Wednesday, May 21, 2008

Case in point: 401(k)-style retirement plans not for everyone

What a shocker! 401(k)-style retirement plans are not worth much. Here we have an example of college educated teachers with control over their 401(k) type retirement plans that have failed to invest wisely to secure a decent income in retirement. After 17 years, the teachers have actually requested to hand over their retirement plan money and be allowed to go back into an under funded, state-run pension plan!

The experiment has failed. Unfortunately, Pandora’s box has been opened and even though these public employees will be allowed back into a defined pension plan, many private sector employees will not. Second chance do-overs for corporate America are not likely.

At my place of work, the new hires requested a portable pension-like fund and voted via surveys to get just that. When the company announced this change to the retirement plan for all new hires, I had mixed thoughts. I envied the portability and independence that a 401(k)-style retirement plan would offer. But, the impact of such a change extends much deeper than just having control over your own funds and the potential to capitalize or fail at managing your retirement income. As a long term employee and future pension participant, I am also very wary about how this portability will affect the workforce.

One of the greatest strengths at this company is the accumulated wealth of knowledge and experience that goes into every design. That is quickly changing. The new hires readily state that they have no intention of staying at one company for even 5 years! Let alone 10, 20 or a career. It’s a fact that employee turnover is increasing. A defined pension plan is one very good reason to stay with an employer and it is no longer a factor at this company.

The lessons learned from the teacher's case in West VA can also be applied to other similar situations. Remember how so many clamored for Social Security to be privatized? Give me my money, they said, I can invest better than the US Government. Personally, I would love to have Social Security privatized. I know I could invest intelligently and improve on the returns. Seems most everyone else thinks that too, but it is far from the truth. This WVA case is a prime example.

Privatization of Social Security would be a boon for me, but not so great for the country as a whole, and for that reason I am against it. Darn it! I detest socialism. But, I also know that Social Security is all that some folks have or ever will have for retirement or disability income and they do not have or ever will have the mentality or financial tools to handle money, invest money, or properly plan for their economic futures. Face it, the majority of humans are financial flops and giving them investment control over their Social Security money is akin to throwing them out on the street.


  1. You've touched on some very interesting topics.
    Companies that offer pensions are a dying breed. More and more companies are either freezing them or getting rid of them entirely. My company has changed the plan 3X in 5 years- fortunately they gave the option for current employees to choose the plan that kept most of the original benefits rather tha go with the so called "new and improved" plan.

    The reason for vanishing pensions goes hand in hand with the reason the teachers want to give up their 401K plan- lack of investment expertise/skill and transfer of risk. In other words many companies and individuals choose not to accept responsibility for managing their financial accounts and would rather place the burden in someone else's hands.

    I would like to condemn individuals as being lazy, but there is so much false information being spewed by main stream media, that it's easy to see why people get overloaded into inaction. We all have an innate fear of losing money and one has to tolerate a certain amount of risk to get a decent return.
    One need only observe the "bailouts" going on by the Govt to see why Social Security Privatization wouldn't work. The majority of folks wouldn't save and the Govt would have to come to their rescue anyway.

    Privatization will also never be implemented due to the fact that the Govt actively spends our SS contributions and replaces them with IOUs. If they were to route that money directly to the people the Federal Deficit would grow by leaps and bounds. The scary part is we are not too far from reaching a point where benefits paid out aren't covered by incoming contributions. I foresee emergency changes where the retirement age will be raised to the 70's in order to keep SS solvent. As we've learned from Katrina, you're in big trouble if you have to rely on the Govt to take care of you.

    I think a healthy democracy needs a minimum amount of socialist programs to provide a safety net for the less fortunate rather than the lazy. Pure capitalistic governments don't last long due to the wealthiest groups hoarding more and more resources for themselves at the expense of the exploited masses. Think of how corporations would treat their workers if they weren't bound by laws protecting individuals. Actually we don't have to just think as there are active examples of sweatshops in China and abroad where workers are virtual prisoners.

  2. Soullfire: you make some very good points. I appreciate the comments.

    There are numerous reasons why the average individual fails at financial management. One of the most obvious is that folks are too eager to get rich quickly with little patience for slow, steady growth. They jump from one hot stock or fund to another racking up fees along the way.

    To that end, most express amazement and assume luck was involved when a co-worker accumulates a million dollar nest egg while simply working at the local factory - Not wanting to admit that the same fate was also within their reach.

  3. These 401(k) plans are best for the high income people - the people who need it the least. For average workers no matter what they do they'll never save enough to retire with these 401(k) plans. There are going to be a lot of angry old workers doomed to work until they can't anymore. Then, unable to work and the paltry nest egg runs out, they end up on the street to beg from the rich.