The 401(k) was started in the early 70’s as a test, against the long-standing insurance industry’s pension funds management system. With pension plans getting harder and harder to pay out, employees were being advised that they would need to start funding their own retirement accounts — of course Wall Street wanted a piece of the action and thus the 401(k) was born. Allow me to make some observations based on my 45 years of retirement planning experience about how well that 401(k) test has done.
Observation #1: Human resources counted on to help employees with retirement planning using new programs but this never happened. In the 1970s as pensions became harder and harder to fund, employers were forced to cut costs and hoped HR people would council with employees about their retirement options. Unfortunately this guidance has never really happened.
Observation #2: Employees are only taking advantage of the employer’s match 24 percent of the time. Statistics show that $24 billion in matching funds for 401(k)s is going unclaimed every year. This is a huge amount of money that could help the average worker have a better retirement but the opportunities of the 401(k) program have obviously not caught on in the workplace as much as had been hoped with the program was put in place.
Observation #3: Only 10 percent of all employees have stayed on top of any portion of investment choices in the last eight years. During this time the run-up in the market should have given people a reason to re-balance their funds. When 2008 hit hard, uneducated employees chased the market all the way down selling at the bottom. Many got so discouraged as to never again be a part of a 401(k) plan again.
Observation #4: Mutual fund companies enjoyed large fees with no accountability. Plan administrators rebated costs back to fund managers in terms of “soft dollars” (or in other words, paying for travel and entertainment expenses supposedly related to placing investments). These were never reported to anyone for any reason. If a mutual fund employer can get travel expenses paid for travel needs of his staff members, they are delighted.
Observation #5: The value of the 401(k) approach is in question. Results speak volumes! Years later, few employees have adequate retirement accounts, and they are living longer that ever before. Our recent 2010 census report shows the average person reaching retirement age has less that $60,000 of total assets and this is after a lifetime of work and making an average of $52,000 a year. So $2 million goes through our hands and we have kept only $60,000 to use for the next 20+ years of retirement? To me this says the 401(k) experiment has failed.
Contrast all this to what workers experienced prior to 1970. No market risk ever, because insurance companies guaranteed all the funds. Of course this meant employees received a boring rate of return, but they also received a retirement income they could not outlive based on a formula, like the number of years worked and a percent of salary. The employee never had to study investment options and funds were guaranteed so the pension administrator didn’t need to be an investment professional.
Here are some balancing statistics to compare.
- The average worker pre-1970 did not have a college education. They worked for one company their entire working life, receiving a gold watch after 40 years of service. Those were the good old days.
- The average worker today will have six careers during their working life…six careers, not six employers. The number of people who employ them may be double that! As a result, the 401(k) experiment came along and each and every employee now had to become their own investment adviser (even though they didn’t know that’s what they would have to do).
- Workers have never have realized, even up to and including today, that they must be totally in charge of their retirement income. But as I have mentioned in previous posts, even though they are expected to handle all this playing of the stock market, they don’t actually get to do this. It is done by a fund manager, who will often mismanage funds and tack on hidden fees.
- The knowledge that they were supposed to be playing the market and managing their money all these years has come as a big shock to many Baby Boomers as they have begun to reach retirement age and as they realize they haven’t made much in the 401(k)/IRA game. The Census report for 2015 proves this point as an average 65-year-old has less than $60,000 of total assets to show after a lifetime of work.
In future posts I will discuss HOW to change this dreadful situation by learning alternative methods for building retirement.