401 success or failure

**EEinNJ** · 06-16-2009, 12:16 PM

The 401k has probably benefited employers and the administrators of employer sponsored plans more than the employees who've bet their retirement on them.
Employers have benefited because it got them out of having pension plans, and they can get out of making any contribution if times get tough.
Every "Qualified Plan" I've had has had higher expenses, fewer choices, and more restrictions than a Schwab or Scottrade account, and I've done better on my own when I could rollover an employer plan into my own account. Still, having been at it for 15 years, the result has been mediocre, because the market as a whole has been mediocre.

It's still better than nothing, and though I'm pretty liberal, I want no part of the government mandating my participation level or administering my money. I want my money back, because we've all been ripped off by big business and government.

**kork13** · 06-16-2009, 12:29 PM

Originally posted by jIM_Ohio View Post

To me I read the article and there is a huge bias (calling the plans failures).

Yet I think most who use the plans
a) save less than 15% of their gross income per month (in 401k-IRA-savings accounts combined)
b) do not understand risks with some or all of the investments chosen (and there is more than one type of risk)
c) do not actually have a plan (they just save and think that is good enough)

I see a-b-c as the problems, not 401ks or similar plans.

Agreed. There are problems with the programs, to be sure. But most of them are either the fault of the individual (choosing not to participate or adequately contribute) or the employer/investment company (expenses too high/not clearly stated, poor employee education). The 401k program itself is just fine. It's the idiots out there who follow the "Ready, Fire, Aim ... Complain" method that are screwing the pooch. Just ask the people who smartly decided to educate themselves and make intelligent choices regarding their 401k's -- their portfolios are down, but most aren't freaking out. Ignorance begets chaos begets poor decisions.

Of course, if the stock market surprises everyone and marches back toward Dow 14,000, the debate will probably melt away, which is why reformers are moving now.

This is what kills me -- the idea that the "reformers" have some temporary ammunition, they're going to attack with all they've got. IMO, the more interference that the government makes in all of this, the more things are only going to get even more screwed up. To well-intentioned politicians and "reformers", I say BACK OFF, LET ME TAKE CARE OF MYSELF!

**atomicrc11** · 06-16-2009, 12:39 PM

I feel quite satisfied with them. I had two mediocre plans and since then have had two great plans with Fidelity. Being with Fidelity has been great as my choices have been varied and they have always included some form of Spartan Funds.

I think the reason I like the plans is that I am interested in investing and take the time to plan. I know some people who just use target date funds and I do have to say that since they have always used them, they aren't that bad off. However, if you have no interest in ever doing anything to manage your plan, you may feel is doesn't serve you well and should have another choice.

One option plans should probably include is an annuity option much like the TIAA-CREF Traditional option. This would allow people to have a choice to pick either securities or an annuity. Personally I would take the risk with securities but some others may feel more comfortable with an annuity. In my opinion this would make providers like Fidelity, Vanguard, T. Rowe Price, TIAA-CREF and Schawb to have plans similar to the TSP. The rest would of course be more expensive and not such a good deal, but then you get what you pay for in a plan administrator.

**disneysteve** · 06-16-2009, 04:03 PM

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.

**disneysteve** · 06-16-2009, 04:31 PM

What should be done?

1. Make participation mandatory. All new employees are put into the plan with a 10% contribution. When people are offered jobs, their compensation should be based on that. Don't say they will make $50,000/year. Say they will make $45,000/year plus an automatic $5,000 retirement plan contribution. Have a phase-in period of 3-5 years for existing workers to get them all up to the 10% level.

2. Give employees the option to contribute more, up to the annual limit of $16,500 (or whatever it is), but not less than the 10%.

3. and 4. Eliminate loans. Eliminate early withdrawals. This is a retirement account. It is for retirement. Period.

5. Make it simple for workers to roll over 401k assets into their new employer's plan when they change jobs. Make it impossible for them to cash out the money (see point #4).

I think those 5 things would make 401k plans a whole lot more useful and successful.

**Broken Arrow** · 06-16-2009, 05:00 PM

Interesting article, and wonderful thoughts so far!

I don't think the 401(k) has failed. Far from it, in fact. However, that doesn't mean that it's fool-proof either. Not all investment firms offering 401(k)s are created equal, not all employers pick the best firms for their employees, and not all employees really know what they are doing with the program.

As such, I also don't think it's entirely fair for the article to pin the blame on the program itself nor the stock market's recent lackluster performance.

Still, the result speaks for itself eh? The article seems to suggest that a better alternative is the government TSP. Hmm. Maybe. I actually don't dislike the TSP, especially if we do get tax credits as an alternative to employer matching.

But 401(k)s can be every bit as good as the TSP. For example, my current 401(k) company is Fidelity, and their lifecycle funds are just as competitive as TSP's counterparts.

For me, the bottom line is really the quality of the program itself, and not so much who wants to manage it. I have concerns about both sides really (such as the wisdom of nationalizing TSP and essentially putting a 800lbs government gorilla in the stock market), but if the program is well-designed and well-managed, I really don't care if I am investing through a 401(k) or a TSP.

**Runaway Finances** · 06-16-2009, 06:09 PM

I used to own a pension administration company so I'm somewhat biased. The old defined benefit plans (which few companies have any more) were simply too costly for companies, so they switched to 401K's which shifted most of the burden on employees and away from companies. I'm also biased in that I'm an employer. I don't think most employees truly realize how much health care and pension plans cost employers. They take it for granted for the most part. I know that from experience in seeing many companies and lots of employees over the decades I owned that company. With that said, 401K's are good but typically have terrible investment options. Besides that, most employees have absolutely no clue what investment options to choose from. They really need someone to tell them what to do. The problem is it is not cost effective for anyone to meet with employees one on one to talk about investment options. We just implemented a "CD fund" for those employees who just want pure safety. It's not returning much but it is safe. You can get guaranteed funds, but those are typically group annuity contracts with insurance companies. Those aren't all together bad if they are a guaranteed interest rate, but I'm not a fan at all of annuity contracts that invest in "mutual fund" type investments. They are typically expensive and not great performance. That is not always the case. So what is the solution? I think hiring a manager to manage the money in specific styles is the answer. This manager would have a general idea of the employees and their situation and risk tolerance as whole and manage the money accordingly. We have been doing this since about 2001 and the employees really like it. I'm seeing it being offered more and more.

But to get back to the 401K good or bad question....the first benefit of 401K's is that it is an extremely easy way to save money. The next benefit is if the employer matches contributions. That's just free money. Even if you just use a money market account, those two benefits are worth a lot. The investment issue is the spoiler. That is what complicates things. If your employer matches say 50% of your contributions, then even if you lose 30% in the stock market, you have more money in your account had you invested on your own in an IRA invested in the same thing. Granted you lost money, but it was the employer's money that got lost not yours. So, anytime you can get a matching, you should contribute at least the amount necessary to get the full match. Even if you put it in a money market you are getting a 50% return if the employer matches 50%! No one ever seems to look at it that way but that's reality.

In summary, 401K's are good. Pensions were better, but simply too expensive for the competitive world we are in.

**kork13** · 06-16-2009, 06:52 PM

Originally posted by Broken Arrow View Post

The article seems to suggest that a better alternative is the government TSP.

But 401(k)s can be every bit as good as the TSP. For example, my current 401(k) company is Fidelity, and their lifecycle funds are just as competitive as TSP's counterparts.

Very good point... From my knowledge as a participant in the TSP, there are some good and bad things about it. But in essense, the TSP is the exact same as a 401k, except it's managed by a gov't office. Compare these to your average 401k, and really there isn't anything here that a good investment company can't do (or at least mimic).

The good:
- Simplicity. Only 5 funds to choose from (plus 5 "Lifecycle" funds).
- Hands-off management. Each of the 5 funds are index fund based. The lifecycle funds are simply varying proportions of the 5 funds based on the timeline.
- Ultra-low expenses. The TSP funds' expense ratios currently vary between .015%-.019%. You can't find anything anywhere with expenses that low.

The bad:
- No matching for military members (though I believe civil service employees get up to a 5% match).
- Enrollment is a bit messy. For my peers and I, it took us up to 2 months to finally get enrolled and into the system so we could go online and select our allocations.
- Website and phone systems are both a bit awkward to get access to, and are the only ways to work with the program -- there are no physical offices in which you can go talk to somebody.
- No Roth option (though rumor has it that this is in the works).

So understanding that, I recognize how the author could argue that the TSP could be nationalized and be effective for everyone... But in the end, they're the exact same thing as 401k's!! I agree with BA that putting the entire American workforce into the program would almost assuredly overload and cripple the program.

**disneysteve** · 06-16-2009, 06:59 PM

I don't know the first thing about TSP's. Do they have all the same rules as 401k's regarding contribution limits and withdrawal rules and loans and such?

**creditcardfree** · 06-16-2009, 07:12 PM

I briefly looked at the tsp website here. It does look like loans are an option in a hardship situation. I didn't look for contribution limits.

Personally, I think the TSP is overly simplified. Only 5 funds to choose from!!Of course, for the average person the simplier the better.

**disneysteve** · 06-16-2009, 07:34 PM

Originally posted by creditcardfree View Post

Personally, I think the TSP is overly simplified. Only 5 funds to choose from!!Of course, for the average person the simplier the better.

That's part of my point. A plan designed for the rank and file workers, people of all income levels and educational backgrounds, needs to be as simple and idiot-proof as possible. 401k plans are way too complicated as they currently exist.

I think I'm pretty financially savvy. Still, signing my wife up for her 401k 2 years ago was a chore. Figuring out which forms in the thick booklet applied to her situation and needed to be filled out was part of it. Then, researching all of the investment options took me a few days. I can definitely see where most people wouldn't have a clue.

**kork13** · 06-16-2009, 07:37 PM

Originally posted by disneysteve View Post

I don't know the first thing about TSP's. Do they have all the same rules as 401k's regarding contribution limits and withdrawal rules and loans and such?

Contribution limits are the same, and withdrawal rules and loans are pretty similar to 401k's (though I'm not sure about the specifics)

Originally posted by creditcardfree View Post

Personally, I think the TSP is overly simplified. Only 5 funds to choose from!!Of course, for the average person the simplier the better.

Personally, I love the simplicity. I'm a big fan of index funds, and the TSP has everything I need for (IMO) an adequately balanced portfolio:
- U.S. Treasuries
- Corporate Bonds index (based on the Barclays U.S. Aggregate Index)
- Large-cap stock index (S&P 500)
- Small-cap stock index (Wilshire 4500)
- International stock index (Morgan Stanley Europe, Australasia, Far East (EAFE) Index)

But again, that's just my own opinion, because I like simplicity in my finances...

Part of the reason they're able to keep the expenses so low is that there are so few choices. More people's money in just a few pots, and less overhead. Also, fund-to-fund transfers are limited to something like 5/month to prevent excessive transaction costs. The TSP is great for "leave it and forget it" investing, but nothing much more complex than that.

**maat55** · 06-16-2009, 08:19 PM

My oldest brother is the worst manager of personal finances ever. He was called into his HR office when he became eligible for the his company 401k. The HR was somewhat of an retirement adviser and asked him numeruos questions concerning his present financial status.

The HR informed him that he would likely work till he died despite any 401 investments he could build.

My brothers response was: Why should I invest in your 401k if I will have to work anyway.

I agree with many that, a large number of americans are not 401k literate and are even intimidated by having to make 401k decisions. Many like my brother probable think that a 401k is an unnecessary addition to SS, even with the employer contribution.

**Broken Arrow** · 06-17-2009, 06:43 AM

Originally posted by kork13 View Post

Contribution limits are the same, and withdrawal rules and loans are pretty similar to 401k's (though I'm not sure about the specifics)

Yes, and like the 401(k), you can also roll your money out of a TSP and into your own IRA some day.

Typically, I'm not big on the government telling me how I should handle my own retirement money. But in the case of TSP... well, on the surface anyway, I can't find too many things to complain about.

401 success or failure