8 Responses to Why 401(k) Retirement Plans Really Don’t Work, and How to Fix Them

  1. eden says:

    I agree. The one change that the government could make is to require that the default set up is to have contributions deposited in one of those funds that automatically adjusts for your age.

  2. Scott says:

    I don’t know why people in Washington feel that every problem needs a government program to fix it. The government finds new and innovative ways to waste money and resources everyday. George Miller and Jim McDermott need to be ousted from office before they can do any more damage.

  3. Jim B says:

    The dirty little secret of the 401K is that it has been a huge wealth transfer scheme from investors to vendors. With rare exception the plans are run by employers who forget the millions in their company sponsored plan is actually deferred income of the employees, not corporate funds. President Obama and congress should simply create identical tax deduction limits for both IRAs and 401 type plans. This would allow participants to opt out of their lousy employer plan and let the market work to reduce expenses and create greater transparency. Of course pensions died when health care costs skyrocketed. No secret with that. Fix HC and it’s a different world.

  4. Jeff says:

    I love the idea of a 401k, but I don’t participate in it (I only do a Roth IRA) because the mutual fund company in my company’s plan has only high-fee funds that are 2%+ per year! It is insane to waste that much on fees, in my opinion.

    I would be much more satisfied with a 401k plan that worked like my IRA – so that I could pick better choices (i.e. low cost, no load index target date funds), yet still get my employer match. Now that would be great – although I still worry that a majority of people will remain poorly diversified.

  5. Michael Harr says:

    401k plans definitely need an overhaul. As an advisor (for 3 more days anyway), I’ve reviewed many plans with an annuity wrap fee that adds another 0.75% to 1.50% to the total cost of the plan. These are typically for small employers that would be better served with a SIMPLE IRA plan instead.

    I listened to this woman’s testimony and she clearly stated a return of inflation + 3% which is ridiculous. Just as pension plans have seen, assuming high rates of return ends in the death of the plan. In the same way, I would ask, where are the investments yielding a guaranteed inflation + 3%? They don’t exist.

    When the fund doesn’t return this amount, guess who makes up the difference? We do in the form of higher taxes which harms economic growth.

    Target date retirement funds are becoming more prevalent and offer a good alternative to the typical participant’s options. The top three investments in 401k plans are (1) cash, (2) company stock, and (3) bonds. This clearly illustrates that the average plan participant knows little about investing.

    I am leaving the financial advisory business to start a new website that we hope to release this summer. I hope that it will be the answer to the financial illiteracy problem we have and has been painfully illustrated with the housing crash, mortgage meltdown, and retirement savings collapse in the past year.

  6. I agree that many 401K plans have inferior funds, or the fees on the funds are excessive. Having low cost index funds available inside all 401K plan offerings would be a good first step to fixing them. That said, you can still boost your returns by making a few allocation adjustments each year to capitalize on the shifts in equity/bond trends.

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  8. Ali says:

    Three Points–
    1) Even being in a “target date fund” would not have protected the hypothetical 55 year old from a significant (ie 20-30%) drop in thier account balance during 2009. Thus, the impulse to sell at the bottom would probably not be alleviated in the unsophisticated investor.
    2) At the root of the problem is inadequate savings. Putting in 3 or 4% to get the employer match is not enough for the average person to maintain their standard of living through their retirement years (even ignoring inflation and assuming a 10% rate of return).
    3) To Jeff’s comment above about investing in a Roth IRA instead of his employer sponsered plan due to high plan expenses. Assuming that you are giving up an employer match, you are cutting off your nose to spite your face. Put enough into the plan to maximize the match, and complain to management/ HR about the high fees within the plan–your company can move its plan to a more cost effective platform.

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