The problems with 401k statistics

[disneysteve]

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

[Broken Arrow]

Depends on who your 401(k) provider is.

My last one was horrendous, but my current one is with Fidelity and they're great.

[disneysteve]

Never having one, I am not sure if fees are hidden in them even if the funds don't have a load on them.

The only "hidden" fees are funds that have higher than average expense ratios. If you are paying 1.5% on your 401k fund when you could be paying 0.25% for a comparable fund to Vanguard, that's a problem.

[Thrif-t]

You know what my problem is with the 401k plan. I got in at my first job in 1990 my match was 6% and now 19 years later the match is still 6%...why doesn't the match ever increase every so many years? Maybe because of the limits on the amount you can save in them? Well I'm one of the lower wage earners, it can go up to 20% and I still won't reach the limit.ha

[disneysteve]

You know what my problem is with the 401k plan. I got in at my first job in 1990 my match was 6% and now 19 years later the match is still 6%...why doesn't the match ever increase every so many years? Maybe because of the limits on the amount you can save in them? Well I'm one of the lower wage earners, it can go up to 20% and I still won't reach the limit.ha

The match is determined by your employer. They aren't required to provide any match at all so don't complain. Of course, you are earning more today than you earned 19 years ago, so that 6% equals more money in actual dollars than it did back then.

[Thrif-t]

The match is determined by your employer. They aren't required to provide any match at all so don't complain. Of course, you are earning more today than you earned 19 years ago, so that 6% equals more money in actual dollars than it did back then.

uh, not...but I am only working part time now. And if this is to be our retirement (replacing pensions) why aren't they required to match? I think they should as well as raise the match every so many years. I mean people who only make 20k-25K/yr aren't going to get anywhere putting 10% or 15% of their pay away without a substantial match.

[disneysteve]

I mean people who only make 20k-25K/yr aren't going to get anywhere putting 10% or 15% of their pay away without a substantial match.

Actually, putting 15% of your pay into a retirement plan works regardless of how much you earn. In fact, the lower income workers have an advantage because social security makes up a much larger percentage of their pre-retirement income than it does for higher income workers. Remember, there is a maximum cap on SS benefits regardless of how much you earned while working.

I agree with you, though, that all employers ought to match the contributions. I don't think it is necessary to steadily increase the match rate, though. Where would that extra money come from? And there would have to be some limit on the match or eventually it would reach 100%.

[am_vanquish]

uh, not...but I am only working part time now. And if this is to be our retirement (replacing pensions) why aren't they required to match? I think they should as well as raise the match every so many years. I mean people who only make 20k-25K/yr aren't going to get anywhere putting 10% or 15% of their pay away without a substantial match.

It makes sense that the overall effect of a 401(k) should match that of a pension plan, but it's just too difficult to get this to happen. Unfortunately, employers are more concerned with their bottom line than they are about the financial security of their employees. Therefore, most often they "back into" the matching % based on their budgets ... not based on how well it will help their employees prepare for retirement.

BUT, you'd be suprised at how close a full 6% match on 401k contributions will come to the average Pension benefit. A full 6% match is generous by today's standards and does quite well at replacing the benefits of a pension plan over an employee's "life-cycle." Plus, you have to factor in a premium for the mobility of 401(k) plans, the ability to choose your own investments, and generally lower vesting requirements. In your example of working for the same employer for 19 years, you're correct that a pension benefit would be better. However, that's not the standard any more. These days, people move around quite often ... and for them the 401(k) benefit is better.

Regarding people at the lower end of the salary scale ... they don't have to sock away 10-15% of their income. The rest of society is compensating for their inability to save for retirement through Social Security. A person earning 20k when they turn 65 can expect Social Security to cover about 69% of their pre-retirement income. Meanwhile, a person earning 70k will only get about 42% of their pre-retirement income from Social Security. That's just the way Social Security was designed ... for better or for worse!

[disneysteve]

Regarding people at the lower end of the salary scale ... they don't have to sock away 10-15% of their income. The rest of society is compensating for their inability to save for retirement through Social Security. A person earning 20k when they turn 65 can expect Social Security to cover about 69% of their pre-retirement income. Meanwhile, a person earning 70k will only get about 42% of their pre-retirement income from Social Security. That's just the way Social Security was designed ... for better or for worse!

SS was designed as a safety net, not a primary income source for retirees. It was also designed at a time when the average lifespan was 62 and the benefits age was set at 65 meaning many people would never live to collect or only collect for a short time.

[disneysteve]

realistically how much should we have at retirement in our nest egg to live comfortable say in the year 2020???

That depends on your budget. I think you should be shooting for 80-100% of your pre-retirement income. If you are earning 100K when you retire, you'll want your investments generating 80-100K/year in the first year of retirement. Using the 4% withdrawal rate, that means you'll need a nest egg of $2.0-$2.5 million. That assumes no other source of income. If you have any pension, that would reduce the amount needed. If you count social security, that would further reduce the amount needed.

[momula]

Ahhh!! 401k's are stressing me out lately. I really do want to count on them but not sure its safe