Why It's Time to Retire the 401(k)

[tonysam]

This was in Time magazine a couple of weeks ago, but I haven't seen it posted here:



Retiree Robert Shively spends his days on the golf course. For many, that would be a dream come true, but not quite in the way Shively does it. The 68-year-old is the cart mechanic at the Niagara Falls Country Club.

Two and a half decades ago, his then employer, Occidental Petroleum Corp., cut its traditional defined pension plan in favor of a 401(k)-type system. So instead of getting a guaranteed pension check of $1,308 a month for his 36 years as a full-time, salaried employee, the former chemical-factory worker receives $225 a month from his 13 years as an hourly employee, plus $180.16 a month from a profit-sharing plan Oxy had for salaried employees until 1994. He also has $70,000 left of the money he saved from his tax-deferred 401(k). On the days he works, Shively rises at 5 a.m. to get to the golf course. He mostly enjoys the job. But on tournament mornings, he has to be at the course at 4 a.m. A few years ago the country club switched from gas to electric carts, some of which have four 84-lb. batteries each. Every year, Shively and another worker have to lift out all the batteries and store them for winter. "Your body aches all over," he says.


This isn't how retirement was supposed to be.

More


These plans were never designed to help workers save for retirement anyway; they were designed to save companies money on pension costs. It was a cost shift from employer to employee, but it was marketed as some "get rich" scheme.

I always loved that H.R. saying: "What starts with an 'f' and ends with a 'k" and means screw your employees?"

[MadHound]

1. We're quickly slipping back to the labor practices of the 18th and 19th centuries

Working people hard until they die, throwing them away when they can no longer work. Pretty soon I imagine that we'll start to see child labor making a comeback.

[tonysam]

2. IF you can find work at all, that is.

[MadHound]

5. Oh think of this as reducing labor costs

I've got a sneaking suspicion that these high jobless rates, which will probably continue to grow, are part and parcel of reducing labor costs in this country. Make people desperate enough for a job and they will take it, even if it only pays half of what they formerly made.

[Kansas Wyatt]

21. The Administration has already said this is going to be a jobless recovery.

Nobody has said a word about when the extended unemployment benefits run out.

The American Worker is being sacrificed.

[ejpoeta]

6. as bush would say.... it's uniquely american.... or he said something similar to the woman

at one of his 'town hall meetings' where a woman was working three jobs. what they don't realize is that people will be happy as long as they feel like they are wealthy and doing well themselves. but once most folks are living hand to mouth and struggling just to feed their kids, that's when revolutions and overthrowing happen.... think of the french revolution and the guillotine.

[haroldweeks]

92. And no job security or benefits

Jonbs do not last as long as they used to or provide benefits like paid insurance...

[lunatica]

3. He should be grateful he has a job

:sarcasm:

[marmar]

4. Never again for me with a 401k......Luckily I got my money out of that mess before the crash.

[tonysam]

7. I never trusted the things when I read about them years ago,

and how the whole purpose of them was to shift retirement costs from employer to employee; in short, they were scams to help a company's bottom line (pensions are VERY expensive). In every way they are inferior to defined benefit pensions, which guarantee a set amount of money each month for the rest of an employee's life. These defined contribution plan accounts last only as long as there is money in it.

In other words, the money is likely to run out LONG before you die. Only the very wealthiest workers ever would benefit from these scam plans.

Of course, Wall Street benefited from these scam plans.

Furthermore, they are mostly unregulated and uninsured, unlike defined benefit plans.

[dixiegrrrrl]

35. Me too.. AND I told my younger relatives the whole scam.

They refuse to contribute.
One day it will be mandatory to contribute, betcha.

[LondonReign2]

82. Utterly terrible advice

It's foolish to tell younger workers not to participate in their 401(k) plan...utterly foolish.

First of all, contributions are tax-favored. That is, you don't pay any taxes until you start to withdraw the money -- so your advice has just caused them to pay additional taxes.

Second, many many employees match a certain percentage of employee contributions -- so if they work for such an employer, your advice just cost them free money.

Third, fewer and fewer employers offer tradional pension Defined Benefit plans -- so most likely your advice means they aren't going to have their employer give them ANYTHING for retirement.

Fourth, even if they have an employer with a traditional DB plan, most don't vest until they've been with the employer for 5 years, and most don't start to build into sizable payout until 10-15 years with the employer -- so with your advice and the way workers move around, they are probably out of luck there.

Whether you like it or not, everyone is responsible for their own retirement, and telling people not to take advantage of a 401(k) as one piece of your strategy is just dumb.

[Statistical]

94. Also if nothing else he/she could open a 401K contribute the minimum to get max match...

Say 6% and company matches 3%. They are saving 9% a year and reducing taxes.

Then setup plan to put 100% of funds into govt Treasury bonds. I don't recommend this but if you are allergic to the market it is a way to save SOMETHING rather than end of up paying more taxes, saving less, and struggling on SS when you retire.

[backwoodsbob]

106. yep

my company looks over the financials every quarter and decide what the match for the next quarter will be...they ALWAYS match up to 12% of pay.This quarter we are ONLY getting 125% match.That's the lowest it's been in 5 years.They normally match AT LEAST 150%

[dmallind]

8. Twenty five years =70K? Didn't use the 401K much at all so it's hardly to blame

1984 DJIA was 1212 - less than ONE EIGHTH of what it is today. For about 15 years after that it was lower than the current level - so at the very least two thirds of his 401K would have grown had he equaled the DJIA in a broad portfolio, which is pretty low bar. Not only that but I can pretty much guarantee the company would have matched 50% of his contribution at least up to 6% of his pay, and maybe better. Even at the very worst of the recent slump this March I was UP considerably in my 401K donations compared to current value, which are well under 25 years old and many times greater than $70K. Even pretending there was NO match then putting in just a couple thousand a year for the first five of those 25 years and then stopping entirely (and stupidly) would have garnered him much more than $70K. If he had used it to the very very lowest no-brainer minimum of maxing out the likely matches at 6% of his salary it would have been many many times that level after 25 years. So why only $70K "left? What was it initially? What did he spend it on? Or did he just not use the 401K very much?

The things only work if you USE them guys......

[tonysam]

9. No, they don't.

Not for the vast majority of people. Time to get off the sales pitch.

[dmallind]

13. They don't what? Contribute enough?

Here is OP's current benefits link.

For over 35's they contribute 7% of base pay into a pension fund (4% under 35). They also match 100% 6% of your salary in a SEPARATE 401K.

So tell me why this guy only has $70K left after 25 years......

https://oxylink.oxy.com/Forms%20Publication%20%20Info/Online%20Publications/Benefit%20Plan%20Descriptions%20and%20Rates/Benefit%20Plans%20Brochure.pdf


Section Six - in full color.

[A HERETIC I AM]

42. Looks like a pretty decent package to me. n/t

[JBear]

111. Yes, they do...but there is a catch!

In order for them to work, YOU have to contribute to them. That is effectively a reduction in pay now, for a paycheck later. The DB plans were typically fully funded by the employer, not the employee.

That said, if you DON'T use them, you don't get any of the matching funds. That is simply leaving money on the table.

Until we have a serious change in worker's attitudes, this kind of thing will continue. I dare say that no company will start a new DB plan without serious pain from their labor pool.

:bounce:

[dysfunctional press]

12. do you have any idea what his pay was? or if he recieved regular raises...

that matched the increases in his cost of living? did he have any expensive situations throughout his life?

contributing 6% isn't always an option for A LOT of people.

[dmallind]

14. See my last reply -

If you can't find a way to get a guaranteed DOUBLING of your money, what right do you have to blame an investment option?

[tonysam]

15. You sound like a financial adviser

I hate to tell you, but the facts are the facts. Few people ever retire with enough money to live on if they depend on 401(k)s.

They are poor substitutes for Social Security and defined benefit plans. That's the bottom line.

[dmallind]

16. No - just a reasonably competent investor who's OK at math

401Ks of course are designed to supplement social security (which the quoted snippet at least does not include for some reason in his income) not to substitute for it.

They of course only work if you leverage the easy money in employee matching at the very least - this guy had a far more generous package than most and obviously either did not use it or spent the bulk of it already. Neither of which is the fault of the investment option.

[tonysam]

18. You missed the point. They aren't designed to "supplement" Social Security.

In fact, when Ronald Reagan and his ilk were touting them when these scams became more available to regular workers, they were hoping more and more people would take advantage of them so that people would rely on Social Security less, or hopefully, that "socialist" program could be gutted altogether. After all, Social Security was going broke, according to the propaganda the Cato Institute and other like-minded outfits were promoting back then in order to destroy the program.

What really happened was companies ditched their expensive defined benefit programs, which are FAR superior to these do-it-yourself plans, in favor of these cheapo defined contribution plans. Pretty soon workers had NO choice whatsoever in whether or not they could have a real pension.

[hfojvt]

67. defined benefit plans were unsustainable

They also had two problems. 1) either the company did not make contributions to back up their obligations, and thus found themselves unable to meet those obligations, or 2) they did make contributions and then were tempted to raid that huge pile of money (as anybody would be. As a much younger man, I did not want to make IRA contributions, until they changed the rules so I could use that money without penalty as a down payment for a home or in case of job loss.

This worker was apparently just like an irresponsible company - he never thought about or planned for retirement, hence he has very little to show for 25 years of contributions.

[tonysam]

76. More apologetics for the scams, I see

You know you and other people who are posting here haven't a clue about pensions, which are part of the social contract, and these stupid scams which are not, and you will find when you retire--IF you can retire--what you have in a 401(k) will never last you until you die.

You think if you have 150K or 200K in one of these scam accounts when you retire it will last you till you die? Don't be dumb. Typically the money will run out in 8 or 10 years. All you will have left is social security. Ten cents says I will be better off than you in the long run, for I will have not just Social Security but Nevada PERS, which will be about $500 a month or so when I retire, but it will be there and last me until I kick off. I was shitcanned illegally, so five years is what I have and only about a fourth of what I would have had if I didn't get sacked, but it's way better than people who have scam accounts.

If you hate traditional pensions, I take it you despise Social Security, which is a defined benefit plan.

[MajorChode]

83. You have demonstrated you have very little basic knowledge of the subject

Social Security has a defined benefit, but it's not a "defined benefit plan" in the way that pensions are. A pension puts aside money in a trust which is used exclusively to pay benefits. Even though Raygun bastardized SS back in the 80's and made a so-called SS trust fund, SS is still a pay-as-you-go plan. You claim to be an expert on the subject, but your poor understanding of that concept leads me to believe otherwise.

If you have $150-200K and your money runs out in 8-10 years, then you didn't manage it very well. If you don't have any confidence in your ability to manage those types of investments, you can buy a fixed annuity that pays about $1,200 per month for the rest of your life or somewhat less if you want survivors benefits. That's effectively exactly what a company is doing for you anyway. Again if you don't understand that basic concept, it doesn't inspire much confidence in your claim of expertise.

[hfojvt]

101. I was gonna say that social security also pays less than a 401K

I did a spreadsheet on my (and my employer's) tax payments, projected them ahead until I was 60 and added a fairly modest 5% interest rate. As a worker making 20K, social security benefits were less than 5% of what I pay in, and unlike a 401K, I never get those payments back. The $180,000 nest egg that I paid/will pay to the government is theirs to keep, especially if I, as an unmarried guy, dies before they have to pay very much in benefits.

As for the $150K in my retirement accounts, why should that be combusted if I am also getting $825 a month from Social Security which I am projected to get if I work until age 67 at my current $11,202 salary. (although I still think it is better to cash out at age 62 living on a mere $569 a month might be a little bit tighter.

[MajorChode]

105. It's like comparing watermelons to grapes, though

SS is pay-as-you-go. It's not a retirement plan. People confuse it with a retirement plan because they pay into it and they think they have a guaranteed benefit, but the reality is they are guaranteed nothing and their payments go to fund those who are getting SS disbursements right now. Your SS is only guaranteed so long as there are working people around when you retire to pay your SS benefits and congress doesn't change the law between now and then. SS is closer to a Ponzi scheme than a retirement plan.

[backwoodsbob]

107. $150k?

I've been with my company for 6 years and with the matches they make I already have over 70K..I am in a *safe* category(no stocks) that pretty much gives me a 3.5%solid every year.My company on average matches 150% up to 12%(they adjust match every quarter..LOWEST I've ever gotten is 125% match)

I'll retire with over a million easy

[MajorChode]

80. It wasn't just irresponsible companies either

Even some unions encouraged companies to underfund retirement trusts for short term increases in pay.

[dmallind]

73. Ermm... no

Maybe in Reagan's pipedreams he might have wanted to kill SSI but everyone sane knows that's a nonstarter politically. To rely on SSI less IS to supplement SSI, as it means retirees have an additional source of income not just one.

Sure generous retirement plans that cover all retirement expenses for life would be better for retirees, but companies that offer these are at a massive disadvantage in the marketplace against countries with state taxpayer supported pensions instead, and they routinely find themselves unable to support them. The only way to make sure they can afford them and still stay in business would be to pay workers less or charge customers more - none of which is preferable in the long run, which is why you see private companies only able to sustain pension plans in overpriced monopolies or oligopolies like oil or pharmaceuticals. No other industry can afford it and remain competitive.

[Rabrrrrrr]

115. OMG, you actually think 401ks are a scam?!

:rofl:

Seriously, though, :rofl:

Are you even from this planet?

It's so cute when people who have no financial background or understanding talk about matters economic.

:rofl:

[dysfunctional press]

27. you still haven't answered the question(s)-

do you know how much money he made, or how much he could actually contribute on a weekly basis?
how well did his pay keep up with the cost of living over the years...? :shrug:

"DOUBLING" your money doesn't mean very much when you don't have any money to double.

[dysfunctional press]

10. "...they were designed to save companies money on pension costs."

they were also designed to give a new source of revenue other people's money for wall street to play with.

[PassingFair]

37. This is the truth of the matter.

The only reason we haven't hit ROCK BOTTOM
on Wall Street is because ordinary Americans
have money STUCK there.

This money provides a cushion which the
"investor class" bounces off while they
skim the cream off of the top.

It also provided the the reasoning behind
the TARP bail-outs....couldn't have all
those "retirement accounts" and life savings
wiped out.

:puke:

[tonysam]

11. I like this part of the article:

But all the people who shared their financials with us would have been better off in a pension. And nearly all of them, save possibly Maul, do not have the resources they need to live another 20 years in financial comfort. "It's the biggest scam ever put over on the American people," says Dennis O'Neil, a former human-resources executive who worked for Occidental for 29 years.

The idea that we could ever save enough to pay for 30 years of leisure is a relatively recent invention. An entire profession, financial planning, is dedicated to telling people they can, and must, pay for their own retirement. A 401(k) is usually a central part of those plans. Even for people who don't have enough money to send their kids to college or buy a home, building their 401(k), they are told, is their first priority. It's not terrible advice. The accounts grow tax-free, though you have to pay Uncle Sam's levy when you cash out. Unlike health coverage, you don't lose your 401(k) when you lose your job. And once you set the account up — a minor task at most companies — it's automatic, making it an easy, thought-free way to save. Indeed, Americans have more saved specifically for retirement than ever before. But the past year has shown that even with our added savings, we are at much greater risk today of our bank accounts running empty than when employer-guaranteed pensions were the norm. By Munnell's calculations, 44% of all Americans are in danger of going broke in their postwork years.

_____

You better believe it is the biggest scam ever put over on the American people. It was another way for corporations to undercut the social contract with workers.

[SammyWinstonJack]

17. +1 nt

[Statistical]

19. My major beef w/ 401K was the reduction in employer cost.

A defined benefits pension cost an employer about 15% of wages per year over 30 years. So when it was replaced with 401K an equitable switch would be something like a 1:1 match on up to 15% of income. However it wasn't equitable. Most 401K plans match 50% on up to 6%-10% so the companies contribution is 3%-5%.

Someone making $50K a year and contributing 10% w/ employer match of another 10% over 30 years w/ 10% average gain could save 1.7 million dollars towards retirement.

A 1.7 million joint annuity (payments continue until both parties die) with 100% return of principle (if you die before $1.7 mil on payments balance goes to beneficiary) is $8,579 per month.
Now we have to consider inflation. At 3.0% inflation over next 30 years $8,579 is equal to $3,545 in todays dollars. Adding in social security and considering home should be paid off, kids grown up and living on their own, and maybe moving into a smaller residence $3,545 a month is more than enough to support the same lifestyle.

The major problem with 401K is it allowed companies to replace a 15% cost with a 3% one. Generally speaking one must save 15% of their income each year to save enough for retirement. With employer only pitching in 3% that leaves a 12% burden on the employee.

[tonysam]

20. Yep, you nailed it. They're scams for just that reason.

No company puts in this sort of program and ditch or not offer a true pension because they want their workers to get rich.

HSAs were designed for the same type of thing (if not actually implemented for that reason). Cost shifting plans from employer to employee. So were plans, never implemented, to put worker retraining accounts, which, of course, were designed to gut unemployment insurance.

Same mentality. You are on your own.

[CrispyQ]

23. The YOYOs vs the WITTs.

You're On Your Own vs We're In This Together. Jared Bernstein has a book where he discusses this. The YOYOs think everyone should provide thier own safety net. The WITTs think society should provide a shared safety net.

The YOYO greed & lack of humanity is astounding.

[MajorChode]

46. I don't know where you're getting your figures

Employers may have reduced their contributions to 401(k) type plans over the years, but how can you say they wouldn't have also done so under traditional retirement plans? 15% sounds astronomically too high. Back when traditional pensions were in full swing, even blue chip companies were only giving about 1% of retirement benefits for each year worked. So even if an employee had 30 years with the company, they only got about 30% of their wages in retirement. If the company had been stockpiling 15% on behalf of the employee, it's hard to imagine how they would live long enough to just get the principle back, must less any interest.

The biggest benefit to employers was a fixed and predictable cost with 401(k) plans and no uncertain future liability. They also moved to them because employee preference.

[Statistical]

65. You are comparing apples to thumbtacks.

A pension plan needs to accumulate enough funds to cover an annuity cost for the retired pensioners.

This COSTS the employer about 15% of wages. It doens't mean they give the employee 15% of wages or they promise the employee 15% of their wages at retirement for each year they work.
It means it COSTS the employer 15% of wages. Take a $50K employee. Say the employer had a plan that after 25 years they would provide a pension equal to 50% of their pay = $25K.
Now say pension retires at 60 and lives to be 120. That is 60 * $25K = $1.5 mil. That pensioner is going to cost them $500K to $1.5 mil depending on how long he lives.

So financial firms that run pensions will tell an employer you need to put aside x% of the employers wage EACH YEAR AND EVERY YEAR until he retires to build up enough assets to pay that $1.5 mil in costs over his lifetime.
That x% is about 15%.


So employers replaced a program which cost them about 15% of gross wages with one that costs them 3%. Hell they could have at least FUCKING split the different with us and gave a 10% match.

A 10% match would have saved employers BILLIONS. Plus they have no unknown liability. There liability is limited to the match period. Accountants don't like long term unknown liabilties (like medical breakthrough making pensioners live longer).

Instead they replaced a 15% cost, plus all the risk, plus all the unknown future liabilities with a 3% fixed cost? Sound equitable. Congress should have stopped that. Employers replacing their pension plant at 15% cost should have been required to replace it with a 10% match.

[MajorChode]

70. Your numbers are way off

They are also unrealistic and way too simplistic. I don't know of any company that still has a traditional pension that pays 50% for 25 years of service. That's a 2% multiplier and it just doesn't happen outside of public sector employees. Next, you're assuming an annuity that accumulates zero interest over as many as 60 years. You don't need $1.5 mil to produce $25K over 60 years unless you figure zero interest and 100% of the original amount left over after the person is dead. No actuary on earth could stay in business building that type of pension plan.

The figure is NOT 15%. It's not even in the right ballpark. See post #69 if you want some numbers that are in the right ballpark.

[Statistical]

72. See #71

See #71

[CrispyQ]

22. A few years ago one had to enroll in the 401k plan.

Now many companies automatically sign you up unless you opt out. My husband & I were both surprised to discover this at our last jobs. Yeah, we both had plenty of time to opt out, but the idea that you would be automatically enrolled doesn't sit with me.

Blood sucking vampires are running our country. These people don't even qualify as human.

[HughBeaumont]

24. The Great Risk Shift. Read it. Get Angry.

http://www.amazon.com/Great-Risk-Shift-Economic-Insecurity/dp/0195335341/ref=sr_1_1?ie=UTF8&s=books&qid=1256488156&sr=8-1

401k's, you'll find, weren't the ONLY risk the elite socialized to the working people while privatizing the wealth for themselves.

[tonysam]

25. I'll have to take a look at that

The Reagan administration peddled the 401(k)s during the time when Friedmanism was in full bloom. Remember, people in this administration were in love with the Chilean model of "retirement," which of course turned out to be an unmitigated disaster.

The Chilean model of retirement was tried in Britain, except I believe people there had a choice to pick their social insurance system or a 401(k)-type thing. Most kept the former.

[pansypoo53219]

26. 401k's are a rip off.

and force people to INVEST on the great gambling of investment. it was a pay off to WALL STREET. i am investing in ebayables.

[tonysam]

28. Kick for this important article n/t

[LondonReign2]

84. Incorrect

401(k) plans have money market or stable value plans where you can stick your money. In fact, those accounts used to be the default until target date funds came about.

You are NOT forced to invest in anything else, and can have your money sit in cash equivalents where inflation will slowly chew up all your buying power if you so wish.

[backwoodsbob]

108. 100% correct

I'm in a stable fund.It gives pretty much 3.5% year after year.Some years I beat inflation and some I don't but with my 150% average match to 12% of pay I win in the long run

[tonysam]

29. About six months ago, 60 Minutes had a piece about the

401(k) fallout.

The 401(k) Fallout

[tonysam]

36. The victims--that's what they are--profiled in the piece

(outside of one person) at least are worried they will never retire. I am on the other end; I have been involuntarily retired and probably can never find work again. I have tried to apply for everything, and it's hopeless, completely and totally hopeless.

[latebloomer]

30. And even employer matching is going out the window

Of the 3 last jobs my husband held, one had no 401K, one had a 401K but no matching, and now his current company is doing away with matching.

[tonysam]

31. One might as well keep his or her money--if he or she has it--under a matress

It's probably more secure there than these junk "pensions."

[LondonReign2]

96. Wrong yet again

If you are financially illiterate your should refrain from giving advice.

Employer contributions to 401(k)'s (i.e., the money YOU put in), are more secure than a pension plan. It is always 100% vested and portable between employers, or into an IRA. Not so with a DB plan, where a company might go out of business before paying and which might not be covered under the PBGC (in which case it likely won't pay as much as originally anticipated), and which don't vest for 5 years and are not portable.

[laughingliberal]

93. I was with several companies which had NO matching of any contributions to our 401k nt

[Greyhound]

32. Converting the 401(k) was nothing but a scheme to steal American pensions and retirement

from the people that earned it.

Perhaps this will be known as the "Great American Swindle" in the future. They stole the labor of nearly a century and used it to destroy our nation and dominate the globe.

And SS is still on the block.

[tonysam]

33. +1

[Odin2005]

34. The 401K is a scam designed to channel money into the Wall Street Casino.

They wanted to privatize Social Security for the same reason, to keep the party going.

Once all the retirement money dries up the Dow will settle somewhere around 4000, where it should be now if increases were just the result of economic growth and inflation.

[SoCalDem]

38. It was a clever way to funnel wads of untouchable (by the employees) cash

into Wall Street, so they had gambling money..

A steady stream of cash, every week...for decades.. and all they had to do was send a piece of paper to the "marks" 4 times a year, along with fancy charts & graphs that showed hw "rich" they were becoming..:puke:

The best retirement is a fixed benefit...even if it is not a large amount. There is something comforting to KNOW that someday you will have $x every month coming in. (of course some companies screwed their employees on pension plans, but most did not).

[Statistical]

39. 401K are required by law to offer both Treasury fund and corporate bond fund.

You are not required to put a single cent of your 401K contributions into equities (stocks).

[MajorChode]

40. 401(k) are a win-win for employers and employees

Prior to 401(k) plans, where did companies invest pension funds? For the most part, they invested them wherever they wanted. And if the company went bankrupt, guess what happened to your pension? You wind up with a government insured version which may be a small fraction of what your retirement would have been. So any "guaranteed" pension isn't much of a guarantee either. Employers win because they don't have this huge employee pension "guarantee" hanging over their head if investments go soft. Such has drug many a company under leaving employees with little or nothing anyway.

The employee also wins because prior to 401(k) plans, an employee was virtually tied to a company until they retired. If they quit prior to retirement, they were lucky to receive a severance package worth a fraction of their pension value or a future pension check at a greatly increased age and a greatly reduced amount. With a 401(k) they can take their retirement plan with them and lose nothing.

Most 401(k) plans have less or no risk options. They instead opted for higher risk investments and it was a gamble that some lost. While that might be a tragedy, it doesn't mean the alternative was much better. There's lots of people who lost under those too.

[tonysam]

41. Oh, please

They are the biggest crock of shit--EVER--perpetrated on American workers.

[MajorChode]

43. Nice retort

I just gave a detailed explanation of why they are a good deal and they best you can do is offer a completely unsupported opinion that you think they are a "crock of shit."

Your opinion is noted and given all the credit it deserves.

[tonysam]

45. They're NOT a good deal

Have you even done any research at all about this issue, and why there is such an uproar?

They are WORTHLESS--repeat WORTHLESS. A defined benefit plan is federally insured, and it is regulated. You try and convince me of the hogwash a scam like a 401(k) is better than something that is guaranteed and will last you for the rest of your life.

You can't, that's why. You sound like a financial adviser.

[A HERETIC I AM]

48. Can you provide a source for that claim?

A defined benefit plan is federally insured, and it is regulated.

Where do you get the idea that all defined benefit plans are "insured" and "regulated" ?

I would be very interested in reading the source for this particular claim.

[MajorChode]

51. Some are, some aren't

Some companies and some employees are exempt, and before 401(k) plans, a lot of employees had no retirement plan whatsoever. So it was great(well at least good) if you worked on the assembly line, but not so great if you worked for a small business. Now virtually any sized business can offer a 401(k).

[A HERETIC I AM]

55. Actually, the smaller the business, the less likely they will offer a 401(K)...

but there are other lower cost alternatives for companies of say - 100 employees or fewer.

SIMPLE IRA's for example.

[MajorChode]

58. I'm not saying they are more likely to offer a 401(k) period

I'm saying they are more likely to do so vs a traditional pension. And it's debatable whether a SIMPLE IRA is a "lower cost" option. The administration costs may be lower, but the employer must contribute to the plan unless they opt for matching contributions and the employee contributes nothing. With a 401(k) they are under no obligation to contribute, so there is only administrative costs.

[tonysam]

52. They are.

Here you go:

Pension Benefit Guaranty Corporation

It was created as part of the ERISA legislation, which in turn came into being after scandals involving people losing any chance of getting the retirement they were promised were brought to light; i.e., Studebaker.

Naturally they have been burdened over the years with companies going belly-up, etc. Premiums went up, and companies found a way to get around ERISA and pushed those shitty 401(k)s in lieu of real pensions.

[A HERETIC I AM]

57. Not all.

My question to you was;

Where do you get the idea that all defined benefit plans are "insured" and "regulated" ?

You're response that "They are" insinuates that every single defined pension plan is insured

That is not that case as revealed on the same website you linked;

http://www.pbgc.gov/about/insurepension.html

I will concede your larger point, however.

The PBGC had slipped my mind.

[tonysam]

59. It isn't a true pension unless it is federally insured

The difference between a true pension and a 401(k) is a traditional pension is federally insured; 401(k)s are not.

I have studied this matter for years--defined contribution plans are JUNK.

Don't hand me any garbage a true pension which GUARANTEES (which means it has to be insured if in the event a company goes belly-up) a monthly amount of money for the rest of your life is not better than a plan where the cost shift is on YOU and lasts only as long as the money is in the account.

[A HERETIC I AM]

61. I'm not handing you any garbage whatsoever. I merely asked you a question.(edited)

Relax there, Miss.

BTW, I think you typed too fast and didn't mean to say what you said;

"Don't hand me any garbage a true pension which GUARANTEES a monthly amount of money for the rest of your life is better than a plan where the cost shift is on YOU and lasts only as long as the money is in the account."

Are you missing a period in that sentence?

**On edit here to note the edit you made to the above sentence** to wit;

Don't hand me any garbage a true pension which GUARANTEES (which means it has to be insured if in the event a company goes belly-up) a monthly amount of money for the rest of your life is not better than a plan where the cost shift is on YOU and lasts only as long as the money is in the account.

Fair enough.

It seems to me that the real reason Defined Benefit plans have fallen out of favor with companies over the years is because Americans are living much longer than they were when those plans were the norm.

It was mentioned upthread a "30 year retirement". The fact is, the cost of providing a near full salary level (or even 60%) monthly stipend for 3 decades after an employee leaves a firm is enormous and damned few companies can afford such things. Trying to fund a lifetime annuity for the number of people in question with the funds available to do so is extremely difficult to do.

The time period when it was possible and economically feasible for a typical company to provide for such plans was, in light of the history of industrialized society, a relatively short window. The days when a person could hire on at a company at 20 years old, work until they were 65 and collect a pension until they died are long gone primarily because the life expectancy of the above hypothetical individual was less than 80 years of age when those plans were commonplace.


What's killed the defined benefit plan is people living into their 90's.

The American electorate repeatedly, and will likely continue to, vote against the level of taxation necessary to ensure pensions on the level of the EU(for example). Americans, for better or worse, just can't stomach the idea of giving away fifty or more cents of every dollar of earned wages for social services the English, French Scandinavians and the rest of Europe enjoy.

Please don't think for a second I don't understand the sentiment of your OP and the other comments you've made on this thread. But unfortunately, the tree you are barking up has Americans sitting on every branch and limb, and they are barking back down at you, telling you they want every single dime of pay taken home with them, damned be the consequences.

[LondonReign2]

90. That is correct HERETIC

Part of the reason for the traditional DB plan going away is the cost tied to workers living longer post-retirement. (I work with a LOT of actuaries, so I know of what I speak). Pensions now cover works more than twice as long post-retirement as they did when they were being widely instituted.

[MajorChode]

68. Only if you want to make up your own definitions

Trade unions have been offering pensions decades before anyone ever thought about the PBGC and still do.

And no the scenario you're referring to is not better for all people regardless of what you think. The scenario you mentioned is really only good if the company you work for decides to keep you around until you are eligible to retire. Companies have all sorts of reasons to get rid of older employees, and one of which is high PBGC premiums. Newer employees are less of a retirement liability so the premiums go down. If you don't have a contract, out the door you go and there's almost nothing you can do about it. That "guarantee" you thought you had doesn't do you much good if you don't make it to retirement. And guess what happens if you die right before you retire? Your survivors are at the mercy of whatever benefit your company decides to give them. And what happens if your retirement fund is underfunded (as many, if not most, are), and your company goes bankrupt? Well, provided you have already retired, or you're eligible to retire, you are going to get a check, but it's not going to be anywhere near what you thought your "guarantee" was. So good luck because that's all you get and there is no COLA so it never goes up, and you can just about forget about benefits.

Now with a 401(k), I know where the money is. I know if I have it invested in risk free or risky investments. I know if it has enough to support whatever my retirement goals are. I know where it's going to be if I die. I know where it's going to be if my company goes tits up. I know where it's going to be if they decide I'm just costing them more than I'm worth. I know where it's going to be if I decide I don't want to work for them any more. That's a helluva lot better "guarantee" as far as I'm concerned. YMMV.

[MajorChode]

49. There's an uproar because people made bad gambles and lost

Where does the fault in that lay?

Try looking up the rules on those "federally insured" pensions some time and then tell me again how much research I need to do. Ask anyone who actually gets a retirement from the PBGC how great that "guarantee" is. If you want a guarantee, invest your 401(k) in government securities. It's a better deal and even more secure than a PBGC guarantee.

Cheers!

[LondonReign2]

88. You are arguing a useless point

Traditional DB plans are dying out rapidly, so you can "wish" for them to come back all you want but it isn't going to happen. So for people still in the workforce it is time to come to grips with that and use DC plans to their advantage -- claiming they are WORTHLESS is simply stupidheaded.

DB plans *are* very nice -- if you plan to stay with one employer for a mimimum of 10+ years. But DC plans are far from useless -- tax advantaged, portable, and frequently with employers contributions either as matching contributions or profit sharing contributions.

SS is designed to replace one-quarter to one-third of your income. DC plans, while far from perfect, are an important tool to fill in the rest of that gap.

[tammywammy]

44. And haven't we been seeing what happens when the govt takes over your pension

You'll get, what about half of what you were originally promised?

[MajorChode]

50. If that

[ldf]

47. an employee was virtually tied to a company until they retired

well, we sure don't have to worry about THAT horror, now, do we?

:sarcasm:

[MajorChode]

53. Not if you have a 401(k)

You're free to market yourself to whomever will pay you the most and/or offer the most benefits without fear of significantly losing your retirement. Without one your employer can use you up until you near retirement and then drop you like a bad habit for virtually no reason at all. Lots of companies do.

[Statistical]

62. They would be better is companies contributed a fair amount to them.

Defined benefit plans cost companies about 15% of a workers wages. So why was defined benefits replaced with 401K which cost companies a 3%-5% match?

If companies offers 401K with 1:1 match up to 10% or 15% cap then I would agree with you. I live that I can take a 401K after 4-6 years. I never will work for one employer long enough for a traditional employer. I also like that the assets are in my name. I can also CHOSE to put money in bonds or T-bonds is I want to.

What burns me is the fact that employers contribute virtually nothing in return for removing all the risk and cost from their balance sheet. Congress should have made sure that 401K that replaced defined benefit plans provided an EQUAL BENEFIT.

[tonysam]

64. 401(k)s were NOT designed, repeat NOT designed

to be your pension; they were supplements to pensions. You will NEVER do well enough in a 401(k) plan that you would get in a plan that is guaranteed to pay you as LONG AS YOU LIVE. Unless, of course, you are very highly paid.

The two aren't equal because the defined contribution plans weren't designed to be pensions.

[Statistical]

66. I already showed you it is more than possible.

$50K employee. Saves 10% (most intelligent nations have a savings rate >10%).
Employer matches it with another 10%.

Over 30 years invested with 10% average gain that is $1.7 million. A $1.7 million annuity will give you a 100% guaranteed for life income of $120K a year. Now that number is greater that real buying power due to inflation. $120K in 30 years is equal to $35K a year in today's dollars. ($120K in 30 years will have same buying power as $35K today based on 3% inflation). Add in Social Security of another $10K a year and the reitree has a guaranteed income equal to 80% of his/her working wage. With paid off house, grown kids, debt paid down that should be more than sufficient to live out rest of their lives with dignity.

Now in reality it gets more complicated than that. The employee will have wage increases, and inflation will reduce future earnings, also some years will be more 10% and some less than 10%. The employee should also take more risk initially and go to safer investments as he/she gets older. Still it can be done.

It take in the ballpark of 15% of your income at a minimum (20% gives you more of a cushion).

Think about this. HOW DO YOU THINK PENSION PLANS RAISE THE FUNDS TO PAY YOU YOUR "GUARANTEED INCOME FOR LIFE"?
They do it by putting aside about 15% of your gross wages and investing them while you are working for 30 years. There is no magic involved. You can do the exact same thing with a 401K.

The major difference is that employers replaced a 15% cost with a 3% one. Thus shifting 12% of retirement cost to employees.

401K reform should:
a) require 1:1 matches
b) require matches up to 10% of income
c) require yearly risk, goals, investment training (at employer cost)

Third parties could run projections based on emplyees contribution rate, retirement goals, current investment choices, and number of years till retirement (once again at employer's cost) to show them if they are on track, and if behind how much they should increase contributions to get on track.

[MajorChode]

69. I'd still like to know who sets aside 15% for a pension plan

Actuary formulas for pensions are pretty complicated and I don't think there's a set percentage set aside for each employee for every year they are employed, even if the employer has a fully funded plan. There are a lot of variables involved. If I were just to guess, I'd say you need about a 5% contribution per year for every 1% multiplier on a traditional pension and maybe less. Even big companies that still offer traditional pensions only give about a 1% multiplier.

An employee that retired at $50K after 30 years would get a $15,000 fixed yearly annuity (1% multiplier). You would only need about $180K(or less) to fund that annuity. Assuming they started out at about $20K and worked their way up to $50K, you could get that easily with setting aside less than 5% per year (using your 10% average interest assumption). 15% would give you probably more than a 3% multiplier and would work out to be 90% over 30 years. I don't know of any companies paying a 90% pension for 30 years. Perhaps there are some.

[Statistical]

71. 5% contribution hardly?

Most pensions were 2% per year initially (50% of pay after 25 years). Military and some civil service still offer this. Just because they got crappier over time doesn't mean we should lower the standard. 50% replacement income + SS provides dignity in retirement. It is my goal to get enough funds to have 50% replacement income + SS when I retire.


IF you forget inflation that makes the numbers easier to hit. Virtually all pensions and indexed to inflation. If they aren't they would be next to useless.
If today 2010 someone started working at $50K and worked 30 years and got a $15K pension that would have the same buying power as a mere $6,000 today (assuming 3% inflation). Try living a $50K lifestyle on $6K.
Lastly your annuity numbers ($180K for $15K annually for life) are low. More like $210K (more if you wanted to provide a spouse benefit).

Quick calculator here: http://www.totalreturnannuities.com/information/rates.html

I haven't seen an annuity by a respectable company with a multiplier of less than 14 ($10K income requires $140K lump sum).


So if we use some more realistic numbers like:
1.5% of wages at retirement per year (45% after 30 years)
3% inflation =2.42x multiplier over 30 years
Assume employee starts at 32 and retires at 62
Wage growth equal to inflation ($117K income by 2040).
8% gain (pensions have more restrictions on investments then 401K or stock market in general)
Annuity multiplier of 15x

To get a $25K annuity (in 2010 buying power) would require $60K in income at retirement (in 2040 dollars).
That requires an annuity of 900K

5% of gross income provides only half of that.
It would require 10% of income put aside at those conditions to equal a 45% pension.
Even a 30% pension would require 7.5%.

If you think defined benefit pensions cost employers only 5% of gross wages well you are living in a dream world. Defined Benefit Pensions were insanely expensive (10% of gross wages is a good starting point although it does vary by company). If pensions only cost a mere 5% then there never would have been the push to 401K.

Now I think defined benefit programs were/are unsustainable:
a) unlimited future liability
b) loss of pension if/when company goes away
c) modern workforce almost nobody works 30 years for same company

However it was a SCAM to replace a 10% cost by the company (and company assumes all future risk) with a 3%-5% cost (and employee assumes all future risk).

ON EDIT: Edited numbers initially I forgot to index wages to inflation and that results in higher 15% number. However 5% is simply impossible even under the most optimistic scenario.

[MajorChode]

74. Sorry, I can't agree with much of what you wrote

You can't compare government pensions with private sector pensions. As you so eloquently put it, it's like comparing apples to thumbtacks. Government employees traditionally had the best pensions because their pay was typically lower than private sector employees. They used the promise of early retirement and more generous pensions to lure and retain employees.

I don't know of any major company that offered a pension with an automatic cola. For all the blue chip companies that I'm familiar with, they offered fixed pensions and any raises to retirees were negotiated by the union and management. So maybe they got a small raise every 5 years or so and maybe they didn't. If they did get a small raise, it was no where near what the actual cost of living was. Unions primary represent the interests of workers, not retirees. And that's just for companies that had unions. If you didn't have a union, you probably were on a fixed income for the rest of your life. That's why you hear about so many old people who are struggling on a fixed income. I have spent many years as a union steward and many years as management. I'm quite familiar with these types of agreements. I know a lot of retirees on defined benefit retirements, and with the exception of those on a government pension, they all work pretty much the same. And yes a lot of their pensions are next to useless many years down the road. Welcome to reality.

As far as government pensions go, let's consider that scenario. Most local and state governments followed the federal government's lead, so let's look at the defined benefit pension that the federal government offered. This pension offered a 2% multiplier, retirement at 55, a cola, and health benefits. In short, it offered things most private sector employees can only dream about. As it turns out, the government did actually have a fixed percentage that went to their pension trust fund for every year they worked. That amount was 7%. Those funds were set aside in a trust that was invested solely in government securities. So here you have a defined benefit plan that is head and shoulders above the vast majority of private sector retirements, invested in lower yielding government securities, and it costs 7%. So you expect me to believe that private sector defined benefit retirements that had a far lower multiplier, much higher normal retirement age, no automatic colas, invested in higher yielding investments, AND it cost more than twice as much? I can't buy that. I can much more easily believe they cost half as much.

Here's also why your assumptions defy all reason. Any union contract negotiator worth his salt (and I have never met one that wasn't), knows exactly what the company pays for salary and benefits. So you expect me to believe that one day the company went in to the bargaining table and said, "our defined benefit pension which costs us "15%" of payroll, is now going to be converted to a defined contribution plan that only costs us 3%-5%," and we never so much as heard a peep out of the unions? I can't buy that.

[Statistical]

87. No way it costs 7%.

It is easy to run a spreadsheet.

Take a hypothetical person age 32 working till 62. Take 7% of his pay. Now index his wage by inflation and contribute 7% each year. Now assume 8% hypothetical return with no losses any year. You get nowhere close to the amount of money needed for a 50% anuity.

7%contribution/30years/8%gain/3%inflation only gets you about 25% of pay. Prove me wrong. You can setup a ballpark estimate in about 10 minutes in excel. It isn't happening. If you are saving 3%-5% of your pay and think you will retire on it then you will be in for a rude awakening. It isn't rocket science or magic. If you can't do it in a spreadsheet they can't pull it out of thin air.

I agree govt pensions are better than private sector that is why my 15% was likely high. 15%over 25 years is good for 50% retirement pay for life. 10% over 30 years is good for around 30% retirment pay for life. The idea that you can do it with half that is a joke. Not unless your yearly gains are 15%-20%. No pension plan can legally be taking the kind of risk necessary to pull 20% a year.


The unions DID "peep" that is why Union jobs kept Pensions the longest but eventually as the squeeze was put on it was no pay raise, higher health premiums or accept 401K. Many still have them they just accepted a "deal they couldn't refuse" by limiting pensions to current members and new members get 401K

[MajorChode]

104. Way

Consider a hypothetical worker with a starting pay of $25K who gets an average of a 3% raise every year. At the end of 30 years he makes $58.9K per year. Using your numbers, a 7%contribution/30years/8%gain adds up to $288.6K. Now go the other way. Subtract 50% of $58.9K per year and add back 8% interest, the money doesn't run out for 17 years. Actuaries know that a person who retires at 62 only has 10 more years of life expectancy. That's 7 more years than it needs.
http://faculty.kfupm.edu.sa/coe/gutub/english_misc/retire1.htm

Defined benefit retirement plans aren't built for each individual employee. They are built collectively. They have a collective fund which pays benefits. You're trying to reduce actuary science to 10 minutes on an excel spreadsheet and it just ain't that simple. If it were, companies wouldn't pay big bucks to hire highly educated actuaries to build and maintain their pension trust funds.

You're also too hung up on using your annuity cost web site, but large companies don't buy annuities on behalf of their employees. They just pay their retirement out of their trust fund. Companies that sell annuities use extremely conservate formulas that insure their profit. That's why it's not a good idea to buy your own annuity and it ain't a good idea for large companies either which is why they don't do it.

[Statistical]

113. We are both simpifying but I enjoy the subject.

Maybe my numbers were high but I still think your numbers are low.

While life expectancy is 70 the standard deviation is 16. So almost 30% of people will live longer than 80 years. What is the plan for them going broke and dying penniless.

84& of people will live 86 years or less.
98& of people will live 102 years or less.

A progressive system needs to account for them that is why I looked into annuities.

Also 8% is way beyond risk level recommended for people who have already begun retiring and need stable income.

By getting rid of pensions employers shed not only cost but RISK. They no longer need to worry about changes in inflation, changes in life expectency, market risks, etc. This all had to be hedge against and wasn't free at a minimum the actuary formulas requires more than sufficient funds to cover the median under near perfect conditions.

Many employers provide 3% match or no match. That is simply unnaceptable. People can save with 401K but they also are taking more risk why requires larger reserve. Companies should be grateful to have offloaded that risk and shouldn't be trying to reduce the cost also.

Replacing a defined benefit system with something like:
1:1 match
up to 10% of income
annual retirement counseling (paid by employer)
annual progress accounting (paid by employer done by third party)

would be a more progressive system. Can people retire under the current system in which some employers match 3% (or 0%), and employees are given no guidance? Sure. An EQUIATABLE solution would be one that at least ensures the majority (not just the mean) of people have a lifetime income at retirement.

401K can be a win-win solution. Right now it is more a win solution.
Employers:
a) reduced cost
b) took long term risks of books
c) limit liability to contributions which eliminates costs associated with hedging

Employees
a) have to pay more for retirement
b) absorb all the risks
c) like your mean vs standard deviation comparison illustrates needs to absorb higher costs (annuities) to guarantee income for life

Don't you think we can do better?

Moving 401K minimum match from 3% - 10% would cost employers a negligble amount of money. Labor costs in average Fortune 500 companies is <20% of gross expenses and labor includes wages, healthcare, benefits). Annual counseling and progress tracking might cost a little more but would help employers who have no clue what they need to retire.

[MajorChode]

116. Employers do get rid of risk, but that was the whole point

More often than not, employers invested their pension trust in their own company. So if the company went bust, the employees got a double whammy. The PBGC does help some, but most employees still lose twice. So a defined contribution plan does transfer that risk to the employee, but at least the employee has the option of diversifying that risk or investing in government securities. With a defined benefit plan, they were at the mercy of the investment savy of their company.

And yes, both of us were simplifying the whole process and leaving out a lot of important details like what happens to employees who are fired or quit? While they might get a severance package or they might eventually get a reduced pension at an increased age, they still lose overall and the pension trust wins. What if an employee dies on the job? They might get a death benefit and their spouse might get survivors benefits, they still lose in that situation too. Like I said, you can't look at a pension plan from the perspective of one employee. It's a collective trust. That's part of the reason why you don't need to invest as much as you're thinking to pay a set benefit. Lots of other variables come into play also, and to go into those would be beyond the scope of what I'm willing to write.

You also can't use the life expectancy figures for the public at large. When people retire at age 60 or greater, lots of them go home, turn on the TV, and wait to die. They usually don't have to wait long. Someone who retires at a younger age usually finds something else to keep them occupied. Someone who never retires tends to live longer also.

It's easy to point out the negative aspects of anything, but far more employees have retirement plans of some sort than ever before. It's easy to point out some guy who worked for Oxy and never saved enough for retirement, but what about the millions of people who would have never had any sort of retirement plan if 401(k) plans had never come into being?

[tonysam]

75. Watch the Frontline documentary, and then you will understand

401(k)s were never designed to be retirement plans; they were supplements to real pensions. You can NEVER, EVER have enough money in a 401(k) that would be adequate for your retirement. Only if you are very, very highly paid can you do it. The money in a 401(k) runs out LONG before you die; defined benefit plans last you for the REST OF YOUR LIFE. How HARD is that to understand? Your arguments are the same crap used by privatizers against Social Security; they are bullshit.

You do NOT know what you are talking about at all. I do. Throw your fuzzy math at me all you want, but I know better.

[MajorChode]

79. Hogwash

There are lots of people who have and still do have 401(k) plans that are more than adequate, and most of them were built on modest incomes. The IRS sets contribution limits to 401(k) plans and always has. So the "very, very highly paid" you mentioned have contribution limits that are capped anyway. So the reality is that a "very, very highly paid" person would have even less chance building a retirement that meets their goals if that's their only investment vehicle, because they were limited by what they could invest from day 1. So while their overall account might be higher, as a function of income it would be less. The documentary you mentioned talks about employees who made high risk investments and lost. That has very little to do with the potential that these plans have for building an adequate retirement. It just means that some people made poor choices, albeit with poor advice, and they lost.

[ipaint]

81. Some people are good at investing but most folks

are not financial planners or investment counselors. Many don't have the time, some don't have the intelligence and most don't have the education or savvy to understand and effectively manage their investments.

No one is saying you can't or those like you can't work a 401k to your advanatge the problem is that if large numbers of people are finding that 401k's don't meet their needs as pension have in the past because they weren't able to manage it correctly, we all end up paying. Just like healthcare and housing in the end it will get costly for everyone if large segment of older folks live close to poverty the last 20 years before they die.

As people who bought houses with adequate deposits and prime loans are finding out today people are not islands unto themselves. What happens to many of us does ripple into your world too and many times not in a good way.

[MajorChode]

85. I'm thinking your world went the way of the dinosaur quite some time ago

Pension plans were great back in the 50's through the 70's when the industrial base was strong and people started working for a company in their 20's until they retired. They don't reflect the reality of a service based economy where people frequently change jobs. That ship has sailed.

[ipaint]

95. Well my point wasn't whether the ship sailed or not. I happen to agree

we are way beyond the point of no return. My point was having so many people unable to take care of their needs as they get older will drag everyone down.
I don't expect the folks with selfish attitudes that brought us all to this point will look for a solution until then.
As with everything else, we must do it the hard way. The mistake of forcing people to rely on 401k's contributed to what is unfolding today.
Acknowledging that at least will give some people the ability to look for a solution similar to the ones that did work (back in the age of the dinosaur 20 years ago) if we ever get around to fixing the mess.

[MajorChode]

99. Then we are even

My point had nothing to do with the investment savy of the average American, but along those lines the biggest problem that most have is that they don't save enough. Most 401(k) plans are underfunded and not because of poor investments, but because people don't put in enough to begin with. Stocks and real estate are both investments that are subject to radical swings up and down. If people are going to invest heavily in both, they should understand that. I didn't hear too many people complaining when stocks were routinely posting double digit gains back in the 90's, and I didn't hear too many people complaining when the same was true for real estate.

[LondonReign2]

97. I think you are correct ipaint

The fact is, the vast majority of people have NO BUSINESS managing their 401(k)s -- they don't have the knowledge or time to do it well. As a result, most people in 401(k)s underperform the market.

A couple of good things that came about from the Pension Protection Act -- it set into law that employers can auto enroll employees into their plans, which as least gets people started saving; and, it allows target date funds to be the default option, so people don't have that money sitting exclusively in money market funds where inflation will vastly erode its value.

[ipaint]

100. The thing is at least half this country doesn't make enough to save anything.

And with health care reform doing nothing about rising costs that problem will get worse. We have been bleeding good paying blue collar jobs with pensions for 3 decades and the majority of jobs replacing them are low paying service jobs.

People who can put aside 10-30% of their income towards retirement are comparatively very comfortable. I'm not talking about that segment of workers. For me it is all about the blue collar workers who are being left to fend for themselves working low paying jobs and the only retirement available is a 401k.

Retirement is going to be an upper middle class and above luxury in the future. The reason it was a middle class and working class reality in the past is because good paying jobs with pensions and health care, unions and laws made it possible. Now we are looking at at least double the number of baby boomers living in poverty after age 65 than are today. The majority will need to keep working.

I'm on the back end of the baby boomer generation and I dread what will happen in the future when most people will be relying on social security and medicare as the primary source of income/health care.

[Statistical]

89. Fuzzy math? This is my retirement that I am saving for.

I set a goal, calculated how much I need to save (adjusted for inflation) and am on track.

HOW DO YOU THINK PENSIONS PROVIDED INCOME FOR LIFE? MAGIC? POTS OF GOLD? MONEY PRINTING MACHINE?

No they did the exact same thing you do in a 401K.

Save $x each year.
Work for y years.
Invest gaining z% each year.

At the end of y years contributing x dollars and investing at z% you will have some amount of money.

That amount of money can buy an annuity (I wouldn't recommend it but some people want the guaranteed income for life). $14K will get you $1000 annual income for life. So you need about 14x your retirement income saved by the time you retire.

It isn't rocket science. The major problem is the AMOUNT you need to save. Which is around 10% for 30% income after 30 years, or more like 15% for 50% of your income after 30 years.

[backwoodsbob]

109. you're just wrong

I make about 50K...certainly not upper income.At my companies average 150% match up to 12% I will retire at 62..put my money in an annuity...and live fine for the rest of my life.

[Statistical]

110. Well most companies provide 3% in a match.

50% max on up to 6% on contribution.

Redo your match with you 6% + employer 3%. Not so pretty now huh?

If more companies didn't burn expensive pension plans for 3% contribution 401K it likely wouldn't have results in such a bitter taste in most people mouths.

6% + 3% for retirement it simply financial dishonesty.

If I was in charge I would push for a minimum of 1:1 match and up to 10% of income.

[ipaint]

54. Frontline did a piece on 401k's

Brooks Hamilton
Benefits consultant, Brooks Hamilton & Partners

So in the mid-1990s, you are working ... as a record keeper, looking at a dozen, 15 large companies. What do you see happening over a period of several years with the 401(k) plans?

I was slow to see it. I should have seen it sooner, but my gut told me that forcing novices ... to direct their own investments was not really a good thing to do. I used to ask the CEO, CFO of my major clients, ... often in a conference room some young employee would bring in coffee, and as they would be leaving, I would ask the CEO, "Would you allow that employee to direct the investment of your account in the 401(k) plan?" They always thought I was some kind of idiot: "Of course not. I wouldn't let them touch my account with a 10-foot pole." And I said, "But you force them to manage their own!" And they are running their money into the ground.



... We decided to look at the top 20 percent and the bottom 20 percent . ... The same story repeated over and over. The top 20 percent always did anywhere between five and six times the annual investment rate of return of the bottom 20 percent. If the bottom 20 percent, say, had a 4 percent return, ... the top 20 percent might have had a 25, 26 percent return. ...

I label this yield disparity. I just coined the term. I thought, we have a yield disparity that is a financial cancer in our great, beautiful 401(k) movement. I had never seen it before, but it was everywhere I looked.



What do you mean a financial cancer?

It would destroy the opportunity for ordinary workers to retire in dignity. They couldn't get there from here. There is no way.

http://www.pbs.org/wgbh/pages/frontline/retirement/

[tonysam]

56. Thank you for that link.

I am going to watch that now.

Lots of loopholes in ERISA have greatly contributed to the mess we have now.

[tonysam]

63. Watching this,

and 401(k)s, designed as supplements to pensions, are the biggest bunch of crap ever thanks to companies doing away with real pensions.

The way things are going, the only workers left who will have true pensions will be federal, state, and local employees. Of course, in a number of states, including mine, workers can get shafted out of full Social Security benefits thanks to government pension offset and windfall elimination provision unless they paid into Social Security for 30 years because states opted out of paying into the SS system.

[tonysam]

60. Article from April about the auto industry and PBGC

Retiree pensions are at risk

[taught_me_patience]

77. 401k's are great

They allow the wife and me to save for retirement with pre-tax dollars. We make too much money to have an IRA, so this is the only taxvehicle we can take advantage of. Even if the market is flat over the next 30 years, we'll have earned 40% by not being taxed.

[closeupready]

86. I've had everything in my 401(k) in money market, and haven't lost a dime.

I've actually gained better than most all of the other funds.

[closeupready]

78. Wait a minute - he gets $406/month, has a $70k retirement account, and social security.

That's not exactly chopped liver. No, it's not as much as what he would have gotten if Occidental hadn't switched to 401(k)'s, but it's clearly sufficient to live on.

[haroldweeks]

91. Small business owners often cheat

AND deposit the money elewhere earning interest.

A Republican mayoral candidate in my state is suing an online forum participant for airing his dirty 401(k) laundry.

[Dreamer Tatum]

98. Absolute horseshit

Every nickel you contribute to a 401k can be invested in an annuity. In fact, you can invest in an annuity and get the pretax benefit as well. And some employers contribute to the annuity, just as they do the 401k.

This story is about people with sour grapes, period. If you have significant money in a retirement account, then you should manage it and not blame others when bad things happen.

[ipaint]

102. It doesn't work.

You can punish people to your hearts content, call them lazy, stupid and wasteful, the reality still is 401k's don't work anywhere near as effectively as pensions which came with professional benefit managers.
That fact will come back to bite your quality of life and the rest of us in the "retirement" years to come. Just like for profit healthcare and subprime loans do today.

[NeedleCast]

103. My 401(k) (acutally a 403(b)) is great

I work for a non-profit that gives me 10% of my salary without me having to contribute a dime. I put in 6% of my own for a total of 16% going into my retirment fund, tax free. I'll be the first to admit that I'm an unusual example but it's definately a plan that works for me.

While the story in the OP is interesting it lacks lots of facts. After the recession struck, many on DU who were approaching retirement age were complaining about the hit their 401(k)s took. I'm amazed at the number of people who have failed to manage their retirment funds. The Time article is sad, but doesn't tell us what percentage dude was investing, whether he pulled out money at any point, what his base salary was, what was being matched (if any) in his 401k, what age he enrolled in it, etc. etc.

[Statistical]

112. Another good employer.

Very commendable your employer is paying 10% of your wages as cost of retirement benefits. Most employer's don't though not even as a match. Most opt for the minimum 3% (50% match on up to 6%).

I don't think 401K need to go but there should be some reform.

[Rabrrrrrr]

114. Yeah, because we can so TOTALLY trust companies not to fuck up the pension, or go bankrupt.