Are 401(k) Plans Really That Bad?

At least once a week I receive an article submission from a guy named Steven Selengut. Steven, a portfolio manager and author, runs Sanco Services, a portfolio management company. This week’s article is titled “Why 401(k) Retirement Plans Really Don’t Work,” which you can read in its entirety here. The author prefers pension plans to 401(k) plans. I have published the parts of the article below along with my thoughts.

The investments contained in a pension plan are designed to produce income, and are managed by trustees who are experienced in constructing safe, conservative, diversified programs that are just as boring as they can possibly be. Most pension plan benefits are calculated as a percentage of the amount earned while employed. The Social Security retirement/welfare plan is a tontinesque Ponzi scheme based on the government’s ability to continually abuse taxpayers. There are no investments at all, and no trustees… just IOUs.

I simply refuse to believe that people can’t manage their 401(k) plans themselves. It’s not that difficult. Employers should concentrate on bringing in unbiased educational services to help their employees learn about asset allocation and investment selection.

Defined benefit pension programs are rapidly becoming extinct— corporate America can no longer afford them, along with 50% of total Social Security contributions, employee health care, and CEOs who collect $50 million per year from their unwary shareholders. But those that have survived (notably, labor union plans, retirement annuity contracts, and the Congressional Pension System) produce monthly income checks without any problems whatsoever. And here we thought our congressional leaders were incompetent— not when it comes to their own benefit package + COLAs.

Here he hits the nail on the head: pension plans are too expensive! When companies provided pension plans for their employees, the norm was for an employee to retire at 65 and die within 5 to 10 years. Now days, that’s not the case and employers simply can’t afford to pay for a retiree’s 25 – 30 year retirement.

Still, the 401(k) plan deserves to be every bit as popular as it has become. It, and the vast array of complicated IRAs, could help save Social Security, improve the economy, and create jobs— all those good things that neither of the presidential candidates have a chance of achieving. Just two simple strokes of an Oval Office ballpoint get it done: 1) Eliminate all taxes of any kind, at any jurisdictional level, on any form of investment and/or retirement income. 2) Replace the failing Social Security system with a private pension system, funded by taxpayers only and managed by the existing insurance industry infrastructure.

I like both of his suggestions although I’m not exactly sure how they would work. For one, how does the government make up the shortfall in tax revenues if retirees no longer have to pay taxes? That’s a scary thought if the government’s not willing to make the necessary spending cuts.

I bet the insurance industry is salivating at the prospects of his second suggestion. I could go for a private pension or private fund as long as I get to choose where my money goes. I don’t see this one happening any time soon. Politicians are too scared to touch Social Security and AARP would scare the crap out of retirees.

How do we make the 401(k) plan provide more retirement security? That’s not so difficult either. Simply dictate that all plans require participants to invest at least 60% of their assets in individual (plain vanilla) income securities that can be withdrawn “in kind” at retirement.

NO, NO, NO! I HATE this idea! Instead, show people how different asset classes work and show them how to gravitate from one class to the other as they approach retirement. My wife and I have NOTHING invested in income securities at this time in our lives (we’re both under age 40) and requiring us to put 60% of our retirement assets in income securities would be ridiculous.

Finally, I’m tired of all this talk about how bad 401(k) plans are. Yes, there are bad aspects to them. They can be expensive and loaded with horrible funds, but all of this can be overcome with education. If managed properly, a 401(k) can be better than a pension plan with lots more flexibility.

14 thoughts on “Are 401(k) Plans Really That Bad?”

  1. “Employers should concentrate on bringing in unbiased educational services to help their employees learn about asset allocation and investment selection.”

    Absolutely! This can make a world of difference at very little additional cost to an employer.

  2. “Employers should concentrate on bringing in unbiased educational services to help their employees learn about asset allocation and investment selection.”

    Thankfully, that is exactly my role with the retirement plan provider I’m with. I’m on-site at the employer almost 100% of the time, and it is my job to attend all of the new employee orientations to talk about the 401k plan, how investing works, etc. We even hold regular educational seminars throughout the year that help people learn even more about their plan and the options in it.

    Unfortunately, I’m a minority and most companies don’t have this type of service tied to their retirement plans, but it makes all the difference in the world. Too many companies simply offer a plan, but could care less if employees enroll, and do nothing more than shove them off to an 800 number if they have questions.

    If a company isn’t going to offer a pension, the least they should do is be able to provide appropriate assistance when it comes to their 401k/403b/457b plan.

  3. “Pension plans produce fixed amounts of monthly income that don’t change appreciably when dot-coms, real estate, CDOs, or index funds (they’re next) self-destruct.”

    Throwing in some scare tactics suggesting index funds are the ‘next to go’. Index funds are exactly what all his all-knowing pension plans have invested in all these years. He needs to do some research.

    The rest sounds like half-baked ideas. Suggesting all these changes without considering consequences. Must work for some insurance company.

  4. “Simply dictate that all plans require participants to invest at least 60% of their assets in individual (plain vanilla) income securities that can be withdrawn “in kind” at retirement.”

    What an appalling idea. The flexibility of the 401k is one of it’s biggest advantages. This is just another half-assed way of removing the responsibility for proper management of retirement.

    I want more options for allocating my 401k money, not less.

  5. Unfortunately, people are too stupid and greedy to manage their own financial resources. If they weren’t, we wouldn’t have the current subprime mess.

    The government 401k only has index funds and targeted date index funds. Even with these limited choices, people can screw themselves chasing the previous month’s gainers, instead on settling on an asset allocation and sticking with it. The various Lazy Man’s Portfolios prove the point – slow and steady wins the race.

  6. I stayed in my former employer’s 401K plan for nine years after the leaving the firm. It was invested in a “vanilla” 60/40 balanced fund (with Vanguard). I only switched to a traditional IRA in 2006 so I could move half my money into non-Vanguard IRA CDs.

    Those CDs have done pretty well, I might add.

    I think some posters give folks too little credit for managing their retirement funds. The trick is to stay conservative, balanced, and leery of the “get-rich-quick” schemes.

    Just my $.02.



  7. Bozo,

    Keep in mind that it’s to the professional’s advantage to belittle people and make them feel stupid and that they need the services of a professional to help them navigate through this amazingly complex financial mine field.

  8. The biggest problem with 401ks is so many do not use them. Making them the default is a start, but many won’t anyway.

  9. JLP: I’ve never really found personal investing all that much of a mine field, but maybe I’ve been lucky. My wife and I thought once about going to a “personal financial planner”, recommended by a friend of a friend of a friend, until we found out that the “planner” really was an annuity salesperson.

    Once I discovered on-line blogs and financial calculators, I found that I could do 95% of what the “planners” did by myself. I could find the best CD rates, determine proper asset allocation in stocks/bonds, calculate what our principal would yield in thus and such many years, etc.

    Staying conservative, I was able to maintain principal, grow it at a reasonable rate, and sleep well at night.

    Now, in retirement, I’d say the key is still to avoid the hucksters, seek a reasonable rate of return consistent with safety, and spend less than you earn (whether that be earnings on investment/Social Security/pension, or by working, or all of the above). That way, you’re sort of guaranteed not to run out of money. Yes, I learned that from my Mom (who is 93, and will NEVER run out of money, just ask her). Earn an average of 5% and withdraw 4%, works like a charm.



    PS: Thanks for the blog. It does make for interesting reading.

  10. Education or “advice” for participants is a fallacy. It’s the RARE plan that is transparent and cost effective. The value of the tax deduction is easily offset by the outrageous hidden fees collected by the vendors, brokers, and “Advisors”. If you are only offered garbage, then you can only choose from garbage (or to NOT participate). The retirement industrial complex is without question, the greatest rip off ever achieved in the history of our great country. Literally BILLIONS of dollars are siphoned off every year from the accounts of unsuspecting participants. Employers simply have no clue! Think I’m wrong? Name the funds and plan.

  11. Jim, you sure are cranky. OK, for starters, Vanguard. This was the plan my employer adopted quite some years back. Offered (and still does) rock-bottom fees with properly-managed index funds. Fidelity is another. Both funds are very transparent and cost-effective. From Vanguard, I received very good advice when I wanted to swap out half my money into laddered CDs. The Vanguard Bond Desk told me in no uncertain terms to do it myself, since I could get much better rates than they could. This was NOT in Vanguard’s self-interest, but it sure increased my yield over the past two years.

    OK, we’ve done well with Vanguard, and have gotten good service and good advice.

    Just my $.02.


  12. Jim,

    I think EDUCATION is the key. If more participants knew the right questions to ask company management, companies would be forced to take a look at their plans.

  13. Bozo,
    You’re on the money with your comments (except that I’m cranky). I have the knowledge of an industry insider and know first hand how participants are just plain squeezed. This is the rule, not the exception. Vanguard? One of the few bright lights in a sea of opaque, poorly performing offerings.

    Participants will NOT rock the boat about their plan choices because they’re rightly afraid they’ll be on the next short list for pink slips when the company makes “strategic adjustments due to market conditions”. Just too risky.

    I wish there were more positive things to say.

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