More on the 401(k) Problem

We talked a little bit about why the 401(k) is problematic in my conversation with Helaine Olen yesterday. That conversation is also happening in other places, like at Counterparties:

The first generation of 401(k) holders is retiring. Duncan Black, in USA Today, reports just how bad things are looking: “According to the Center for Retirement Research at Boston College, the median household retirement account balance in 2010 for workers between the ages of 55–64 was just $120,000. For people expecting to retire at around age 65, and to live for another 15 years or more, this will provide for only a trivial supplement to Social Security benefits… And that’s for people who actually have a retirement account of some kind. A third of households do not.”

Americans have had more than 30 years to learn the ins and outs of this massive experiment in tax-deferred investing, but as Alicia Munnell, the director the Center for Retirement Research says, “we just don’t know how to do it”. What money people do save, they tend to manage poorly. They think they can do better than the market, or tend to choose financial professionals that are bad at beating it. More education isn’t going to fix the problem. As the Economist points out, financial education can actually lead to worse decision-making. And although the 401(k) costs $240 billion a year in tax deductions, research shows it doesn’t make people save any more than they otherwise would.

When David submitted an early draft of his essay on how young people are reframing the idea of retirement, I pointed out to him that there is a large population of people out there who are about ready to retire and would like to retire, but do not have the funds to do so. My father, who is in his early 60s, is in this boat. When the market crash occurred a few years ago, he about fell over when he looked at his 401(k) and saw the amount of money his account had lost. And he’s part of a generation who managed to stay at the same job for 40+ years, and tried to play things by the book, diligently setting aside a certain amount of his paycheck into his retirement account. He’d lose a lot more sleep worrying about what he and my mother would have to do if he didn’t come from a culture where parents can rely on their children to support them in their old age. I’ve got my dad’s back, but since I’m not as traditional, I’m wondering who will have mine.

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