Skip to comments.

Out to Steal Your Pension The 401(k) Could Prove a History-Making Fiasco

Posted on by B. A. Conservative

The 401(k) Could Prove a History-Making Fiasco



By K.C. Swanson

Staff Reporter

04/08/2002 07:06 AM EDT

It's starting to look like 401(k) plans will go down in history as a costly failure. In fact, the abandonment of old-fashioned pension plans is likely to leave many Americans poorer in their old age.

Evidence shows that as 401(k)s have taken hold, employees have lost ground in their retirement savings -- even during one of the greatest bull markets in history.

In the last 10 or 15 years, companies have increasingly pushed the burden of managing pensions onto their workers. During the market's boom years, workers rarely complained. Indeed, few regretted the disappearance of defined-benefit plans in an era in which 401(k) plans offered access to double-digit stock market gains.

Now it's clear that many employees either can't afford to make adequate contributions or don't understand that they must. In 2001, fewer than 7% of 401(k) participants contributed the maximum allowed amount to their plans, according to Cerulli Associates, a fund consulting group.

Moreover, because the average U.S. worker has little training in financial planning, some have assumed far too much risk, while others have invested too cautiously -- and both moves damage long-term returns.

Granted, not everyone has lost out with 401(k) plans. Employees with high incomes, financial know-how and an interest in investments stand to benefit from a system of self-managed retirement accounts. But few people fit that profile.

Retirement Savings: Facing a Shortfall

Surprising as it may seem after a decade of prosperity, Americans on the verge of retirement actually have less money saved now than 15 years ago. For those aged 47 to 64, inflation-adjusted median retirement wealth -- including defined-contribution plans, defined-benefit plans and the value of Social Security benefits -- actually fell by 11% between 1983 and 1998, according to a study by New York University economist Edward Wolff.

Yet for the same age group, average retirement wealth rose 4%. In other words, over the last 15 years, wealthier people gained retirement wealth, the less affluent lost it.

It's no coincidence that in the meantime, 401(k)s were elbowing out defined-benefit plans as the retirement plan of choice. By 1998, well over half of workers close to retirement owned a 401(k).

"401(k)s are good if you can accumulate a lot of money, but medium-wage workers just haven't accumulated as much. Lower-income workers did much better under [defined-benefit] plans," says Wolff.

401(k)s Win the Popularity Contest

As traditional pension plans lose ground 1983 1989 1998 % of households with defined-contribution plan 12.2% 28.3% 58.9% % of households with defined-benefit plan 68.9 60.8 43.5 Source: Study by Edward Wolff, based on data from Federal Reserve's Survey of Consumer Finances.

Meet Your New Pay Cut, the 401(k)

Given their unimpressive track record, how did 401(k)s get to be so popular in the first place? It helped that the plans became widespread in the '90s, amid a period of double-digit stock market gains. Back then, 401(k)s were touted as a means to access potential stock market riches -- unlike defined-benefit plans, with their stodgy guaranteed payouts.

401(k)s also offered portable benefits, letting workers take their retirement funds with them if they changed jobs.

But at least as important as their appeal to workers was that 401(k)s saved employers money. "401(k) plans in general are seen to be cheap because the company doesn't have to make as large contributions," says Annika Sunden, associate director for research at Boston College's Center for Retirement Research.

Under a defined-benefit plan, a typical company might pay an average of around 8% of its payroll into a pension account, with individual payouts based on a retiree's salary and tenure at the firm. But with a 401(k), a company could pay benefits of anywhere between 3% of payroll, if it provides a match to employee contributions, to nothing at all.

By switching from defined-benefit plans to 401(k)s, companies have effectively cut worker benefits. But there's little evidence that they have simultaneously raised wages to offset that effect.

Moreover, in line with the faltering economy, companies have cut the amount of money they contribute to worker plans. "401(k)'s are profit-sharing plans. People have forgotten that. When profits decline, company contributions decline as well," says David Wray, president of the Profitsharing/401(k) Council of America, an employer trade association. In a survey of 909 member companies, the council found that their average contributions to 401(k) plans dropped from 3.3% of payroll in 1999 to 2.5% in 2000. Contributions declined further in 2001, though no specific number has been released yet.

The bottom line: Many employees with 401(k)'s aren't saving enough money to retire. A survey by the Employee Benefit Research Institute found that among workers aged 40 to 59, 39% reported savings of less than $50,000. Less than one-fourth have saved $100,000 or more.

Such low totals are not a reflection, however, of declining contributions. Despite the down market, contributions to 401(k)s increased 10% from 1999 to 2000, according to Cerulli. The firm projects that contributions grew another 10.1% in 2001, though the information hasn't been made official.

But partly because of the down market, the average 401(k) account balance declined 0.1% in 2001, according to the ICI.





How the Savings Stack Up

Total accumulated for retirement, by age group All Workers Workers 20-39 Years Workers 40-59 Years Retirees (age 60+) Nothing 15% 22% 13% 11% $1-9,999 12 21 9 16 $10,000-$24,999 11 15 8 9 $25,000-$49,999 9 9 9 4 $50,000-$74,999 8 7 7 4 $75,000-$99,999 5 3 7 5 $100,000-$149,999 6 3 6 3 $150,000-$249,999 6 2 8 5 $250,000 or more 6 2 9 9 Don't know/refused 23 16 24 36 Source: January 2002 Retirement Confidence Survey, sponsored by Employee Benefit Research Institute and American Savings Education Council.

Social Security Won't Pick Up the Slack

Some folks may be betting that Social Security will come to their aid in retirement. Indeed, almost half of current retirees 60 and older say Social Security is the biggest share of their income.

But the federal program is not likely to be able to pick up the slack in the future. Already, payouts are on the decline. In the 15-year period ending in 1998, the value of Social Security benefits to households with people aged 47 and over declined 11%. Among the reasons: average hourly wages have declined in that period, as have the average hours worked. Also, fewer people are married, and married people reap bigger Social Security benefits.

Moreover, with the very structure of Social Security up for debate, it seems risky for younger workers to expect generous benefits when they reach old age.





Where They Plan to Get It

Expected largest sources of income in retirement, by age group All Workers Workers 20-39 Years Workers 40-59 Years Retirees (age 60+) Money you (and/or your spouse) put into a retirement plan at work 30% 38% 25% 7% Personal savings or investments outside a work-related retirement plan 14 18 13 9 Workplace pension 14 12 15 22 Social Security 13 7 16 48 Employment 9 10 9 1 Money provided by an employer through a contribution to a retirement account 7 4 9 1 Money from the sale of your home or business 6 4 6 5 Other government income programs, such as SSI or veterans' benefits 3 3 3 5 Support from your children or other family members 1 2 1 0.5 Source: January 2002 Retirement Confidence Survey, sponsored by Employee Benefit Research Institute and American Savings Education Council.

As it stands, of course, the tenuous footing of Social Security in the future has grabbed all the attention. But it's becoming clear that many Americans also haven't put enough money aside in their private retirement accounts, the other key component of retirement security.

And unlike the '90s, today there's no soaring stock market to give anyone reason to think insufficient retirement funds could go the distance. "I think the stock market hype really clouded this [retirement savings] issue," says Wolff. "The boom largely benefited the rich, but it hasn't really filtered down that much."



TOPICS:

Business/Economy

KEYWORDS:

pension

theft

Hang on folks. This type of hype has always been the prelude to a major assault by Democrats and other liberals to steal your wealth so they can use it to buy the votes of their constituents. Democrats are flat evil, and pose a far greater threat to the United States than the likes of Osama bin Laden or anyone else but China. In the absence of Democrats, China would not have been a threat in our life times. Interested in Fighting Back?



To: B. A. Conservative

bump



To: B. A. Conservative

A sucker born every minute. The 401(k) scam. Hey buddy, give me 15% of your paycheck. In 30 years I'll give you a million dollars. ok? Oh you want your money now? Well you will have to pay a penalty and outragous taxes. SCAM SCAM SCAM!!!!



To: B. A. Conservative

Well, I'm always suspicious of statistics like "between/from 19xx to 19xx." The arbitrary period cited is invariably one that agrees with the author's presumptions. But the author is probably right that 401(k)'s are not appropriate for most people. I predict that in, say, 10 years' time participation in 401(k)'s will greatly decline and defined benefit plans will make a big comeback.



To: Tauzero

and then the company providing the pension payouts goes bankrupt and what do you get? Nothin. I'm stickin' with 401k.



To: rohry; TigerLikesRooster; arete; Dukie; Billy_bob_bob; headsonpikes; razorback-bert...

Bear market mass psychology ping.



To: Musket

TANSTAAFL. Also true of 401(k)s.



To: CJ Wolf

Social Security takes 15.3% of your paycheck (up to the Wage Base) and gives you a magnificent rate of return of maybe 2%. It's probably the worst deal, compared to corporate defined benefit and defined contribution plans.



To: B. A. Conservative

In 2001, fewer than 7% of 401(k) participants contributed the maximum allowed amount to their plans, Oh brother, at my last job I could have saved up to 16% of my income. Who says that 16%(plus company matching) is the minimum that people need to save?



To: Musket

Corporate defined benefit plan contributions are deposited in a trust. The corporation is not allowed to touch the money once it's in the trust. The corporation is subject to penalties if it does not put enough money into the trust. Finally, if there is not enough money in the trust to pay benefits, the Pension Benefit Guaranty Corporation will pay for them.



To: B. A. Conservative

This article's spin and paternalism are annoying. So the poor, stupid worker who doesn't know that he's supposed to save and can't handle those confusing investments needs someone--the government, perhaps--to step in and take car of him. The real story is that the returns on a 401k blow away "returns" on our Social Security "investments" (Clinton-speak for "taxes"). Give me ownership of MY SS, put in my account, the supposed "lockbox," and I'll make out just fine, thank you. I'll take the freedom and accept the responsibility.



To: Looper

Hi Looper. No argument from me with devolving social security back to the individual, if it is done correctly: 1) the individual must control, 2) must be mandatory withholding that the individual self-directs, 3) investment options are pre-defined within certain catagories that can be "re-balanced" periodically, and 4)the account assets are owned by the individual and can be transferred upon death to beneficiaries. These would be the major provisions for a new social security program, IMHO. Now, so far as the private citizen being responsible for their future? They already are. Social Security is not much to live on in your retirement years and, as far as I kow, no one is forcing anyone to contribute to ANYTHING except the SSA.



To: Tauzero

Granted, not everyone has lost out with 401(k) plans. Employees with high incomes, financial know-how and an interest in investments stand to benefit from a system of self-managed retirement accounts. But few people fit that profile. I guess two years of flat market indexes has finally got people's attention... We managed to invest our way to $250,000 in 12 years despite not fitting that profile... Is anyone here familiar with the Steel industry bailout? The primary reason for that was to continue to be able to fund retired Steel-workers pensions...



To: Looper

"The real story is that the returns on a 401k blow away 'returns' on our Social Security 'investments' (Clinton-speak for "taxes")." In a few years the real story might be quite different.



To: Gig

"1) the individual must control, 2) must be mandatory withholding that the individual self-directs, 3) investment options are pre-defined within certain catagories that can be "re-balanced" periodically, and 4)the account assets are owned by the individual and can be transferred upon death to beneficiaries." Oh yeah, that sounds like a really attractive program. </sarcasm>



Comment #16 Removed by Moderator

To: Looper

Yes, we must protect people from their own weakness, because only WE represent the People's Will! It wasn't any fun with Robespierre, and it got less and less fun with each rerun.



To: B. A. Conservative

Granted, not everyone has lost out with 401(k) plans. Employees with high incomes, financial know-how and an interest in investments stand to benefit from a system of self-managed retirement accounts. But few people fit that profile. Hell, I'm a financial moron and I even *I* put a bunch of money away in my 401(k). Pensions won't work any more -- nobody stays employed at the same company these days....



To: CJ Wolf

A sucker born every minute. The 401(k) scam. Hey buddy, give me 15% of your paycheck. In 30 years I'll give you a million dollars. ok? Oh you want your money now? Well you will have to pay a penalty and outragous taxes. SCAM SCAM SCAM!!!! If you come to us in thirty years with your tin cup held out, plaintively begging for your rent, I will tell you very politely to go away.



To: Gig

We ought to have a system similar to what is in place in Chile. Agusto Pinochet had one of his advisors (one of Milton Friedman's students), set their retirement system up based on free market principles. The government mandates 10% of a persons gross wages be contributed to a retirement plan that has been approved by the government. The investor can move his/ her money around and has control of it. This investment isn't taxed. This system has been in place since the mid 70's, and has replaced their version of SSI. The result? The citizens of Chile have their own secure retirement system that isn't under government control.



Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.

FreeRepublic , LLC, PO BOX 9771, FRESNO, CA 93794

FreeRepublic.com is powered by software copyright 2000-2008 John Robinson