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.