A recent article from the Wall Street Journal interviews the creators of the 401k plan. Several of the original proponents acknowledge that 401ks are not being used as originally hoped. The article questions whether or not 401ks have helped Americans retire or if they have damaged American retirement dreams, particularly as 401ks have replaced the traditional pension fund.
Listen as Hannah responds to the article from her perspective as a financial planner working with many clients who are retiring with 401k savings.
What can go wrong with 401(k)s?
The crux of this article hinges on the fact that 401ks are serving as a replacement for pension plans. The article implies that 401ks were originally sold to employees as a supplement to those plans.
From the viewpoint of a financial planner, additional retirement savings on top of a pension is ideal. There’s little argument about the value of pension plans. It’s like social security with real competitive returns.
Backers of the 401k idea hoped people would see them as an opportunity to start saving beyond their pensions. Unfortunately this hasn’t happened. Combined with fewer pensions offered, the dynamic created a massive deficit in retirement savings.
Younger generations assume that the primary way of saving for retirement is through a 401k. It’s become very unusual to see younger clients with pension options. When I have seen them, they look nothing like what some of my older clients have.
On paper, 401ks make sense. My clients that take advantage of them diligently save and make good decisions on how their investments are positioned. Eventually they find themselves in a position where they can retire comfortably.
That being said, those with a pension and a 401k tend to be in a better position.
How fear affects retirement
Another factor briefly mentioned in the article, is the panic people feel when the market drops, like it did in 2008, causing them to pull their money out.
I always say that wealth is not made in the up-markets like we are experiencing now, but rather in the down markets. It’s such a backwards concept, but it can create a tremendous amount of wealth for those who take advantage of it. The absolute worst thing an investor can do is pull their money out of the stock market when it goes down. The opposite is true, down markets, when prices are low, are the best time to invest.
One of the reasons I believe in having a financial plan is that it helps avoid this fear. Unless you have a plan for emergencies and the unexpected, then when the market goes down (and we know it will), you may find yourself in dire financial straits.
Because pensions have plan administrators, each individual investor doesn’t have to make investing decisions. Since they aren’t swayed by the emotional decision-making that goes into individual retirement plans, pensions should have reliable payoffs. However, sustainability has become a problem for many pensions, both because of unrealistic projections and lackluster investment returns.
Having a financial plan in place that takes full advantage of retirement accounts helps you to avoid uncertainty about the years to come