Sunday, January 27, 2013

Why 401(k) plans suck

It's not getting better.
In a nutshell: Most people don't save enough in their 401(k) plans for retirement.

And even if they do, they're borrowing money against them.

The Washington Post noticed that in a story last week titled, "401(k) breaches undermining retirement security for millions."
More than one in four American workers with 401(k) and other retirement savings accounts use them to pay current expenses, new data show. The withdrawals, cash-outs and loans drain nearly a quarter of the $293 billion that workers and employers deposit into the accounts each year, undermining already shaky retirement security for millions of Americans.
Add to that the inadequacy of most 401(k) plans. The Center for Retirement Research reports a typical worker should save about $363,000 by the time he or she retires. According to the Fed, a typical household approaching retirement had 401(k)/IRA balances of only $120,000 in 2010, far short of the projected amount for the individual.

Angry Bear argues:
...the current model, based on 401(k)'s rather than true pensions, is not working.
Here's why:
  1. ...there is a  $6.6 trillion gap ... between what people need to maintain their current standard of living and what they've actually saved for retirement. This is equal to the combined assets of defined benefit pensions and 401(k) type plans, more than total state/local/federal government retirement plans, and more than twice as much as the Social Security Trust Fund. 
  2. 49% of private sector worker have neither a 401(k) or a defined benefit pension plan.
  3. ...employers have embraced 401(k) plans because they are less expensive than providing pensions, thereby "cut(ting) overall employee compensation," and that 401(k) plans don't take into account the stagnation of real wages.
Houston, we have a problem.