Don’t Blame 401(k) Plans

There was an article in the Wall Street Journal a few days back and it’s about how Baby Boomers are starting to realize that 401(k) plans fall short.

Too much is blamed on 401(k) plans. At their very worst, they have high fees, poor education given to participants, and mediocre funds. Even at its worst, it is still an effective tax deferral savings program for retirement.

While I have been critical about high fees, poor participant education, and mediocre investments, I still think it is one of the greatest developments in tax law in the last 30 years.  Where else can an employee stock away $16,500 a year on a tax deferred basis (with an additional $5,500 for those 50 are over)? With the addition of the Roth feature, the employee has the option to defer on an after tax basis and have tax free distributions after age 59 ½.

We have a retirement crisis in this country, but is that really the fault of 401(k) plans? Social Security may go broke as soon as it’s my turn to collect, but is it really an effective retirement savings vehicle. Defined benefit plans have gone the way of bellbottoms, but is that the fault of 401(k) plans? Defined benefit plans have been killed by the Internal Revenue Code and over regulation that have either made it easier for plans to curtail them or more difficult to maintain. Either way, it wasn’t the fault of 401(k) plans.

As far as saving in 401(k) plans go, they are like studying for the bar exam. Having taken and passed three different state bar exams (NY, MA, and CA), I can tell you that I studied hard for weeks at a time. I didn’t pick up the book the day before the exam and expect to pass. Passing the exam takes weeks of consistent, daily studying. As far as saving in 401(k) plans, they need consistent savings. Saving in a 401(k) plan isn’t for those who just turned 50. Just saving when you are near retirement is the ultimate financial error.

 When I was 27, I was finally a participant in a 401(k) plan and I started to save as much as I could (those days there were deductibility limits that limited what I could defer pre-2002). My mother, not a financial wizard, didn’t understand why I was saving for retirement, that it was for when I was older. As ridiculous as my mother’s advice was, I am sure that too many Americans don’t understand that saving for retirement has to take place over a 30-40 year period.

We can talk about all the problems that 401(k) plans, but I have yet to find anyone who complains about them come up with a better alternative. A government sponsored plan isn’t the idea, look what they have done with Social Security. I think fee transparency and plan designs like automatic enrollment or perhaps mandated automatic eligibility for the salary deferral portion of a 401(k) plan can enhance the retirement savings of countless Americans.

At the end of the day, with all the problems that 401(k) may have, it’s up to the individual to save for retirement. Let us stop blaming plan providers or mutual fund companies, let us take some personal responsibility first.

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