The 401(k): Americans ‘just not prepared’ to manage their own retirement funds

[NNN0LHI]

http://www.washingtonpost.com/business/economy/the-401k-americans-just-not-prepared-to-manage-their-own-retirement-funds/2012/04/03/gIQAnQV1uS_story.html?tid=pm_business_pop

By Jia Lynn Yang, Published: April 4 | Updated: Friday, April 6, 7:47 AMThe Washington Post

When lawmakers added a subsection to the tax code called the 401(k) more than three decades ago, they could not have imagined that this string of three numbers and a letter would become a fixture in the financial lexicon.

Nor could they imagine the stress it would unleash.

A poll by Gallup last year showed that for two-thirds of Americans, not having enough money for retirement topped seven other financial worries, including medical bills, mortgage payments and their children’s college tuitions.

Worrying about having enough money for retirement is not a new phenomenon. But the rise of the 401(k), dating to the early 1980s, has steadily shifted more financial responsibility onto the shoulders of many Americans who are — let’s face it — clueless.

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http://en.wikipedia.org/wiki/401(k)

A 401(k) is a type of retirement savings account in the United States, which takes its name from subsection 401(k) of the Internal Revenue Code (Title 26 of the United States Code). A contributor can begin to withdraw funds after reaching the age of 59½ years. (See subsection "Withdrawal of funds" below for restrictions before that age.) 401(k)s were first widely adopted as retirement plans for American workers, beginning in the 1980s. The 401(k) emerged as an alternative to the traditional retirement pension, which was paid by employers. Employer contributions with the 401(k) can vary, but in general the 401(k) had the effect of shifting the burden for retirement savings to workers themselves. In 2011, about 60% of American households nearing retirement age had 401(k)-type accounts.

[Snake Alchemist]

1. Americans probably aren't prepared to manage their own savings accounts either.

The savings rate of Americans is pathetic even in good times.

[Mimosa]

51. What savings??? Har har. n/t

[hedgehog]

2. A question about the 401(k): can someone invest independently

or are you bound to the investment package(s) your employer offers?

[Dokkie]

5. yea

and that is my problem, my employer would only give matching contributions to the select mutual funds they offer. I am a commodities guy and want nothing to do with stocks therefore there are no options for me

[JDPriestly]

7. The worst is yet to come.

Wait until you are 95 and trying to juggle your 401(K).

How in the world are very elderly people supposed to make decisions about their "investments"?

It is a ridiculous idea.

Most elderly people do not have enough saved to warrant paying a financial adviser. Their children are busy with other things, and besides Mom and Dad don't want the children interfering.

The 401(K) is the dream of people who hope that the elderly and the working stiffs with their money trapped in investment accounts will invest it unwisely. A well managed union pension fund would be a far better guarantee. If you are not just a lone investor trying to figure out charts and reading financial screeds, you could have a more secure retirement.

My savings aren't much, but I just hate having to deal with the whole 401(K) business. It's a headache. And a lot of seniors lost a lot of money in those traps for the lower middle class.

[Snake Alchemist]

9. What if you have a poor pension fund manager? nt

[Lydia Leftcoast]

12. And there's the hazard of falling under the influence of a shady financial adviser

My late mother's financial adviser was churning the investment account that her second husband had left her. He would call her every couple of days and say, "I have this great new investment opportunity," and she, never having had to handle large sums of money before and being 85 years old, would say, "Just do what you think is best."

She was being charged $2000 a month in commissions.

Fortunately, my brother took a look at her financial records, immediately told her not to agree to any more purchases or sales, and told the investment firm about their shady employee (they fired him). He then went with her to talk to a new financial adviser about rebalancing the account more toward bonds so that she would have a steady income that didn't require a lot of intervention.

But not everyone has a child who will intervene.

[meow2u3]

47. The trouble is finding a financial adviser who is not shady

I don't know about you, but I think I can count on the fingers of one hand the number of honest financial advisors.

The entire 401(k) game is rigged to steal the pensions of those who contribute to them.

[closeupready]

21. Just posted the same thing below. You're exactly right.

Wall Street WANTS financially illiterate people to be given control of the trillions in the SS trust funds, in the form of 'personal accounts' or whatever the term is. Makes it that much easier to separate them from their retirement money, as opposed to having the government invest them (and manage the trust fund) in Treasuries.

[tammywammy]

68. Yes, but there are other investments you can do on your own

Your employers 401k will have a variety of choices on where to allocate your money. If your employer matches, it's generally the best idea to contribute enough to get the max out of your employer - it's "free" money. Where I work they give 1/2% for every 1% an employee puts in, up to 4%. Independent of that they also set aside another 3% which every employee is eligible for regardless of if you participate in the 401k. So for 8% I'm getting 7% from my employer.

A 401k is pre-tax money, which is taxed on disbursement. You could invest in a Roth IRA with taxed money.

Here's a simplified chart of the differences: http://en.wikipedia.org/wiki/401(k)_IRA_matrix

I've rolled over a 401k from a previous employer into a traditional IRA, but then I also contribute into the 401k where I work now which is done through ING. ING has a good website that helps you work out where to put your funds and is very informative.

[Brickbat]

3. But but BUT! BUT! We were told it would give us ever so much more FREEDOM! And that some nasty union

or pension program wouldn't just sit on it and get fat! And that our beneficent employers (may they live forever) would -- if we were very, very good and didn't get greedy and whine for more -- even MATCH a tiny percentage of our "contribution"! That's, like, FREE MONEY!

FREEDOM!!1!!1!!!!11

[shraby]

4. Meanwhile back at the ranch, the 401(k) many people have for their retirement has been

periodically reduced by drops in the stock market. When they build up in value again after a drop, there is another drop to deplete the funds.
Whatever happened to a regular savings account that paid a reasonable interest rate that could build and not be raided by the stock market? That option for savings disappeared with the invention of the 401(k). What a racket!!

[badtoworse]

6. You can still put money in a savings account, but they pay almost nothing in interest

That is driven by Federal Reserve policy.

[cbdo2007]

15. Your scenario only applies if they put in all the money at once and never add

to it again which 0% of people with a 401K do.

Instead they use dollar cost averaging, so they are buying whether the market is up or down and it averages out to a certain % increase over time, which is proven to always be a better interest rate than anything else available.

Not sure what the crime is there. In addition, many companies match funds which give people an immediate boost in interest rate.

[ieoeja]

29. But 10% increases are always smaller than 10% decreases.

$100 - Start
$110 - 10% Increase (1. x 100 = 10)
$99 - 10% Decrease (.1 x 110 = 11)

$100 - Start
$90 - 10% Decrease (.1 x 100 = 10)
$99 - 10% Increase (1. x 90 = 9)


I got 20% increases for a couple decades. Then a 50% decrease one time. That single 50% decrease lost about 15 years of the 20 years accumulation because it was 50% of the much larger amount.

And I had my money in the "Short Term Gov't Guaranteed" fund when the 50% wipeout occurred in 2001. Fortunately, my company offered a fund that was nothing more than a savings account by the time the second 50% wipeout came in 2008. And I switched to that a few months before the second crash. Then TARP came along and made me a bunch of money.

But I still worry. Because the babyboomers are retiring. They will eventually be removing far more money from 401(k) than the funds will have as income. Which means the funds will have to sell stocks. And when all the 401(k) funds are selling rather than buying....

Everyone loves talking about social security hitting a point where people are pulling more money out than putting money in. But at least that will not effect the value of the social security funds that are already in place. When that happens to 401(k), on the other hand, it will destroy the existing value of the 401(k) stock holdings.

[lovuian]

8. The Republican's experiment failed

and who pays the price ...the baby boomers
at least we have social security

Pensions need to be done by all companies

[lastlib]

10. The financial illiteracy of the American people generally is indeed appalling!!

This is the reason that privatizing Social Security is such a bad idea--why would we so blindly put our vital retirement funds into the hands of the same Wall Street vultures who gave us the meltdown of 2008??? Many 401k accounts still have not recovered from that debacle. Yet the vultures would profit handsomely for doing that to us.

Few people really have the financial savvy to manage their retirement money. Apart from vaguely understand a few bromides ("Stocks will make you more money than bonds."--yes they will, but only if you know how to pick the right ones), they lack not only the skill, but the information to properly and safely make decisions that will benefit them financially. And most company plans don't help much, offering a slender array of options that are usually the cheapest to manage and administer, without regard to how they help the employee.

[Egalitarian Thug]

13. You're right, but when did it become a requirement to learn finance and,

essentially take on another job, so you wouldn't starve in street if you live too long or fall victim to a Wall Street con artist?

I know a lot about economics and finance, far more than most people, and I've been ripped off with no recourse, twice, to the tune of half a million $ over the last 10 years.

So how is your mechanic or your plumber going to manage their accounts?

[Bucky]

27. It "became" a requirement when lots of people started living long past working age.

Another important factor was the diminishing number of people who take care of their parents when they get older. Put together, these are huge societal changes. And fixing these problems will probably require a new governmental policy. I live on a tighter budget than I need to because, on top of my employee pension, I pay into a 402(b)--like a 401k for public employees. My pension alone would only be sufficient if I were going to be homeless after the age of 64. I could pay quite a bit less into my private retirement fund if I had started to pay into it before the age of 39. A lot of people are in the same boat. But, I'm afraid, even more people than that are truly expecting to get by just on what Social Security can provide. Unless you own your own home outright, Social Security can not provide a decent way of life.

[Egalitarian Thug]

33. The number of facts you ignore in this while avoiding the point is impressive.

The conservative narrative that you repeat is of The Big Lie campaign.

Eliminating the pension was key to constructing this narrative and your reply shows that it has worked well for far too many people. A pension is not an employer savings plan, it is a contract between the worker who generates wealth and those that use that wealth while it is being generated, rather like Social Security (another contract I'm sure you believe has to be "fixed&quot . Briefly and in layman's terms it goes like this; "You work for me now and make me rich instead of working for yourself and in return, when you can no longer work for yourself I will pay you back in the form of this pension for the rest of your life."

It took reagan and the suckers that believed/followed him to renege on that contract. More accurately, it took reagan to sell this theft to them.

You assume a universal capacity to live below your means and you assume a stability in employment enjoyed by ever fewer people as the consequences of this insane model that was imposed on us come about. So you have both a pension and a tax deferred 'savings' plan, good for you, you are a minority there as well.

That's enough for now, I have to do stuff. Be back later.

[Bucky]

38. FYI

You could have made these same points without being a jack ass.

Maybe it's a side effect of being in GD too much, but in the real world it's useful to know that you don't have to make your points with scorn and derision.

[Egalitarian Thug]

40. I guess being a jackass is in the eye of the beholder. Your reply came off as smug

and condescending to me, and that colored my reply. This is the main thing that is putting me off on this site, the lack of civility that is apparently SOP. I could give many, many examples just from the short time I've been here, but apparently that is not allowed here.

Polite discourse is simply ignored.

I'm willing to start over.

[coalition_unwilling]

11. I think every American high school student should be required to

take and pass a course in Personal Finance as a requirement for graduation.

But I also know that investing in 3-4 different stock and bond no-load, low cost index mutual funds is all that is really necessary to have one's funds match the returns of the broader global economy, according to various research studies conducted over the years. In fact, investing in low-cost, no load mutual funds typically outperforms the performance of roughly 3/4 of all financial managers and planners. Not that the financial industry would ever want those statistics to become general knowledge.

[Egalitarian Thug]

14. This is the most important component of The Great American Ponzi Scheme.

In less than a decade, with the enthusiastic support of both parties, the plutocrats looted over a trillion dollars from the American People by legalizing the theft of their pensions and forcing them into this rigged game.

[cbdo2007]

16. Luckily, you don't need to manage your 401K....you just pick a fund

and stick with it for 40 years and you'll still do better than you can do anywhere else.

Hell, most American's are "just not prepared" to even manage their check book, hence all the Billions of $$$ made by banks on overdraft charges, and managing a 401K is a million times easier than subtracting your expenses every day.

[Egalitarian Thug]

34. Did you forget the sarcasm tag? n/t

[inna]

48. amazing, isn't it. hope to see more of your posts, btw -

although DU is hardly a post-inspiring venue these days.

[Egalitarian Thug]

50. TYVM. It actually does inspire me to post, but the undercurrent of fear and

roving gangs of bully-boys is rather off-putting. OTOH, it is nice to not have to put in hours or even days putting together thorough Diaries only to be ignored/lost in the blizzard.

I've been here about a week and I still see many of the same posts on the first pages of the various groups. Never get that on DKos.

[myrna minx]

58. Welcome to DU. I look forward to reading your more of your posts.

[sudopod]

52. what inna said. nt

[cbdo2007]

56. Did you forget the part where you argue using facts to prove me wrong???

Luckily, I understand how 401K's work so when I'm retired at 50 and my family is living very comfortably, you'll still be working and thinking the 401K is a scan just because you don't understand it. I'll keep reading your posts here complaining about it at that time.

[saras]

17. No one is prepared to manage a racket profitably

The purpose of the system is to move money from small investors to large ones. In the long term, that's what it does, tossing the small ones an occasional sop in profitable times to keep them on board.

[raouldukelives]

18. Just keep pumping your money into that 401k.

Eventually the large amount of support you give to Halliburton, Exxon & Monsanto will help them conquer new areas and pass on some of the residual profits to comfort you in your old age.

[SoCalDem]

19. DUH!

This was the "plan" all along.. Have millions of people dump their money (along with their employers' money) into a decades-long slush fund that THEY could not touch, all the while "allowing" the "investors" to gamble with it.

Employers freed themselves from having to provide a pension , and from paying people to manage it, and the employees got to feel "rich-on-paper" from time to time when they got their statements.

Of course, by the time they NEEDED the money to live on, most of it would be gone, or for the ones who managed to perfectly time their retirement age with the market, there might be some money there.

[closeupready]

20. Wall Street likely knew that Americans were bad at managing their money

when they pushed for 401(k)'s. That just means more money in their pockets.

Also explains why they continue to push for "privatization" of social security retirement accounts - they WANT financially illiterate people to be given control of the multi-trillion $ trust fund so they can finagle that cash out of Americans' hands and into their own.

They think we are all stupid and can't figure this out.

[Lydia Leftcoast]

44. They had already seen what a disaster total privatization of retirement was in Chile

They knew exactly what they were doing.

[Yavin4]

22. The Problem with a 401K Is That People Put the Majority of their Assets Into One Type of Investment

which makes them vulnerable to drastic shifts in the market like the collapse of 2008-09. You have to spread your risk around. You need money in plain vanilla savings, a 401K, some hard assets like gold and silver, some bonds, some stocks, etc.

That way if any one of them blows up, you you have some back up.

[FreeJoe]

63. 401K isn't an investment class

A 401K account can have lots of different types of assets. It can have stocks, bonds, money market funds, t-bills, and just about anything else. Each 401K program is different and will have different investment options available. If your company has a decent 401K, there should be no reason why you can't build a well diversified portfolio inside of the 401K.

[Yavin4]

65. True, But a 401K Locks Your Money Up

You cannot pull money out before retirement unless you pay a steep penalty.

Also, read up on MF Global if you think that you're money is safe.

[taught_me_patience]

23. The real problem is that contribution limits are too low

They should eliminate the max contribution and allow people to invest whatever they want. It's hard to build a nest egg with only 15k saved/year.

[badtoworse]

25. It depends on when you start.

My nieces and nephew are in their twenties and have 401k's with an employer match. I'm constantly preaching to them that they should max out on contributions and invest in quality funds. I believe they will amass quite a nest egg if they do that. I did that for the last 25 years and so did my wife. We are in decent shape for retirement.

[taught_me_patience]

32. Hard to "max out" in your 20's.

As most don't get paid very much. Saving $15k is impossible when only making 50k!

[Zalatix]

41. Unless the market collapses.

[Sgent]

30. 15,000

at a post inflation 4.5% (8% pre-tax) for 35 years yields 1.2 million -- meaning you could buy a single premium annuity that pays 73,400 / year until death given today's interest rates.

[taught_me_patience]

31. The problem is that very few can invest $15k when starting out

The first 10-20 years of your career, most people contribute a lot less than the max amount. But, later in life, when they are earning more, more people are capable of adding more than 15k to "catch up".

[mick063]

24. interest alignment

You are big business.

How would you make the typical American support your policies?

You switch his retirement from traditional pension plans to a 401K format.

Why?

If retirement is dependent upon corporate profit, Americans will be more likely to support union busting, deregulation, and tax breaks.

Conclusion:

401K has been very, very bad for America.

[Auntie Bush]

69. That is so true and it's working. Why don't people talk/discuss this more?

"If retirement is dependent upon corporate profit, Americans will be more likely to support union busting, deregulation, and tax breaks."

[waddirum]

26. I simply don't trust Fidelity

or any other 401k administrator. I refuse to give them a slice of my paycheck every month without the confidence that they will still be functioning in 2035.

Lehman Bros. was a 150 year old company and Merril Lynch was a 90 year old company before they went kaput. Nothing in Wall Street history gives me confidence that todays companies will still be around and fully funded.

[coalition_unwilling]

36. I'm an interested layperson here and not an expert, but I think I can allay some of your concern.

When a company like Fidelity or, in my case, Schwab, administers a 401-K or IRA retirement account, it is legally required to use another company as a custodian for the securities held. So you're talking about a nightmare scenario where not only Fidelity but its custodial company both go kaput. Not impossible, mind you, but statistically far more unlikely than Fidelity itself going belly up.

[waddirum]

39. thanks for your reply

Don't forget about the recent MF Global fiasco, where management dipped into customer accounts to cover their failed bets on European bonds. Of course, the customers were made whole in the end, but I can't assume that the regulatory infrastructure will continue to function between now and 2035 (in my case).

[coalition_unwilling]

62. The first rule of investing is or should be "Trust No One." (OK,

maybe your spouse and kids earn an exemption from that rule

That said, MF Global is (I think) a special case where a rogue CEO and support staff manifestly violated the law, even if no one so far has been held accountable before that self-same law. I have two IRAs currently, a smaller one with Schwab and a bigger one (rollover from 401-K) with Putnam. Weirdly enough, Putnam also got in a lot of hot water a few years back for allowing certain special customers to trade mutual funds when the markets had already closed and no one else could trade them. There was a massive brouhaha about it and Putnam, IIRC, entered some sort of consent decree with the SEC as well as paying fines and fees for the transgression. So these types of shenanigans are not entirely unheard of. But the risk of reaching retirement without adequate resources upon which to live is far greater, imo, than the risk of the type of full-blown collapse upon which your fears and assumptions seem predicated. But I do get your point.

[Laura PourMeADrink]

28. Doesn't matter ..I have a self directed one and smith Barney managed

Account...both perform close to the same.

[Marrah_G]

35. LOL what retirement savings?

My retirement plan is to work until I drop dead.

[Auntie Bush]

70. My husband said the same thing...and he did.

Didn't quit till two weeks before he died of cancer and undergoing devastating Chemo. I don't know how he did it...but he needed the money.

[TNLib]

37. I call bullshit.

I don't have the option to invest in my 401K that an independent investors has. I'm limited to what my employers offers as investment opportunities. Also the markets have been increasingly more susceptible to volatility.

I really hate this kind of reporting.

[Egalitarian Thug]

45. "It's your money"...

but you can't have it, or put it anywhere except where we allow you.

[quaker bill]

42. It has nothing to do with preparation or financial literacy

A scam is a scam regardless of how well you are "prepared" for it. No one ever imagined that the people ever were prepared, that is the reason that the funds are so heavily restricted and tax penalized for withdrawl.

401Ks are and always were a vehicle to put the accumulated retirement savings of the public in full view and ready access for speculative plunderers. They were never anything else.

For most folks the employer contributions to these "retirement plans" were nothing more than a joke. The last one I had, after 5 years on the job, I had $1200 (and the market was good). My penny jar was more lucrative.

The popular notion that these ever really were "retirement plans" is the mistake. That people were unable to see through this from the outset is the problem.

[inna]

49. probably the best post in this thread (lots of very good ones, though, impressively!)

i guess threads like these continue to make du worthwhile, for me at least

[myrna minx]

59. Excellent post. n/t

[xchrom]

43. You shouldnt have to be a retirement expert, a health insurance expert,

A pharmacologist, etc to manage your fucking life.

It's a waste of your time & dollars - & don't the people who count know that.

[zeos3]

46. The Great Risk Shift

CHeck out this book by Jacob Hacker. It elaborates on the subject.

http://www.greatriskshift.com/book.html

[HughBeaumont]

55. EVERYONE should read this book. I read it twice.

Really puts into perspective on how we're all left holding the bag while the wealthy literally and legally steal from it every day of our lives. It will be no small wonder why the middle/working/poor's adjusted wages have flatlined for 32 years while the incomes of the wealthy have skyrocketed.

The next time some old bastard like Bernie Marcus or Ken Langone whine and cry about how un-business-friendly America (Democrats, specifically) is, they should be kicked dead in the nads. Don't EVEN tell me how bad the rich have it in this country.

Another good book is Free Lunch by David Cay Johnston. Your blood will start boiling when you read about all of the perks, grants, tax breaks and freebies available exclusively to the wealthy.

[zeos3]

67. Thanks Hugh!

I was actually thinking of that book while reading your reply. Johnston's previous book Perfectly Legal was also a real eye opener.

It's good to hear of others who get their blood boiling by reading this stuff. When I read small passages to my wife, she just looks at me funny.

[sendero]

53. Get ready..

... they are not only coming after your Social Security, they want your 401K too.

An idea that you could "convert" your 401K into an "annuity" has already been floated several times (as a favor to YOU) and that is how they plan to do it. The financial powers that be weren't the least bit worried about how you would manage your account when they traded your defined benefit plan for this joke, and FWIW professional money managers don't have a good track record anyway as a whole.

This article (the parts I could read without registering, I'm not about to do that) is so full of shit I don't know where to start. Your 401K should not require active management, you should be able to buy a balance of stock index funds and bond funds and be done with it.

But that doesn't work once the entire economy has been hijacked by Wall Street, and every action controlled and designed to strip you, the "retail" investor (muppet) of their wealth. They run it up, go short and crash it and you are left holding the bag.

Sweet deal for them, catastrophic for you, and don't look now but the "gains" in the stock markets over the last 3 years are illusory and about to evaporate AGAIN.

[closeupready]

61. Right. Otherwise known as "pump and dump."

nt

[Ship of Fools]

54. My response to the title of this article: *No Shit, Sherlock*

[myrna minx]

60. The Republican Paradise: We lay people are now expected to be *experts* in Medical practice,

pharmaceuticals, lab work, financial planning/investing, mortgage lending, housing markets, law - both criminal and civil and taxes all the while looking for work and raising families. Then when we're swindled, we're to blame for not "knowing better".

[FreeJoe]

64. There is no perfect answer

I like social security, but the returns on my contributions will be pathetically small.

I like my pension, but if I leave my company before I retire, I'll lose a substantial amount of value. I'm not really fond of being stuck at a company because I'm tied down to a non-portable pension.

I like my 401K because it is much more portable. The company that I'm at now offers a really good plan, but I have friends stuck at companies with horrible 401K plans.

There are other alternatives - IRAs, Roth IRAs, etc. My biggest problem is keeping up with it all. Between my wife and I, we have a 401K, several IRAs, several Roth IRAs, an HSA, a couple of Coverdell education savings accounts, a couple of 529 plans, and a flex spending account. Each has different rules and different tax advantages. Keeping up with the rules is time consuming and difficult. I'd much rather have a simpler system. Why can't we just have a system that let's people save tax deferred however they'd like and cap the tax deferral amount. Let them take out the money at any time with no penalty other than paying the deferred taxes. It should would make my life simpler.

Even a 401K is complicated. It's not just the choice of where I should invest my money. The rules for 401Ks are complicated. My plan offeres a regular 401K option and a Roth 401K option. There are caps on how much I can contribute pre-tax and how much I can contribute after tax. Because the rules for different types of contributions differ, my 401K tracks after tax contributions, company matching contributions, pre-tax contributions, prior ESOP matching funds, ROTH contributions, and safe harbor match contributions all separately. I've been trying to get an answer for months on whether I can convert after-tax contributions to a Roth within the plan without having to proportionally convert pre-tax contributions in the plan and without having to proportionally convert pre-tax IRA funds and I haven't found anyone that can answer the question yet. The closest that I've gotten is that every step of what I want to do is legal, but the IRS might rule that the overall set of conversion steps is an illegal step plan. The only way to know for sure is to either pay for a private letter ruling from the IRS or to try and, if the IRS comes after you, see how a court decides.

[TBF]

66. Americans would have to have money in order to "manage" savings -

so far the top 1% are holding most of the wealth pretty tight to their vests via their rigged "stock market".

It is not that Americans are not capable, most simply do not have the opportunity.