Freelance author Helaine Olen wrote the book Pound Foolish: Exposing the Dark Side of the Personal Finance Industry. While I did not read the book, I can certainly understand why someone would want to explore this topic. However, you could also write a book exposing the dark side of virtually any profession or craft, whether it be law, medicine, plumbing, electrical, car sales or car repair. It is like Cosmo Castorini n the movie Moonstruck saying that the plumbing repair would be thousands of dollars. Is that fair or a rip-off? I have no idea and neither did the hapless homeowners. A link on Twitter today took me to an article Ms. Olen wrote for Salon in August of 2013, entitled “401(k)s are a sham”. While some of her points are valid, like brokers selling inappropriate annuity products to seniors, the basic premise of the article is flawed. The article can be found here. (Read the comments for additional enjoyment and an insight to others’ opinions.)
Yes, it is true that many rank-and-file workers can afford to put very little into a savings plan for their own retirement. However, without a government mandate to do so, their employer has not responsibility to fund that retirement. While it may seem callous to say this, not every worker has the education, the motivation, opportunity or lucky break to have a job or career where they are able to not only make a good living for their family, but also save enough to enjoy the years after that career is finished. Very simply, life is not fair.
Beyond the “life is not fair” comment that your folks probably told you a thousand times is that Ms. Olen really does not offer up a solution. It is true that 401(k) plans have not been the answer for everyone; lack of participation, lack of education, high fees and other factors have worked against some plan participants, but not all. You can find many people who have worked on the factory floor for three decades and have managed to accumulate a tidy nest egg through the combination of diligent savings and employer contributions. Speaking of employers, what about the traditional defined benefit, or pension plan? Surely that would be an adequate replacement for the 401(k) plan. Unless, of course, you worked for an airline or a trucking company or a myriad of other companies and have had your pension benefits cut by up to 40%, even after you are already retired. Pension plans can lose money in the stock market and also incur management and consulting fees. They miscalculate the longevity of the participants, resulting in shortfalls. Companies don’t like making pension contributions as it reduces profits; state and local governments don’t like making contributions as it might result in higher taxes. Here is a quick list of the most under-funded state pension plans in the U.S. Illinois, 39.26%; Kentucky, 47.73%, Connecticut, 49.08%; Alaska, 52.35%. Would you rather have a 401(k) plan or a pension plan in the state of Illinois?
The 401(k) plan is not a sham. However, the success of the plan for any participant depends on an employer willing to provide such a plan and hopefully augment employee contributions; the ability and discipline of a participant to save money; financial education; reasonable fees; a menu of investment options that is sufficient by not overwhelming the participant; and finally, the emotional fortitude to weather the vagaries of the financial markets. It is not a perfect vehicle, but it is far from a sham.