Scott Burns Starts a Six-Part Series Today on Retirement Saving

April 29, 2009

I noticed Scott Burns’ column in today’s Houston Chronicle (you can read the article here) is the first in a series on reforming retirement saving. This particular article talks about the fact that many employers are no longer offering their employees a 401(k) match. Scott references a study done by Hewitt Associates that states that a one-year suspension in the employer match can cost a young employee (earning $50,000 per year) $16,000 in future retirement benefits. I think this is unfortunate.

This finding from Scott’s piece reminds me of what I pointed out about the 2009 Fortune 500:

In the 12 months ending Feb. 28, only 12 companies in the Standard & Poor’s 500 provided a positive return. Over 200 companies lost at least half their value.

Finally, this last part regarding how fees can really eat into retirement plans, is telling:

All other things being equal— gross return and career contributions — a federal government worker with a virtually cost-free plan who starts saving 6 percent of income at age 30 will accumulate about 10.5 years of final income by age 67.

A private-sector worker with a typical plan will accumulate only 8.5 years of final income by the same age, if the plan has costs of 1 percent a year.

A worker with a plan that costs 2 percent a year will accumulate only 7 years of final income by age 67.

Those are big differences. Put another way, 2 to 3.5 years of income are siphoned off by the costs of typical plans.

I have a feeling that changes are coming… Let’s hope they are for the better and not some kind of socialist program.

I still think education and SELF-DISCIPLINE are the keys. Employees need to understand just what they are giving up when they elect not to sign up for their 401(k). They need to be updated once a year with something that says, “This is what you could have in your account had you signed up.” Of course, this may do nothing more than lull people into doing nothing since they already feel like they missed out.

I’ll try to highlight the other five articles in the series as they become available.

6 responses to Scott Burns Starts a Six-Part Series Today on Retirement Saving

  1. If you get a chance at any point, John Bogle’s testimony before the House of Representatives about suggestions for reforming the 401k industry is worth the time to read. Unsurprisingly, he’s got some great ideas.

    The full text is here:

  2. Congress won’t change a darn thing, just watch. The mutual fund industry makes 92 billion per year on funds – a great deal of these fees are in 401k plans. They will lobby hard to keep this in place.

    I hate to be so cynical, but it already happened with 403b plans. It use to be teachers and others who use the 403b could use their own vendor or one from a list. But, that was too confusing so they set it up so they had one choice. From what I have seen the one choice is usually an insurance company that is selling Variable Annuities within the 403b. Talk about high fees.

    Save enough in your 401k to get the full match, then do it yourself through a Roth, traditional IRA or even taxable account in tax efficient index funds or ETFs.

  3. I agree with Kirk on that one.. Regardless of fees you CAN’T pass up the free employer match.. Still the best deal in town.

    FWIW. The uber-cheap gov’t plan you speak of still doesn’t match, as far as I know (at least on the military side). I think that may change, but..

    I have a feeling we are going to see some form of mandated employer pension legislation come our way. I imagine there will be gov’t backing. Employers will stop matching, but a pension would make it worthwhile. The return of the three legged retirement stool! 401k, pension, social security!

    Interesting times we live in, for sure.

  4. My company does just what you suggest…by letting people know what they could’ve had in their accounts. I’m not sure if they do this for those who have elected out of the plan, but they do it based on your % of contribution. For example, if you contribute 4%, they let you know what you could’ve had if you had contributed 6%, 8%, etc.

  5. Wow. Thanks JLP for the article. I was not aware that companies are cutting off 401k plans from their employees. I agree with you in that people are very near sided and only worry in what is going on now mainly because they are living paycheck to paycheck and they don’t think that they can give up any money even if it is in the best interest of their future.

  6. Running 401K plans is like a legal crime. The plan administrators don’t have to disclose expenses and employees have no choice in their 401k administrators.

    My wife works for a bank who is also their own 401K administrators. In the past quarter, the money in her money market account LOST money: the plan’s admin fee ate up the 2% return.

    The bank is making fees off their own employees 401K plan (and btw they cancelled the employee match)