NFT: Was the creation of 401k's a mistake?

It assumes that companies would still be providing generous pension plans if 401Ks had not been created. While some would, I imagine it would be a much smaller percentage than 35 years ago.

Also defined benefit plans are not perfect either. They can work well for people who stay at the same company for life. But most peope don't do that anymore, and thus would not qualify for a pension or would only be partially vested.

the other day saying much the same thing.

My though is that this view is a bit odd. One, there are plenty of money managers that have low fees, Vanguard for instance or Fidelity, that's where my current 401K is. Also, people aren't saving enough? Well how would getting rid of 401Ks help with that? Plus many companies match part of the 401K to help with savings. How is that a bad thing?

Defined pensions are gone and were going before 401ks were implemented. And all these public pensions are vastly underfunded and will be the next huge bailout that is needed.

If I put my tin foil hat on, this just seems like another preamble for the government to seize 401K assets or require you to invest in government bonds to save the country from the financial disaster they've brought on.

of defined benefit plans would have been predicated largely on predicting a moving target for life expectancy.

Either people would have less per year or the plans would be largely insolvent because of the growth in benefits needed.

Like every thing, focusing on the consequences without focusing on the evolution of the underlying system (like age structure, amount of time spent in good health, ...) means the author doesn't understand what he should.

I think you need to be smart and listen to the right people when it comes to finances, paying yourself first, and doing what's right for you. A tax sheltered investment retirement account is a mistake exactly how?

Allowing the NFL to be a non-profit. That is a mistake.

Religious organizations tax exempt - that is a mistake.

Allowing a hard working middle class family to attempt to sick away money over the course of their life, which amounts to what some people make in a month in this country -- is the LEAST you can do to cut a square deal

In comment 11497477 buford said:

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the other day saying much the same thing. My though is that this view is a bit odd. One, there are plenty of money managers that have low fees, Vanguard for instance or Fidelity, that's where my current 401K is. Also, people aren't saving enough? Well how would getting rid of 401Ks help with that? Plus many companies match part of the 401K to help with savings. How is that a bad thing? Defined pensions are gone and were going before 401ks were implemented. And all these public pensions are vastly underfunded and will be the next huge bailout that is needed. If I put my tin foil hat on, this just seems like another preamble for the government to seize 401K assets or require you to invest in government bonds to save the country from the financial disaster they've brought on.

In regard to defined benefit pension plans "going away" my recollection is that in 2000 60%, or thereabouts, of employers offered defined pension plans and today its in the neighborhood of 17%.

Given that data, at the time 401ks were created, and for more than 20 years after, defined benefit pension plans were still around and offered much more often than not.

The earlier poster correctly identifies the changing nature of the workplace and the fact that long term employment at one job is quickly becoming a thing of the past, thereby making 401ks more practical.

I remember when the 401k was created, and I do not recall any debate about what impact they would have on defined benefit plans. I recall the debate being out increasing the savings rate of Americans, and that these new plans would do that.

In another point your raise regarding defined benefit pension plans in the public sector, it is undisputable that a main reason, but not the only reason, many of these plans are severely underfunding is that municipalities and state governments refused to properly fund them. As a case in point, in New Jersey, during the Todd Whitman administration, the state did not properly contribute to the pension plan of state workers for ten years.

In another case in point, the NY Times ran an article about 15 years ago that compared two public employee pension funds in Texas. One fund was fully funded and invested prudently, the other minimally funded with much more risky funding alternatives. The premise was that the later plan would be in trouble sooner or later, and sure enough, that is what happened.

Since ERISA minimum funding rules do not apply to publicly funded plans, there is no regulation forcing states or municipalities to properly fund plans. As a matter of fact, public sector unions sued to force New Jersey to contribute to the plans when Todd Whitman was governor and the State Supreme Court said that the Eleventh Amendment to the Constitution protected the state from being sued, and that the court could not compel New Jersey to contribute to the plans.

As a remedy in New Jersey, in the pension reform bill passed under the Christie administration, the State explicitly agreed to subject themselves to suit if, in the future, the executive or legislative branch refused to fund the pension plan.

than a pension.

I worked for the State of NJ briefly. The state never makes required payments. My 401k...nice company match now.

Pension doesn't flow into your estate. You die, only your spouse gets a portion of what you got depending on your survivorship. Your 401k plan will flow to your estate. Whatever you don't spend can be picked up by your kids.

too if you die?

I heard someone complaining about estate taxation and it sounds criminal.

In comment 11497499 pjcas18 said:

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too if you die? I heard someone complaining about estate taxation and it sounds criminal.

I think that present federal estate law, which is a moving target, exempts the first 3.5 million from estate tax and New Jersey exempts the first $660,000 from state estate tax.

If you retire with, say, $600,000 in an 401k for you and your wife, how much money do you spend every year?

Its really a trick question, because if you don't know how long you are going to live you have no idea how much to spend.

I guess the prudent thing to do would be to turn your 401k into an annuity, which would then, functionally, give you a defined benefit for life, or, in other words, a defined benefit pension plan.

Interesting conundrum.

pension plans were going to die anyway. Companies have been pretty ruthlessly cutting back on employee benefits for 20 years or so. No way they were going to keep one of the costliest benefits of all.

The progression in my career has been: traditional defined benefit plan to cash balance plan to 401K with generous match to 401K with less generous match to 401K with no match.

but doesn't this generation of younger people need to plan on having upwards of $1.5-$2 million in total retirement net worth to live comfortably? This is assuming you retire at 65 and live to 90.

Again I can be completely wrong but I thought I've read around that ballpark on multiple occasions.

is just a code word for compensation. Compensation was going to get cut under any name or guise.

at age 65 is going to have to be revised.

are expensive.

Best bet is to hold onto 401k as long as you can until you absolutely need it, then take minimum distributions at 70 1/2.

If you need it earlier than 70 1/2, you want to take minimum draws...only what you need.

are in a position to dictate better terms for themselves, they will. For those who can't, they won't.

The game never changes, only the players. In a globalized world, you have a lot more players to compete with.

In comment 11497530 kickerpa16 said:

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at age 65 is going to have to be revised.

Yep, that, in a nutshell, is the bottom line.

In comment 11497527 UConn4523 said:

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but doesn't this generation of younger people need to plan on having upwards of $1.5-$2 million in total retirement net worth to live comfortably? This is assuming you retire at 65 and live to 90. Again I can be completely wrong but I thought I've read around that ballpark on multiple occasions.

2 million and dont bank on social security. that's essentially the figure we're looking at.

In comment 11497550 mattlawson said:

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In comment 11497527 UConn4523 said: Quote: but doesn't this generation of younger people need to plan on having upwards of $1.5-$2 million in total retirement net worth to live comfortably? This is assuming you retire at 65 and live to 90. Again I can be completely wrong but I thought I've read around that ballpark on multiple occasions. 2 million and dont bank on social security. that's essentially the figure we're looking at.

Matt, I disagree with your statement about social security. I truly believe that SSI will be around until the end of time (figuratively, of course).

In fact, I am inclined to believe that SSI payments will increase, not decrease, in the future, funded by an elimination of the contribution cap. This is one thing that the populist movement can latch onto and ride.

Its just a feeling I have, nothing more.

is that you have no financial incentive to retire, especially if you have kids or grandkids that you want to leave money to

My mom is 80 and in her 46th year of teaching at a community college. She has no plans to stop working. Of course, she has that work ethic of America in the 1950s, and thinks you should work as long as you are physically able to do so. But if she had a defined benefits plan like I do in CA, she would have reached the maximum benefit years ago.

So, every new "idea" they come up with solves one problem but creates another one. If my mom had my plan. she would have retired ten years ago and would have been replaced by a younger teacher making half her salary. So, the taxpayers are still on the hook: it is just in salary instead of retirement. And there is some young woman out there who doesn't have the job she was trained to do because my mom is still working.

they have averaged a return of almost 8% over the last 20 years and are completely solvent

with the big stock run the last 30 years, there is no reason for any public retirement fund to be in financial straits other than mismanagement

plan to live off my 403b. Rolled what was in my pension plan (which the company stopped years ago for new employees) into the 403b upon retirement.

enticed their employees into 401 K's by offering matches. Many of these companies have now done away with this which forces the employee to completely pay for their own retirement on their own. What was once considered a benefit or tool used to attract employees has now been done away with. It is true though as stated above that isn't to say pension funds wouldn't have gone away or been too small to fund retirements anyways.

In comment 11497481 mattlawson said:

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I think you need to be smart and listen to the right people when it comes to finances, paying yourself first, and doing what's right for you. A tax sheltered investment retirement account is a mistake exactly how? Allowing the NFL to be a non-profit. That is a mistake. Religious organizations tax exempt - that is a mistake. Allowing a hard working middle class family to attempt to sick away money over the course of their life, which amounts to what some people make in a month in this country -- is the LEAST you can do to cut a square deal

matt, please explain why allowing the NFL to be a non-profit is a mistake with regards to taxes.

In comment 11497530 kickerpa16 said:

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at age 65 is going to have to be revised.

It already has. Anyone born after 1959 has to wait until they are 67 to receive full Social Security benefits.

I didn't mean with regards to SS benefits, but in the common mindset of the American population.

A bunch of studies have found that, even with the recent recession, many people have 65 as their target retirement age.

for those in my age bracket.

raised.

why would they not? To them, it's the way it works, the fact that it doesn't work is news to them

the social contract,

In comment 11497632 kickerpa16 said:

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I didn't mean with regards to SS benefits, but in the common mindset of the American population. A bunch of studies have found that, even with the recent recession, many people have 65 as their target retirement age.

That's not the mindset of an increasing number of people. Over 30 percent of people between 65-69 are still working, and that number has been trending up for decades.

More Older Americans Working - ( New Window )

I said target retirement age.

Target and reality often fail to meet when the person hits the target age.

to a group today that will terminate their DB plan 50% underfunded. Basically meaning that the benefit employees were promised will be cut in half and yes it is 100% legal. In a 401k you can control your savings. I think a mixture of both is good however the real problem is the lack of financial education and what people prioritize. 50% of the population over 50 has less than 25k in a retirement plan. It's not about what you make, it's about what you save. If you disagree with me just look at Vince Young.

Watching those Kodak pensioners sweat every time EKC stumbles... Yeah, no thanks.

Pensions are a wonderful idea, but not in 2014 and beyond.

In comment 11497688 McLovin28 said:

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to a group today that will terminate their DB plan 50% underfunded. Basically meaning that the benefit employees were promised will be cut in half and yes it is 100% legal. In a 401k you can control your savings. I think a mixture of both is good however the real problem is the lack of financial education and what people prioritize. 50% of the population over 50 has less than 25k in a retirement plan. It's not about what you make, it's about what you save. If you disagree with me just look at Vince Young.

I don't know anything about the plan or the company you reference, but terminating a plan does not end the plan sponsor's withdrawal liability. If in fact a plan is 50% underfunded and the plan sponsor is financially viable, they will be on the hook for the unfunded liability, liability which typically runs into multiples of millions of dollars.

Federal courts are highly intolerant of entities shirking their obligations to fund pension plans. More so, those courts have been known to find parent corporations, subsidiary entities, and, occasionally, majority shareholders in closely held corporations liable under ERISA.

I have recently seen, specifically, in the coal industry, a corporation that tried to spin off its pension and health care liabilities to a new entity get banged over the head to the tune of hundreds of millions of dollars in withdrawal liability for doing so. If you want, I can find the circuit court opinion, which I recall was the 7th circuit.

I understand that the when the public hears that a plan has been "terminated" they think the employees are going to get screwed, but that generally is not the case. Even when a company goes bankrupt the PBGC, under very specific formulae, picks up the lions share of the pension obligation.

Again, I don't know the particulars of the situation you cite, I'm just talking about the generalities of withdrawal liability and what normally happens when a pension plan is terminated while being grossly underfunded.

Pension plan termination really means that employees will no longer accrue additional benefits going forward, but the promises of benefit accrual in the past are legally enforceable, and woe to the entity that attempts to get out from under their obligations.

This article is weak. Making people responsible for their own future is a good thing. Tax-deferred growth/compounding has been proven to be a boon for investors and the economy (with the one exception where companies force their employees to invest in the company/employers stock).

I'm a corporate bankruptcy lawyer, and I see underfunded pension funds routinely. I would trust a 401k fund controlled by me before a defined benefit pension plan any day.

The act of saving is one that is itself beneficial in my view. Beyond that, investing in diverse equities over a long period of time consistently outpaces any other investment. I have my kids 501 accounts in S&P index funds too; the S&P consistently outperforms 90% of all mutual fund managers.

In comment 11497768 blright said:

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This article is weak. Making people responsible for their own future is a good thing. Tax-deferred growth/compounding has been proven to be a boon for investors and the economy (with the one exception where companies force their employees to invest in the company/employers stock). I'm a corporate bankruptcy lawyer, and I see underfunded pension funds routinely. I would trust a 401k fund controlled by me before a defined benefit pension plan any day. The act of saving is one that is itself beneficial in my view. Beyond that, investing in diverse equities over a long period of time consistently outpaces any other investment. I have my kids 501 accounts in S&P index funds too; the S&P consistently outperforms 90% of all mutual fund managers.

401k's are great for all Americans in the top, say, 20% of wage earners. For the rest, not so much.

Would you agree with that statement?

a non-ERISA church DB plan. They have no obligations to pay and no PGBC protection. It's a different game than with a for profit company. The same thing with governmental plans. The point I'm trying to make is that no plan is perfect and if you dig deep enough there are flaws with both of them.

Not necessarily. Why?

Are scheming for ways to get their hands on 401(k)s. Heck, the MyRAs announced by Obama are to be invested exclusively in govt bonds - how convenient, since the Fed is now tapering its bond buying program. Have to keep that money flowing into the treasury somehow.

In comment 11497801 McLovin28 said:

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a non-ERISA church DB plan. They have no obligations to pay and no PGBC protection. It's a different game than with a for profit company. The same thing with governmental plans. The point I'm trying to make is that no plan is perfect and if you dig deep enough there are flaws with both of them.

Ouch. Point made

just stop and think for a second. Or at least consult the facts before you spout off. "myRA" is very obviously and deliberately targeted toward those who likely will never even sniff a 401(k). Earnings are capped at $15,000, i.e. not very much money at all. Bonds, yes. Correct. Consider that those with few resources wading for the first time into investing for their retirement might typically value less risk than we saw in, say, 2001 or 2008.

There are a lot of poor people in America for whom a 401(k) is about as likely a prospect as a Lexus December to Remember event.

I don't really feel like educating you further cause I'm tired, but US gov't bonds are historically a great investment (especially when accounting for risk, as these low-income individuals presumably are doing). If you own a target date retirement fund, you probably own (and benefit from) some yourself.

In comment 11497804 blright said:

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Not necessarily. Why?

Disposable income needed to save for retirement is sorely lacking in the bottom 80 or so percent of earners.

because they were unsustainable over the long term. Legacy costs are a drag on profitability and flexibility going forward, especially vis a vis competitors (domestic and especially international) and disadvantages older companies relative to their younger, unencumbered counterparts. It also encourages bankruptcy as a means of decoupling those pension plans.

took the lump sum and not an annuity from my pension.

I see this stuff everyday and the rules of 401k's are a lot more extensive than one might think. They are extremely fair and are set up so everyone benefits from them. The problem comes to priority and education and people not going beyond the company match. There is also the Saver's Credit that gives tax credits to low income people that put money in a retirement plan. I am very fortunate where I have both a 401k with a 3% match and a DB plan. However in terms of putting money into my 401k I pretend as if my DB plan doesn't exist.

a pretty good DB plan working for the state government and we also put 10% of her salary into a 457B (that has a modest match). I max out my 403B every year, and also have a large contribution from my employer, but it is a *major* pain in the ass. I put more money into that thing every month than I pay for my house! It seems to me that it is a major struggle once you have a family and a house (unless you have a really high income or came into money some other way). I can completely understand why many people can't save adequately for retirement. I can't even imagine what it must have been like in the old days when many people had nice pensions.

to a 28 year old married man with 2 household incomes. I currently get a good company match and sock away a decent amount biweekly to my 401k. No major debt, don't own property, and only have 1 car which is leased.

In comment 11497953 UConn4523 said:

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to a 28 year old married man with 2 household incomes. I currently get a good company match and sock away a decent amount biweekly to my 401k. No major debt, don't own property, and only have 1 car which is leased.

Avoid the clap.


What advice are you looking for exactly?

since I know each situation is different it would be impossible to give very specific advice.

I am Clap free and going strong!

In comment 11497951 Rick5 said:

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I can't even imagine what it must have been like in the old days when many people had nice pensions.

A pension was great. But you stuck with a job you hated because you couldn't afford to lose that pension. Especially since your wife didnt work and thus had no pension of her own and she also didn't get Social Security. You of course qualified for Social Security but it had much lower benefits back then. Also, there was no Medicare system, so you were on your own paying for heathcare after you retired.