4% of investors have the risk tolerance to tolerate a portfolio of 80% stocks. The implication is that lots of people must be investing way beyond their risk tolerance.

Why is that a faulty assumption? For the reasons I gave above. Lots of people have assets beyond their 401k accounts. As I said, my wife has 100% stock in her 401k. I would agree that a 100% stock allocation is nuts, but that isn't her only retirement account by far. In fact, it is a small minority of her retirement savings, so her overall allocation is nowhere near 100% stock.

[bjl584]

Personally, my 401K currently represents about 25% of my total investments and savings.

[investingnoob]

So are we saying 401k's are not as good as what we think they are?

I'm putting 10% every paycheck to my 401k, I get matched 4%.
I'm considering lowering my contributions to 4%.

[bjl584]

[quote=investingnoob;239561]So are we saying 401k's are not as good as what we think they are?QUOTE]

I think that we are saying the opposite. 401K's often do not represent the entire picture when looking at an individual's investments, and 401K's have not been in existance long enough to really tell if they are in fact a good or bad investment.

[simpletron]

those facts are coming from this report from the employee benefit reseach institute(ERBI). http://www.ebri.org/pdf/briefspdf/EB...5_K-Update.pdf

a paragraph from page 15:
Definition of 401(k) Account Balance
In any given year, the EBRI/ICI 401(k) database provides a snapshot of the 401(k) account balances across all active participants’ accounts. The database contains only the account balances held in the 401(k) plans at participants’ current employers and reflects the entrance of new plans and new participants and the exit of participants who retire or change jobs. Retirement savings held in plans at previous employers or rolled over into IRAs are not included in the database. Furthermore, account balances are net of unpaid loan balances. Because of all these factors, it is not correct to presume that the change in the average or median account balance for the database as a whole reflects the experience of “typical” 401(k) plan participants.

I think the consistent group from pages 10-12 are more representative of what a typically 401K would do. The consistent group is a subset where the individuals had been with the same plan for 2003-2008. for this group, average balance went up from 61,106 to 86,513 and median balance went up from 25,507 to 43,700, while the S&P 500 went down 18.4%. looking at figure 6 on page 12, the 50-60 and 60+ group had average balances of 113,070 and 125,052 respectiviely and 150K+ averages for people who have tenures of more 20 years(note: tenure is greater than or equal to how long they have participated in the 401K)

there is also a 1999-2008 consistent group on pages 48-57. the average balance grew from 67,142 to 104,734 and median balance grew from 25,292 to 58,797, while the S&P 500 was down -38.5%.

a paragraph from page 5:
Introduction
Over the past two decades, 401(k) plans have grown to be the most widespread private-sector employer-sponsored retirement plan in the United States, and now serve as the most popular defined contribution (DC) plan, representing the largest number of participants and assets. In 2008, 49.8 million American workers were active 401(k) plan participants. By year-end 2008, 401(k) plan assets had grown to represent 16 percent of all retirement assets, amounting to $2.3 trillion. In an ongoing collaborative effort, the Employee Benefit Research Institute (EBRI) and the Investment Company Institute (ICI) collect annual data on millions of 401(k) plan participants as a means to accurately portray how these participants manage their accounts.

the other retirement assests are the following
private pensions - 1.9 trillion
non-401K defined contribution plans - 0.4 trillion
IRAs - 3.6 trillion
governement retirement plans - 3.5 trillion
social security trust fund(?) - 2.4 trillion
not sure if they include SS or not, but it gives the 16%. the rest of the numbers came from the federal reserve flow of funds report.

in my opinion, the biggest flaw with 401Ks is the user, and not the plan itself. prevent people from taking loans and cashing out when they switch jobs, opt out instead of opt in, automatic enrollment into an age appropriate life cycle fund would go a long way to helping user do things right.

if the federal government wants to help/force everyone to save for retirement, open up the TSP and force everyone to contribute 5-10%(ramp it up over a couple years so there is no shock) and toss in a match/credit for the poor. at 5%, if you beat inflation by 2%/year, which can be done by putting all the money into the G fund(government bonds), you'll end up with 2-3 times your final salary. at 10%, using L funds(life cycle), you could easily see a lot of people with 10+ times their final salary. this plus the reduced SS that's coming would put many workers into a comfortable retirement.

if it isn't obvious I'm for 401K, so I have highlighted information that supports that conclusion. I'll let the people who want to bash 401Ks pick out their own information.

[GREENBACK]

I think this big 401k slam is media driven just as the current argument about whether or not we're out of the recession. I think info on other retirement plans has been left out to create something else controversial. It's irresponsible journalism in my opinion though.

[disneysteve]

Originally Posted by investingnoob

So are we saying 401k's are not as good as what we think they are?

Originally Posted by simpletron

in my opinion, the biggest flaw with 401Ks is the user, and not the plan itself. prevent people from taking loans and cashing out when they switch jobs, opt out instead of opt in, automatic enrollment into an age appropriate life cycle fund would go a long way to helping user do things right.

simpletron, thanks for a great post. It supports what I was saying. I also support 401 plans, though I do think they have flaws beyond just the user. A plan that is almost totally dependent on the employee is not a great substitute for a plan that was totally independent of the employee (traditional pension). Many workers, particularly lower income workers, can't afford to contribute enough to build an adequate nest egg. Unlike most of us here, lots of people don't have the investment knowledge to make good and appropriate choices with their money (though a target fund would help with that). Loans should be banned. The penalty for cashing out should be greater to really discourage that. All plans should be required to offer at least the same basic investment options including index funds and target funds.

investingnoob, I think 401k plans are great and everyone with access to one should be participating. The standard advice is to fund the 401k to get the full match then max a Roth then go back to the 401k.

[am_vanquish]

Originally Posted by disneysteve

simpletron, thanks for a great post. It supports what I was saying. I also support 401 plans, though I do think they have flaws beyond just the user. A plan that is almost totally dependent on the employee is not a great substitute for a plan that was totally independent of the employee (traditional pension). Many workers, particularly lower income workers, can't afford to contribute enough to build an adequate nest egg. Unlike most of us here, lots of people don't have the investment knowledge to make good and appropriate choices with their money (though a target fund would help with that). Loans should be banned. The penalty for cashing out should be greater to really discourage that. All plans should be required to offer at least the same basic investment options including index funds and target funds.

DS, I think the bolded part is what's really at the heart of the retirement-savings problem. I actually work with designing retirement plans on a day-to-day basis, and many of our clients are basically over-compensating in their attempt to move away from the high costs of "traditional" pension benefits ... which is driving the 401k movement. Features like automatic-enrollment and automatic-contribution-increases go a long way in 401k participation. However, there's going to have to be some policy changes from our legislators if the average person is going to have a fighting chance (the issue you bring up often about the 5k limit on IRAs is a perfect example).

That said, we are starting to see some "hybrid" retirement plans coming around where employees and employers share the burden of savings (the DB(k) plan is literally a mix between a pension & 401k). Unfortunately, most of these plans have unnecessary policy restrictions and are only being used for Highly-Compensated Employees right now. They're not going to take off like they should unless they get more support from the media and legislators.

[disneysteve]

Originally Posted by am_vanquish

However, there's going to have to be some policy changes from our legislators if the average person is going to have a fighting chance (the issue you bring up often about the 5k limit on IRAs is a perfect example).

Yes, my IRA example applies. Even the 401k plan limits apply. The max contribution is what, $16,500? Sounds like a lot, but that limit is the same whether you earn $50,000 or $500,000. That limit is plenty for the lower income. It isn't nearly enough for the higher income. Then there are additional limits imposed by individual employers. As I've posted before, my wife is only allowed to contribute 50% of her gross to her 401k. We wanted to do 100% but we couldn't. She only works part time so 50% of her gross is only about $3,000/year.

[Like2Plan]

Legislation authorizing 401ks first went into effect Jan 1, 1980 (I have had my 401k over 22 years -since APR 1987... ) They ought to start to be able to gather data from folks who signed up from the beginning to see how successful this has been...

I agree with many of the points that have been made.

1. DH and I both have a 401K - If you add the two, mine is about 54% of the total and DHs is 46% because mine is mostly govt bonds and didn't get "corrected". DH is 100% in a lifecycle fund of which a large part of it is stocks and his fund received a pretty good haircut. (It has recovered somewhat--up 21% for the year). Our 401Ks are not expected to provide 100% of our retirement income because we have other retirement assets.
2. When I first signed up for my 401k, I saw it as a suppliment to other retirement funds. I think the 401k is a terrible replacement for a pension. But, it is better than nothing.
DH is employed at a company that provided a pension and a 401K and a 401K match when he first started working there. This year they announced a freeze on the pension benefits. (I know-this is one of the arguments against pensions). In order to make up what will be lost in pension benefits over the next 10 years of employment, I figure DH would have to make wise investments on the magnitude of about 30% of his income (this is in addition to what he is already saving)--in essense a de-facto pay cut. The company did increase the 401k match by 3% to "make up" for freezing the pension. One of the reasons the company cited for freezing the benefits is there was too much risk... Hello!? DH now assumes all of the risk (and nearly 100% of the funding) and he doesn't have smart financial guys (he just has me ) managing and investing the account. How convoluted is that? If the company had increase their match by another 10% of salary, it might have been a little easier to take... I guess that is my biggest beef is that the company hype is the 401K as being better than defined benefit, but most don't really match to the level that would make this true.

[EEinNJ]

I think 401k's can be a good deal, but they're an even better deal for employers and the financial industry. Employers now offer these instead of a defined pension benefit, thereby putting the responsibility and risk with the employee. Every employer sponsored "qualified plan" I've had offered limited choices, high costs, and low flexibility- and mediocre returns even with index funds. For us employees, it's one of the few tax shelters, and it provides automatic dollar-cost averaging.

I think lessons of the last 10 years, and in particular the last 2, are taking on too much risk, and overly optimistic expectations of returns.

[Scanner]

I've had offered limited choices, high costs, and low flexibility- and mediocre returns even with index funds.

That's my criticism of 401(k)s - you are often at the mercy of the 401(k) salemen that is buddy/buddy with the person in HR as to what 5-10 funds to choose from, almost which never include REITS or commodities. They are often even "loaded" funds.

They're fine for a certain portion of your portfolio but shouldn't be 100% of your portfolio. Never having one, I am not sure if fees are hidden in them even if the funds don't have a load on them.

[Scanner]

PS: Despite their flaws, I do think they are superior than the alternative - a Pension, esp. an undefined pension.

There's too much risk of someone getting their hands on that money before it's ready to be paid back to you.

I"d rather retain custodianship of my money.

Or. . .you can all send me your retirement money and I promise I'll send you all a monthly check when you are 65. I promise