The 401(K) Debacle

What are you doing for retirement? Does your company have a pension plan that guarantees you money for retirement? Are you hoping that Social Security will be around when you retire? Or, are you pouring money into a 401(K) or 403(B) plan and hoping that you will have enough to sustain you in retirement? Well, therein lies the rub.

Up until the 1980s most companies had a pension plan. Employees who put in a certain number of years were guaranteed a monthly check when they retired. This gave each worker a sense of security about the twilight years - some money from Social Security coupled with some from their pension fund would ensure a semblance of normalcy when they bid the workplace goodbye.

And then there was 401(K). The program was first restricted to the highest paid executives, but in a short time, many companies found it appealing because it brought relief to their bottom line. The fact is that 401(K) or 403(B) plans moved the responsibility of saving for retirement from the fat wallets of companies to the flat pockets of employees. In other words, companies found a way to contribute less to their employees' retirement accounts. In all fairness, however, many employees welcomed the 401(K) as a means to control their retirement-savings destiny. That is commendable, except for one problem.

401(K) and 403(B) plans are designed in such a way that money is pulled from wages each pay period on a pre-taxed basis and is allocated to an account that depends on the whims of the stock market. When the stock market does well, our 401(K) accounts do well. However, whenever the stock market sinks, say goodbye to your hard earned funds.

Over the past 2 years, all contributors to 401(K) and 403(K) plans have experienced losses - some severe. I heard of someone who lost $50,000 and others have lost much more. Some people have decided to suspend contributions to their plans and wait for the market to turn around. Now, if the 401(K) - our retirement engine - is subject to such volatility, is this the way to prepare for retirement?

As mentioned earlier, up until the 1980s pension plans were the norm. Today, only about 21% of all US employees have a guaranteed pension plan. All power to those people! Should companies return to offering pension plans? Answer: I do not think any board will suggest or agree to that. Companies save a lot by going without a pension plan, so why would they return to such a money drag? What must employees do?

We hear the painful predictions of Social Security - unless there is some reform, that fund will go bankrupt in 30 to 40 years. This means that most of us can expect a Social Security-less retirement. So, should we continue to lean on our 401(K) plans?

Based on the fact that 401(K) plans are married to the stock market, it is fair to say that many of us who contribute 2 - 15% of our incomes each pay period to a job-run plan, may be in for an unpleasant surprise at retirement. We can hope that the stock market performs well in the years to come. However, the nature of the stock market beast is that it is a roller coaster ride by nature. The market will have good periods and bad ones too. Is that enough to ensure that we will have a solid retirement fund via a 401(K) account?

It may be time to find another retirement-saving machine.