401k, 401k, Wherefore art thou oh 401k?
John Kostrzewa’s article on the failure of the 401(k) in this past Sunday’s ProJo (which didn’t go immediately on line, for some reason) hit home for many, I’m sure. He focuses on the fact that the 401(k) “system” requires rank amateurs to make relatively un-educated investment decisions. He has a point, but it’s not just the untrained, risk-taking (or naive) investors who have taken a bath in this market. Even careful investors who take the time to educate themselves have been hit hard. I’m no financial wiz, but I do my homework and I’ve now got less in my 401(k) than what I’ve actually contributed over the past 12 years. The mattress would have been better (I kid….I think…). So, how did we get to rely on the 401(k) so much?
The reason for the tumult is that the self-guided 401(k) replaced defined-benefit plans in which companies guaranteed a pension for loyal workers. Under the pension plan system, companies assigned professionals to mange pools of money to make sure the funds would be there to cover a worker’s retirement.
But it was expensive. And Congress was convinced to expand the availability of the 401(k), which was written into law in 1978 and for years used only as a supplement to the pension and Social Security system.
The use of 401(k)s expanded as the philosophy of an “ownership society” took hold and the responsibility and risk of planning a financial future shifted to individuals. The 401(k) program grew to 50 million Americans with $2.5 trillion in total assets.
For awhile, during the bull markets, everybody seemed happy with the switch. But the bear market that has devalued stocks, and sliced 401(k) investments, has exposed the flaws.
It sure has. Kostrzewa mentions some possible solutions, but this WSJ piece by Anne Tergesen is much more in-depth. I still think the 401(k) is an important piece of the equation, but only a piece.