Tuesday, January 03, 2017

"401(K) Pioneers Lament..."

A front page article in the WSJ today discusses 401(K) plans and how they have weakened retirement security for many since their genesis.  The much lauded 401K began in the 1980's as an enlightened method of saving for retirement.  Partially matching contributions by many companies enhanced the attraction.  The result was that they supplanted the traditional defined benefit plan in much of corporate America, something the corporates wanted as a cost saver.  That has led to more uncertainty for many retirees, and a feeling of less security.

There are several problems with 401K products, or maybe the word should just be "issues".  First, they must be capably managed by someone.  Second, the costs associated with that must be restrained. For many savers, investment management is not a skill that was required in their work life. As a saver ages, managing the increasing value of a 401K can become treacherous.  One downturn in the market at the wrong time could cripple a long thought through retirement plan.  Generally that leads savers to be too conservative and forego growth of one their primary nest eggs.

Another issue is that all distributions are taxable, as the money directed into a 401K is not taxed going in.  That can lead to a false sense of security, especially in states with high tax rates.  As at certain income levels Social Security distributions are also taxable, that can be a double whammy that limits the realization of a "comfortable retirement" contemplated by the middle class.  That's again especially true in areas with a high cost of living.

For those who have a defined benefit pension, which now is predominantly public sector retirees, it has become something more dear.  No need to worry about management of investment choices or economic downturns as long as the distributor is solvent.  Many boomers may share a similar experience of having a defined benefit commitment from the early years of their corporate work life when they had modest earnings to now having a much larger 401K value with the associated uncertainty.  With the general rise in life expectancy over time, the defined benefit now feels like a gem.  If inflation returns it could be seriously diminished.  Some seniors joke that by the time they are in their eighties their defined benefit payments could be just enough to buy a turkey sandwich with fries for lunch every day.

There is much to think about here, and for many it is the last thing that they want to confront.  Given the limited savings of many, this eventually(five to ten years out) could lead to a broad crisis that will make student loans look like a zit on an elephant and rival the 2008/2009 mortgage debacle.  Whether this will be primarily an economic event or turn into a significant political event is open to speculation.

This is one of the intuitively felt fears that led to the voters' choice in 2016.

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