“The Grand 401(k) Experiment Has Been A Failure”

What’s in your 401(K)? I’ll go first! I don’t have one. I did so much — usually unintentional — job-hopping in my twenties, and even the jobs I stayed in for over a year weren’t the kind of places that offered 401(K)s, that I never got one off the ground.

Turns out maybe that’s okay though because 401(K)s in general have not been a success. The median amount a person has in their 401(K) is only just over $18,000. According to CNBC:

Older workers do tend to have more savings. At Vanguard, for example, the median for savers aged 55 to 64 in 2013 was $76,381. But even at that level, millions of workers nearing retirement are on track to leave the workforce with savings that do not even approach what they will need for health care, let alone daily living. Not surprisingly, retirement is now Americans’ top financial worry, according to a recent Gallup poll. …

shifting the responsibility for growing retirement income from employers to individuals has proved problematic for many American workers, particularly in the face of wage stagnation and a lack of investment expertise. For them, the grand 401(k) experiment has been a failure.

“In America, when we had disability and defined benefit plans, you actually had an equality of retirement period. Now the rich can retire and workers have to work until they die,” said Teresa Ghilarducci, a labor economist at the New School for Social Research who has proposed eliminating the tax breaks for 401(k)s and using the money saved to create government-run retirement plans.

Let’s all work til we die!

The 401(K) hasn’t been around for that long, considering. Social Security dates back to the New Deal, and people began receiving benefits in 1940, but the idea a more personal, deferred-compensation investment account originated in the late 70s and was clarified in the early 80s. LearnVest asserts, in its history of the 401(K), that the plans came out “more by accident than by design.”

The accidental birth of the 401(k) can be credited to Ted Benna. In 1980, the benefits consultant used his interpretation of the law to create a 401(k) plan for his own employer, The Johnson Cos., that allowed full-time employees to fund accounts with pre-tax dollars and matching employer contributions. Benna then asked the Internal Revenue Service to change some proposed rules under the law that ultimately lead to the widespread adoption of 401(k) plans by employers in the early 1980s.

“I knew it was going to be big, but I was certainly not anticipating that it would be the primary way people would be accumulating money for retirement 30 plus years later,” Benna, now semi-retired and the president of the 401(k) Association, told Workforce magazine.

30 years later, we have discovered that, if our 401(k) is indeed our primary way of accumulating money for retirement, we’re kinda screwed. Partly that’s because, as employers gave more to 401(K)s, they gave less to pensions. Also, we are not awesome, as individuals, at managing our money, especially as wages stagnate and college costs shoot up. Back to CNBC:

Most employees also turned out to be less than terrific investors, making mistakes like selling low and buying high or shying away from optimal asset classes at the wrong time.

Berkeley’s Odean and others have studied the effect of investment choice on 401(k) savers, and found that when investors choose their asset class allocation, a retirement income shortfall is more likely. If they can also choose their stock investments, the odds of a shortfall rise further.

“401(k)’s changed two things: you could choose not to participate, and you chose your own investments, which a lot of people, I think, screw up,” Halperin said.

The takeaway seems to be that if you have a 401(K) through your employer, great. It’s a useful tool. But don’t expect to depend on it.

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