How 401(k)s screw us all

[The Wise Buck]

Originally Posted by Philip Brewer

This was less true than you might think. All through the 1940s, 1950s, 1960s, and into the 1970s vast numbers of people worked for the sort of big companies that offered good pension plans: big industrial companies like autos and steel, big conglomerates making everything from canned soup to cosmetics, aerospace companies, railroads, airlines, defense companies, and big local companies like paper mills and such. Collectively they employed a much larger fraction of the workforce than you might imagine. At the beginning of that period there were also vast numbers in the army, which pays a pension to those who stay in long enough (and that service also counted toward a pension if the person went on to work for the Federal government in some other capacity). And, of course, state and local governments, universities, hospitals, and so on still offer pensions.

People talk a lot about how small businesses "create most of the new jobs," which is sort of true, but also misleading. Business that stay small don't employ very many people. It's the occasional small business that succeeds and becomes a big business that creates lots of jobs.

So, lots of the people who have already retired did have a pension plan of some sort. It's only been since the late 1970s that retirement plans really started being phased out--and lots of those companies kept their retirement plans for people who were already in them, at least for a while.

The upshot is that we're only now just starting to see the beginning of the period where these people--the ones whose pension options were sharply curtailed in the middle of their career--are starting to retire. The article I mentioned at the beginning talks about them.

Soon, though--in just a few years--we're going to be starting to see people who never had a shot at even a modest pension reaching retirement age. A lot of those people are going to be in big trouble.

Excellent points and well said IMHO. The Retirement Plan industry is only now beginning to deal with these issues in any meaningful way. When ERISA "hatched" 401ks or the defined contribution model, there were some assumptions made. One was that the "working person" would be able to navigate the investment world and match the result of the defined benefit plan.

With the recent Pension Protection Act there have been some "steps in the right direction" and the industry has made some recent attempts (and faulty assumptions) to create vehicles to help investors (like target date funds and other asset allocation funds) however, there is still a wide gap that needs to be filled.

Unfortunately, there will be more people who will be working for the rest of their life.

FYI, if anyone would like a good source of these kinds of issues (retirement plans) you may want to check out http://www.plansponsor.com

[lucille]

I see the whole move to 401k from pensions to be a massive failure. I started working as pensions were being phased out. Many places I worked at early in life had pensions but there was nothing to carry over to the new employer. Since I was young and the economy was not so hot at that point I changed jobs frequently and made minimal pay so saving wasn't an option when your counting pennies to pay rent.

When I did finally start working in a more steady manner employers didn't have 401k options. Small businesses or at least the ones I worked for simply didn't offer them. I spent most of those years paying down old medical bills and trying to simply stay on my feet. When I did finally get to where I could start socking something away the dot com era hit and busted. So I was job hopping about every year as companies were bought or folded. I never was able to capture any employer contributions and underfunded what I had because I was trying to make up for all the job transitions that seem to lose you some income. When we finally felt like we were making progress the market crashed and wiped out a big portion of what we had.

I think the entire system is a mess and I don't have enough time before retirement age to suddenly make it rich. My other option is to trust wall street? Shudder.

[The Wise Buck]

Originally Posted by lucille

I see the whole move to 401k from pensions to be a massive failure. I started working as pensions were being phased out. Many places I worked at early in life had pensions but there was nothing to carry over to the new employer. Since I was young and the economy was not so hot at that point I changed jobs frequently and made minimal pay so saving wasn't an option when your counting pennies to pay rent.

When I did finally start working in a more steady manner employers didn't have 401k options. Small businesses or at least the ones I worked for simply didn't offer them. I spent most of those years paying down old medical bills and trying to simply stay on my feet. When I did finally get to where I could start socking something away the dot com era hit and busted. So I was job hopping about every year as companies were bought or folded. I never was able to capture any employer contributions and underfunded what I had because I was trying to make up for all the job transitions that seem to lose you some income. When we finally felt like we were making progress the market crashed and wiped out a big portion of what we had.

I think the entire system is a mess and I don't have enough time before retirement age to suddenly make it rich. My other option is to trust wall street? Shudder.

A lot of people are in a similar situation. This is especially true for those with 5 years or less to retirement. Many of these people did the right thiing and saved every pay period. Then something like 2001 or 2008 happens and they see themselves back to where they were 10-15 years ago.

The market has experienced a tremendous amount of volatility the last 10 years and there is no easy solution as most Americans will not have a workplace pension (defined benefit) But the traditional defined benefit programs are no guarantee of security either. Take a look at the headlines on this site Pension Tsunami which chronicles the state of the defined benefit pension system.http://www.pensiontsunami.com/

I would only suggest making the most out of the options you do have and to also consider making an investment in yourself. Perhaps there is something you would enjoy doing in retirement that would serve as supplemental income? Just an idea...