The tyranny of the 401(k) industrial complex

If you never watch PBS' “Frontline,” you're missing out on some of the best journalism on TV. I don't agree with every viewpoint they advocate, but each episode is thought-provoking and well done.

Recently, “Frontline” focused on “The Retirement Gamble,” as they titled the piece. It can be summed up by this quote by Zvi Bodie, a professor of management at Boston University: “401(k) plans really place the burden on the individual participant to have an adequate retirement. And the vast majority of ordinary people don't know how to do that.”

It's true. As if you don't have enough going on in your life, you have to become a part-time financial planner and investment manager. You need to figure out how much to save, how to invest your savings, and how to withdraw it in a way that makes it last forever or until you die, whichever comes first.

Of course, you can always get help from the financial-services industry — in particular, the mutual fund providers, since those are the type of investments in most workers' retirement plans. However, many of these folks are padding their own retirement accounts at the expense of yours. Here's how economist Teresa Ghilarducci explained it to “Frontline”: “The 401(k) is one of the only products that Americans buy that they don't know the price of it. It's also one of the products that Americans buy that they don't even know its quality. It's one of the products that Americans buy that they don't know its danger. And it's because the industry — the mutual fund industry — has been able to protect themselves against regulation that would expose the danger and price of their products.”

I'll add another shortfall of the 401(k) industrial complex: You don't have a choice. The 401(k) is chosen by your employer, who might be keeping costs low by passing the costs along to you. I'm on the 401(k) committee at The Motley Fool, and I can tell you that it does indeed cost an employer money and time to provide a retirement plan; it's not as easy as opening an IRA with a discount broker. The plan has to meet all kinds of government-mandated tests to make sure that the plan doesn't disproportionately benefit higher-income employers and owners. So companies that offer a retirement plan deserve some level of gratitude, especially if they match employee contributions. But that doesn't mean these companies spend the time and money necessary to make it the best plan possible.

Then there are the funds themselves. The “Frontline” episode included an interview with one of my heroes, Vanguard founder John Bogle. His best quote: “Do you really want to invest in a system where you put up 100 percent of the capital … you take 100 percent of the risk, and you get 30 percent of the return?”

Where did the other 70 percent of return go? To the fund companies, due to high fees and low performance — in Bogle's words, “The magic of compound returns is overwhelmed by the tyranny of compounding costs. It's a mathematical fact. There's no getting around it.”

My picking of bones

While I generally agree with “Frontline's” call to arms regarding the malfeasance of the mutual fund industry, there are a couple of counter-points I would have liked to see them address. First off, the episode recommends index funds over actively managed funds, featuring more footage of John Bogle, one of the main figures in the birth of index funds. However, it would be interesting to ask him why Vanguard itself has had actively managed funds for decades. Perhaps even the most famous advocate for index investing sees some value in paying a fund manager to pick the investments. And, to Vanguard's credit, the expenses on their actively managed funds are very low. I know because I own a few of them, including a few of their index funds.

The “Frontline” episode also had its nostalgia for the good, old days of defined-benefit pensions, when an employer would reward an employee after decades of service with a monthly check in retirement for life. Like many shows that bemoan the state of retirement in America, they clearly argue that those are better than 401(k)s. However, the truth is that these pensions have their own issues. First off, even at their peak, most Americans didn't have a pension. At least with a 401(k), workers can save for retirement in a tax-advantaged account, something they didn't have before these accounts became prevalent in the '80s. Also, a traditional pension mainly benefited employees who worked for the same company for decades. If you left within, say, five years (as was the case when I was a teacher), you got nothing. The money in a 401(k), however, can be taken with you.

Plus, many pensions don't have enough money to pay future benefits and are assuming (nay, praying) that unrealistically high investment returns will bail them out. Private pensions are backstopped by the Pension Benefit Guaranty Corporation, but that “safety net” itself is underfunded by more than $20 billion. Government pensions are backed by taxes, and they're going to hit hard as more and more Boomers retire. So defined-benefit pensions are not the panacea as they're often portrayed, often using film footage from the '50s (as “Frontline” did).

Finally, the episode featured interviews with everyday Americans who have little in the way of retirement savings, portraying them as victims of the mutual fund companies. In many ways, they most definitely were. Yet, as these people sit in their kitchens and living rooms, explaining their predicaments to the camera, I can't help but notice that they have nice furniture, large-screen TVs and cable. I admit that this is a bit callous of me, but I do have a little less sympathy for people with little in savings but plenty of luxuries. (Yes, cable TV is a luxury.)

Carpe 401(k)-em

The good news for you is that you're taking control; you're reading this blog and probably other sources of financial education. Hopefully you're learning how to save for, and spend in, retirement, and how to evaluate mutual funds along the way. Planning your retirement is up to you; no one is doing it for you. Financial advisers have their place, as long as they're fee-only and fiduciaries (i.e., legally obligated to put your interests first — a standard that doesn't apply to the large majority of financial advisers). But however you manage your finances, ensure that it's doing more for your retirement than someone else's.

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Sam
Sam
7 years ago

Excellent post. The state of retirement savings and the industry should concern all of us. We spend a lot of time on personal finance and my husband has a MBA but I often feel like I’m just randomly guessing when I make my retirement investment selections. Managing your own individual pension plan, which is what we each do, is highly inefficient and costly as the author notes. I have not had much luck with advisers, I feel like they are just guessing as well and charging a fee to me for doing so. The one time I hired someone I… Read more »

Andy
Andy
7 years ago

“As if you don’t have enough going on in your life, you have to become a part-time financial planner and investment manager.” People have the time, just not the motivation or the foresight to educate themselves on matters as important as this one. You can take the quote from Teresa Ghilarducci and replace “the 401(k)” with “healthcare” and everything still applies. That’s just as, if not more scary. The quote from Jack Bogle goes back to my first point. If I can educate myself on how to fix my house or my car, I’ll save money. If I don’t education… Read more »

Another Kate
Another Kate
7 years ago
Reply to  Andy

I disagree with the statement “people have the time.” I am a working mom. I can’t keep up with all the everyday housework, paperwork, errands, etc. of life already. I do invest, but no, I don’t have time to really figure out what I’m doing. I suspect many other people — working dads, at home parents, people without kids — find themselves just as busy as I do. I confess that I do sometimes take breaks, but I regret it when I do (everything slides into oblivion if I don’t constantly stay on top of things), so no, adding an… Read more »

Andy
Andy
7 years ago
Reply to  Another Kate

I’ve never seen anyone so busy that from the time they get up to the time they go to sleep, the can’t incorporate something else into their life. Are people really that busy 365 days a year that they can’t read a magazine article over lunch once or twice a week or month? Are their people out there that watch 0 minutes of TV a year that could be used educating themselves about finance instead? Without being too crude, there’s a room in the house where I get a lot of reading done. Everyone uses it and everyone can read… Read more »

Another Kate
Another Kate
7 years ago
Reply to  Andy

Here’s the deal. Yes, I educate myself (visiting GRS, for example, as well as Mr Money Mustache), and I know I’m not stupid. But taking the time to figure out from all of the options that my employer’s 403b program offers (we’re a nonprofit) which is the best is just too much. It’s a bit overwhelming. I’ve tried to select the best fund I can, but I don’t know that I really have. And the fact of the matter is, while someone may always be able to add something to their life, there are too many “somethings” to add. I… Read more »

Andy
Andy
7 years ago
Reply to  Andy

You’re on here and MMM, so you have some time, just not a lot nor as much as you like. Me too.

And you may never know which investment is right for you. In my case, I eliminated the ones I knew weren’t for me and went with what I thought would work best out of what remained. The only way you’ll know whether you picked the best one is after it’s all said and done. Nothing you can do about that.

sarah johnson
sarah johnson
7 years ago
Reply to  Andy

Get a clue. I was a single mom and one of my two kids is disabled and I spent a ton of time getting him therapies and advocating for him. The investment world is too complicated for people in general. A mom with kids doing every day life cannot even begin to understand stocks, bonds, mutual funds or anything else except whether there is enough milk in the frig and what to make for dinner. Oh, guess what, I have an MBA. And I graduated from a top tier school at the top of my class.

RNR
RNR
7 years ago
Reply to  Another Kate

God made Vanguard Index 500 funds for busy people like you, Another Kate.

And he made them for people like me, who know enough to be dangerous, and are smart enough to know it. 🙂

IRA or 401(k), it’s the way to go, if available.

imelda
imelda
7 years ago
Reply to  Andy

Also, what about people who just aren’t that smart? Or not good with numbers? Or foolhardy people who take big risks and gamble?

The world is made up of all kinds of people, and most of them aren’t going to be good at investing. Should they be left out in the cold?

Andy
Andy
7 years ago
Reply to  imelda

I don’t think we’re talking about day trading or mortgage back securities or credit default swaps. Retirement investing can be as easy as asking yourself when you want to retire, how much you can set aside for retirement each paycheck/month/year, then going on Vanguard or Fidelity or any of those sites, open an IRA and start putting money in a target date retirement fund. People assume it’s harder than that but it doesn’t have to be. People like us who know how to do these things need to help those who don’t know and are intimidated by the idea.

Another Kate
Another Kate
7 years ago
Reply to  Andy

Okay, I didn’t read this before my cranky post above. Yes, this I know how to do. This I have time for. The trouble is selecting the fund from those offered and ascertaining it’s the right one. A few years ago, I noticed a pattern of losing money every single quarter from my fund for an extended period of time. I’m a big believer in buy and hold, and I let it go on for a long time before taking action, but when I noticed that my husband’s fund was earning and mine was not, I finally called a representative… Read more »

Ben
Ben
7 years ago
Reply to  Andy

Andy, I agree with you to an extent. I have made an effort to learn about all of my investment options to put myself in the best possible position. However, if I’m going to pay someone to manage my investments for me, shouldn’t there be a reasonable expectation of success? If I am paying for their expertise, I don’t want just average returns. Yet time and time again we’ve found that very few fund managers can get above average returns.

Mrs PoP @ Planting Our Pennies
Mrs PoP @ Planting Our Pennies
7 years ago

Robert, I’m curious what you think of the employer’s fiduciary responsbility as a 401K administrator. Do you think most employers are dropping the ball on that by offering plans with high fees? I’ve talked with the folks at my company about the different options, and they’ve researched quite a few alternatives and have a system they think works best for most people. It’s not perfect, but they really did put a lot of time and effort into it and regularly seek out feedback from 401K plan members to make sure they’re meeting our goals. In general, I look at a… Read more »

My Financial Independence Journey
My Financial Independence Journey
7 years ago

I generally dislike the 401K system for most of the reasons outlined above. The funds are too expensive and there’s no real choice. If I had my way, I would opt out of mutual funds all together and go with individual stocks. That way, I could avoid throwing tons of money into overvalued companies.

I think that employers and the mutual fund companies are doing people a disservice by auto enrolling them in target date funds rather than the lowest cost index funds that they can find.

Sloane
Sloane
7 years ago

This is not a failing of the 401(k) system; it’s a failing of the financial institution that your employer chose, or the plan options that your employer chose. Go to your employer, get a couple of co-workers to go with you, and ask the employer to open the plan up to more investing options.

My employer uses Fidelity, for example, and our plan allows me to invest as I see fit. I have a mix of low expense index funds and mutual funds.

Johanna
Johanna
7 years ago
Reply to  Sloane

I’m late to (this part of) the party, but this comment keeps eating at me.

Go to your employer and ask for better options…but what if they say no? When employees are entirely at the mercy of their employer’s decision to offer good 401(k) options, bad 401(k) options, or no 401(k) options, THAT IS A PROBLEM WITH THE SYSTEM.

EMH
EMH
7 years ago

I agree with Sloane. The company I work for allows me to choose whatever I want for my 401k I have stocks, index funds, target date funds and I also have a small cushion of cash all in my 401k. I am allowed to choose my investments how I see fit.

My previous employer’s 401k plan only gave me about 20 options to choose from and none of them were great. It is the employer, not the system.

Emily @ evolvingPF
Emily @ evolvingPF
7 years ago

I’ve never had access to a 401(k) so I use a Roth IRA with Vanguard for my retirement savings. Stories like this make me apprehensive about finally having an employer that offers a 401(k) because the fees may be higher than I’m accustomed to paying. But at least there is still the option of contributing to an IRA – for me and these “victims.”

Emily
Emily
7 years ago

As a W2 contractor, I don’t have ACCESS to a 401k plan! I would LOVE to put my money away, but the government has decided that people without access to a 401k only need to be able to put away $5500 in a ‘retirement’ IRA… I wish there was another option for my situation.

KSK
KSK
7 years ago
Reply to  Emily

There are other options, such as a SEP IRA and an individual 401K. I am self-employed and have an individual 401K. I can contribute $16,500 per year + a percentage of my profits.

Johanna
Johanna
7 years ago

The more I think about the 401(k) system, the more angry I get. In so many ways, the game is rigged so that the very, very rich can get their hands on everything that the rest of us have. Of course, there are the fees, as discussed in the article. There’s the push for amateur investors to make their own way in the market – every mistake that one of us makes (panicking and selling when the market is down, for example) is an opportunity for someone else to reap bigger gains for themselves. And there’s the fact that as… Read more »

Tom
Tom
7 years ago

“The plan has to meet all kinds of government-mandated tests to make sure that the plan doesn’t disproportionately benefit higher-income employers and owners.” I’ve never understood the purpose of this rule. I’m sure it had a good intent at one time, but if every employee is offered equal access to the same plan, why should the employer have to, in effect, penalize those who make more than $110,000 because participation is unbalanced? (That is the limit at my company, not sure if it’s true nationwide). This comes from someone who is not really close to making that much money per… Read more »

Pretired Nick
Pretired Nick
7 years ago

I’m so sorry I missed that Frontline! Great overview of the situation. While the structure of modern retirement plans and the lack of regulation is a complete mess, the lack of education of the workforce is an even greater mess. It’s almost like people should be forced to go to a class or something so they are at least armed to face these choices.

Alea
Alea
7 years ago
Reply to  Pretired Nick

You can view the episode online at the PBS website. It kind of leaves you with the feeling, of “what is the point?” Save, save, save, and then a market crash happens and it’s all gone. Might as well learn how to hunt squirells. As for the dream of a pension plan, you should all read RETIREMENT HEIST, by Ellen Schultz. I would never accept a job that offers a pension, the contract is not worth the paper it’s written on. My favorite line from the book goes something like this: A company goes before a judge to explain why… Read more »

Jenny @ Frugal Guru Guide
Jenny @ Frugal Guru Guide
7 years ago

Also, when a private company dies, so does the pension in many cases. This happened at the law firm where my grandfather worked for 40 years. Fortunately, he chose AGAINST the pension option, so his retirement was not destroyed. The pension system itself can lead to abuses, too. You have no benefits, typically, if you work for less than 5 years, and you have extremely reduced benefits until you work for longer than 20 years. Imagine that you finally hit the 20 year mark and now have 40% of your max pay at retirement. You REALLY can’t afford to leave… Read more »

@debtblag
@debtblag
7 years ago

Vanguard has actively managed funds because try as he might, Bogle can’t convince people to stay away from them.

I can only imagine the amount of money he has saved individual investors with his life’s work, but he’s not stupid enough to not take money that people are throwing at him.

Jenny @ Frugal Guru Guide
Jenny @ Frugal Guru Guide
7 years ago

BTW, I’m not sure why the Pension Benefit Guaranty Corporation didn’t save the pensions that my grandfather’s coworkers were expecting, but I do know they took a huge financial hit. Perhaps it was because so much of the value of a pension comes in the last few years before retirement. Perhaps it was because only part of their expected retirement was a true pension–maybe the rest was a profit-sharing plan of one sort or another. I do know that many people were hit very hard by the 100-year-old firm’s closure, and what they had expected to retire on did not… Read more »

Jake
Jake
7 years ago

This is a nice article. I can understand that it would be difficult as an average American to know how much to save and where to save it, but I feel like it’s something that needs to become a priority to learn. Everyone learns how to drive a car, why can’t everyone learn how to invest and save? It can be very complicated, but it doesn’t have to be. I think that after a couple of hours most people would know enough to be able to do it on there own. They may not get the best returns possible, but… Read more »

Johanna
Johanna
7 years ago
Reply to  Jake

The difference is that car manufacturers, road engineers, drivers ed teachers, traffic cops, and various regulators are all more or less united in the goal of making driving as easy and safe as possible. You don’t have a multibillion-dollar taxicab industry lobbying Congress to keep things complicated and convincing people to leave the driving to the professionals.

And car crashes still injure and kill a lot of people each year.

Ely
Ely
7 years ago
Reply to  Johanna

This.

AND not EVERYONE can learn to drive.

Ramblin' Ma'am
Ramblin' Ma'am
7 years ago
Reply to  Ely

I can’t drive, but I do actively manage my 401(k). Since I live in the Boston area, I think the latter is more baffling to my coworkers!

Sloane
Sloane
7 years ago
Reply to  Jake

I have used Fidelity and Vanguard, and both had extremely informative websites. It’s no harder than picking a couple of the top-rated, low expense funds and then checking to make sure that you have a good balance of stocks and bonds in your mix (Fidelity lets you practice with a hypothetical trade so that you know how a trade will change your portfolio).

imelda
imelda
7 years ago
Reply to  Sloane

For pete’s sake, don’t you have any imagination? Just TRY, a little, for a second, to put yourself in someone else’s shoes. Imagine you’ve never heard of those companies – or any investment company. Imagine you’re not very tech-savvy, and the websites confuse you. Imagine you you’re intimidated by the terminology that makes no sense to you. Imagine you don’t really understand how to connect your bank account to the investment account. Imagine you’re scared of losing your money. Imagine you’ve never read a PF blog, or been offered a PF seminar, and all you have is a vague sense… Read more »

Andy
Andy
7 years ago
Reply to  imelda

Sometimes people may have to bite the bullet and ask for help. Friends, family members, coworkers, church, banks, ask someone. People need to help themselves by letting others know they need help.

The failure isn’t with the 401(k) system, it’s that the education system doesn’t emphasize financial literacy. A personal finance class should be mandatory in schools (high school or college or both).

Sloane
Sloane
7 years ago
Reply to  imelda

Please do not insult my imagination or intelligence. Yes, I can imagine never having read a PF blog, not being familiar with retirement vehicles or how to invest. I can imagine all of that, and in fact, I’ve experienced all of it. But I educated myself, and I think you can educate yourself to and take control of your future. From your reference to your fellow college graduates, I’m guessing that you are young, so you have the time horizon to use to get a handle on your retirement. Do not let the difficulty of the situation overwhelm you, quit… Read more »

Johanna
Johanna
7 years ago
Reply to  imelda

Andy and Sloane (and others in this thread), what you are advocating is an individual solution to a systemic problem. The fact of the matter is, the vast majority of people are not saving adequately for retirement. Maybe you think their reasons for not saving are stupid, they’re just making excuses, and all they really need to do is get some personal responsibility and listen to YOU and they’d be just fine. But ultimately, that doesn’t matter, because they’re not (all) going to listen to you, and they’re going to keep on not saving. A system that works only for… Read more »

imelda
imelda
7 years ago
Reply to  imelda

Sloane, Johanna expressed what I was trying to say much better than I did. As she said, I’m talking about the SYSTEM. It’s not working for most people – shouldn’t we ask why, rather than demand that everyone change?

And thanks for your kind advice, but I wasn’t talking about myself. Obviously I’m on this site because I love PF and find investments and money fascinating, in general. I’m worried about the millions of people who are NOT nerds like me.

Andy
Andy
7 years ago
Reply to  imelda

Johanna, you said “the vast majority of people are not saving adequately for retirement”. I don’t see how that’s the fault of the system. Just because people choose to or cannot save enough for retirement, for whatever reason, good bad or otherwise, how is the system to blame? There will never, ever, ever be one system to fit all 300+million living in the USA. There won’t be two, three, ten or one hundred systems either. Not everyone can, or sadly, wants to be helped. That’s no reason to scrap what we have, especially when there’s no alternative. I’m lucky, my… Read more »

imelda
imelda
7 years ago
Reply to  imelda

Andy, there is a fairly simple solution that does work for everyone, called a public pension. It works in many other countries (countries that are certainly in no worse financial state than we are) and could work here. As for why we call it a failed system – if it is failing for most people, then it is not a good system. Here’s an interesting article about it: http://www.financialsamurai.com/2013/02/05/median401k-retirement-balance-by-age-is-dangerously-low/ There are all kinds of articles about why and how 401k is not working for Americans, and how most people reach retirement with very little saved; all you need do is… Read more »

Sloane
Sloane
7 years ago
Reply to  imelda

Imelda, the article is interesting and informative, but it still makes the basic point that people need to save more. The national personal savings rate is around 2% – that’s the problem. Sure, the system can be reformed to make fees and fiduciary duties more transparent. That seems fair and reasonable. But until people save more, they will not have savings available to them in the future. Public pensions are just another way of forcing people to save. In fact, we already have a public pension (Social Security), so if you want increased benefits from the government, you have to… Read more »

Johanna
Johanna
7 years ago
Reply to  imelda

“force people to live on less now so that they can have more in the future.”

Well, yes. That’s called “saving,” and it’s exactly what you’re saying individuals need to be doing anyway. So what’s the problem?

Your “significant downside” is not a downside at all. Even under a vastly expanded Social Security system, individuals are still free to save more on their own, if they want a retirement that starts earlier or is more luxurious than what the system provides.

imelda72
imelda72
7 years ago
Reply to  imelda

@Sloane: Exactly. Precisely. With your usual acuity, you have hit the nail on the head! (sorry, couldn’t resist that quote) Anyway, it strikes me that I agree with everything you said, aside from your conclusion. You identified the problem: “But until people save more, they will not have savings available to them in the future.” People aren’t saving. How can we change that? “Public pensions are just another way of forcing people to save.” Huzzah! That’s my conclusion. You pointed out some downsides, which Johanna responded to. In my opinion, the downsides you pointed to are FAR less grave, and… Read more »

Johanna
Johanna
7 years ago
Reply to  imelda

This article, and the Slate article it links to, really get to the heart of the problem, I think: http://www.motherjones.com/kevin-drum/2013/05/401k-retirement-funds-are-rip All the talk about “There is no one-size-fits-all solution” is nonsense. The path toward a comfortable middle-class retirement is pretty much the same for everybody, so there’s no reason, logistically, why it can’t be orchestrated on a large scale. To the extent that there IS individual variation, it’s entirely due to individuals wanting MORE than basic comfort – which, as I said, they’re perfectly free to save for and provide themselves. Anyone who says that we need to preserve individual… Read more »

Kim
Kim
7 years ago
Reply to  Jake

How to save, sure, that’s easy. But, saving correctly is what is at issue. I actually spent 5 years working at a major mutual fund company (although in IT, not in the funds side), and you would think I’d be an expert at saving for retirement after having so much exposure. Nope. You basically learned to “save, put money into your 401k, it doesn’t matter what fund, just invest here.” And I believed it. How do you know who to listen to? People want to invest at Fidelity or eTrade or wherever because they see the commercials and think they… Read more »

Lucas
Lucas
7 years ago

Agree. I would love to have regulation that required the investment companies to show you how much you paid in real $ every year to them as it is impossible to figure out. The number would shock most people. I definitly try to keep the expense ratios are low as possible and pretty much just do indexing becuase of it.

CCH
CCH
7 years ago
Reply to  Lucas

I think a good approximation of the fees that 401k companies charge you can be calculated by comparing your total contributions to the plan (from old W-2s or year end paystubs) to the present value of the plan. This will give you your real rate of return percentage from your 401k investments. Compare this percentage with the rate of return that the 401k plan statements say you earned. The difference is the amount you paid in fees to the 401k company. You can also take the total expense ratio for each mutual fund you own and multiply it by the… Read more »

William Cowie
William Cowie
7 years ago

Your quote of Zvie Brodie reminded me of another issue perplexing observers: the low voting percentage. So, Gallup or one of those polling companies did a phone survey, which went like this: Q: Good evening, Sir. We’re doing a quick survey about the low voting turnout. So please tell us: do you think the problem is ignorance or apathy? A: I don’t know, and I don’t care. Comical, and perhaps not exactly true, but it highlights that Brodie only got one part right when he said that people don’t know how to take care of their retirement. I believe the… Read more »

John S @ Frugal Rules
John S @ Frugal Rules
7 years ago

I am sad that I missed that Frontline as I generally like their work, even if it’s simply thought provoking and I don’t agree. I would agree with many of your points and great catch on the Vanguard and actively managed fund issue. From my experience, I have seen that too many employers simply do not care to provide a good and beneficial 401K plan to their employees. It really is sad as it can just load it down with needless fees. That said, there’s also something to be said of those that do not invest at all. I would… Read more »

KSR
KSR
7 years ago

http://www.pbs.org/wgbh/pages/frontline/retirement-gamble/

You can watch it here if ya have 53 minutes to spend.

Luke
Luke
7 years ago

Thanks for another great article, Robert. You’ve quickly become my favorite contributor to GRS. I really look forward to the GRS email each Wednesday.

For those who missed the Frontline episode, it can be found on http://www.pbs.org.

mike
mike
7 years ago

I don’t think the 401k system is that bad. Yes it has it flaws but no more than most legal or financial aspects people deal with in life, buying car, house, marriage, divorce, transactions, etc… Most of the people that I know spend way more time doing things they enjoy or spending time and lots of money on luxury items. It never took me more than an hour or two to go into and look at a couple funds electronic prospectuses, to determine fees and investment strategies. From there I would usually pick the lowest index funds and do my… Read more »

Ramblin' Ma'am
Ramblin' Ma'am
7 years ago
Reply to  mike

I agree–I also think people are just intimidated by retirement accounts, so they never really try to understand them. Many people don’t really get what mutual funds and index funds are. They probably think saving for retirement means choosing individual stocks, and they figure they don’t have the financial education to do that so they may as well avoid the stock market altogether.

I have that Frontline episode on my DVR. Will have to check it out soon.

Johanna
Johanna
7 years ago
Reply to  mike

“By the way, you don’t need more than 8th grade Math to figure this stuff.”

I disagree. I mean, you don’t need to do any integrals or derivatives or sines or cosines, but the numerical intuition that comes from having had a lot of advanced math classes is actually really, really helpful. So is a solid understanding of probability and statistics. There’s a reason that finance companies and hedge funds like to hire math geniuses.

Plus, not everybody did well in 8th-grade math, and that’s OK.

lmoot
lmoot
7 years ago

As a gen y’er (and as a witness of the portfolio crash of several gen x’ers right before their retirement) I am not putting all of my eggs into the 401k basket, and I’m putting even less eggs into the social security one. In fact, I pretend social security doesn’t even exist (I’m not going to be an extremist that says that it won’t….but I will say it’s possible). My plan for retirement is a mixture of 401k, Roth IRA (because I don’t plan on earning much job income in my life…not counting rental income which doesn’t even calculate into… Read more »

Tiara
Tiara
7 years ago

It seems to me that a figure I read says the average American watches 4 hours of TV a day – and they don’t have time to study a little investing theory? Sorry, I don’t buy it. Anybody can buy a target date fund and stuff as much money as they can afford into it, it’s not rocket science. The real problem I have right now with the system is the artifically repressed interest rates – safe bonds are paying less than the inflation rate, so people are putting themselves at more risk than they really want to in order… Read more »

Jane
Jane
7 years ago
Reply to  Tiara

I don’t imagine you should base whether or not someone has the time to research their retirement accounts based on statistical averages of television viewing. First off, the 4 hour a day number takes into account the retirees and non-workers, who presumably watch way more than this a day. It is rather unlikely that those who are actively contributing to a 401K account and could benefit from further research are spending that much time in front of the boob tube. Plus, the reality is that many Americans are exhausted after a long day of work and commuting. So what if… Read more »

Ed
Ed
7 years ago

I am a firefighter and have a hazardous duty pension… I also contribute to a 403B plan… as a 401K… that is tax deferred to supplement my retirement… the state has just switched to a hybrid plan… a mix of both… due to the state not properly funding the pension plan for years and putting the money in a general fund. I will take my hazardous duty pension plan any day over a “Define contribution” plan. I want to know how much I am getting upon retirement…50 percent of my high 3 years not risk my retirement on wall street… Read more »

cathleen
cathleen
7 years ago

I’m so fortunate. My employer gives so many 401k choices it’s a bit overwhelming. And I get $1 per $1 match up to 6% of salary.

My Annual return is currently 13.77%, which is pretty darn good. The last 5 years have been between 9.7-13.77

A Carter
A Carter
7 years ago

As the special pointed out, 401(k)s were created as a tax dodge for the hyper wealthy; they were never intended to be a way for average wager earners to accumulate nest eggs. As a result, they don’t really do that good a job. There are two huge problems with the 401(k)s – they are only as good as the company they are tied to, which means their quality is all over the map, yet they are touted as “one size fits all.” The other is that they are a lot more about making profits for the investment houses than they… Read more »

imelda
imelda
7 years ago
Reply to  A Carter

It also strikes me as funny – in a not-laughing kind of way – when people judge others for their “luxury” purchases. So, what? These people should put off EVERY frivolous expense until they…escape poverty/debt/are financially independent?

Few people who are poor believe they will ever not be poor, let alone that saving $50 a month on cable will help them get there.

Diane C
Diane C
7 years ago
Reply to  A Carter

A Carter, I am vigorously nodding my head in agreement. I own a HUGE plasma TV, which I bought for $250 from a friend who’s a serial upgrader. He just had to have a 3-D TV. There is no cable or even antenna hooked up to it. I get my movies from the library, yard sales, Swap-A-Dvd and the like.
My house is lovely, but most everything I own is from consignment, Craigslist, estate sales, etc. Laughing all the way to the bank and looking good doing so.

imelda
imelda
7 years ago

OK, so I’ve posted a slew of negative comments to this blog entry, and I think perhaps I should explain why. I hate the 401k system. It’s like telling everyone to go on a diet for 40+ years, and letting that serve as a substitute for health care. It’s nonsensical, and unrealistic. People who are struggling to get by – and most people feel like they are struggling to get by – are not going to save the amounts of money they need to fund a retirement decades away. They’re not going to invest wisely – instinct is always to… Read more »

Johanna
Johanna
7 years ago
Reply to  imelda

“It’s like telling everyone to go on a diet for 40+ years, and letting that serve as a substitute for health care.” I like this analogy a lot. Nagging one person to go on a diet might or might not work. Nagging EVERYBODY to do the same, almost certainly will not. Personal responsibility is just that – personal. At the individual level, when you’re looking at any given person who’s failing in their retirement savings, maybe there’s a legitimate argument to be had about whether they could or should have been more responsible. But when the vast majority of people… Read more »

Mike@WeOnlyDoThisOnce
7 years ago

Very interesting in the Times about 401(k)s this morning. Excellent relation.

rebecca
rebecca
7 years ago

Ha! I wasn’t the only person who was puzzled by the “poor” unable to retire couples furniture and very large tv.

It was a great show on 401k and you brought up some excellent points. I am currently not working by choice and one of my biggest concerns is saving for retirement.

RNR
RNR
7 years ago

Good post, interesting comments. Having been involved in IRAs, 401(k)s, and now a 403(b) I helped design, a couple of observations: – Everyone makes mistakes. My wife’s IRA was a backloaded variable annuity dog for 7 years. We moved it out into Vanguard index and made more money in two years than the previous 10. I learned. She learned. We earned. – Those little bits add up. I was in a bad 401(k) plan, but I saved to get the match, and was conservative in a bond fund because of the lousy, murky funds. As I learned, I spread my… Read more »

jimmy
jimmy
7 years ago

Self-help books like to diffrentiate between being poor and being broke. Being broke is a temporary financial condition where you don’t have enough money to buy what you want. Being poor is a mindset, where you don’t see youself as achieving any kind of success or any kind of wealth. It’s a mindset where you don’t look ahead to the future and are not willing to suffer delayed gratification for wealth in the future. Consequently, poor people spend all their money now to make themselves happy now, to buy tangible things like big-screen TVs and to buy intangible things like… Read more »

Johanna
Johanna
7 years ago
Reply to  jimmy

I actually think there’s a kernel of truth here, which is that attitudes toward money make a big difference. But I don’t think that good or bad attitudes can always be turned on or off like a lightswitch. We’re all a product of our environment. Among the advantages I’ve had in life is the privilege of being born to parents who are good with money. I’ve had a lifetime to learn by example that shopping around, questioning whether unnecessary purchases are things you really want, and saving up small amounts of money over long periods of time are worthwhile things… Read more »

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