The 401(k): A Regrettable Revolution?

If Henry Ford had regretted popularizing the automobile decades after his efforts, would you raise an eyebrow?

I know I would. Which is one reason I did just that when reading a recent piece in the Wall Street Journal about a man named Herbert Whitehouse.

It seems that Mr. Whitehouse now has pangs of conscience with respect to his role in popularizing the now-ubiquitous 401(k) retirement savings plan.

Whitehouse, a former Johnson & Johnson (JNJ) executive, pushed for the adoption of 401(k)s in 1981 as a way to supplement a company pension that guaranteed payouts for life.

Here’s how the WSJ puts it:

Thirty-five years later, the former Johnson & Johnson human-resources executive has misgivings about what he helped start.

What Mr. Whitehouse and other proponents didn’t anticipate was that the tax-deferred savings tool would largely replace pensions as big employers looked for ways to cut expenses.

And with just 13% of all private-sector workers now having access to traditional pensions (vs. 38% in 1979), it’s easy to see why the cloud of regret hangs over the Whitehouse.

The WSJ piece continues with the following description of the early push that made 401(k)s popular, and how those responsible are lamenting that push.

Many early backers of the 401(k) now say they have regrets about how their creation turned out despite its emergence as the dominant way most Americans save.

Some say it wasn’t designed to be a primary retirement tool and acknowledge they used forecasts that were too optimistic to sell the plan in its early days.

Others say the proliferation of 401(k) plans has exposed workers to big drops in the stock market and high fees from Wall Street money managers while making it easier for companies to shed guaranteed retiree payouts.

I think all of this is likely true, especially the part about forecasts being too optimistic.

It’s also true that a 401(k) leaves one exposed to market drops and high management fees found in so many mutual funds. (Note: In tomorrow’s Morning Edition, Grant Wasylik will show you how you can tell whether your mutual funds are worth the fees.)

Still, there is a flipside to this coin. Unlike a traditional pension plan, a 401(k) allows you to participate in the good years of the stock market … and there have been many more of those than there have been big drops.

I have no doubt that the decline in traditional pensions has contributed to more retirement angst than there once was.

But the reality in the corporate world for decades has been the inability of most companies to offer a decent pension the way many could in the 1950s and 1960s.

Given this reality — and the reality that, like it or not, your retirement options are basically your 401(k), Social Security and your own outside money saved and invested — what should an investor do?

***

My solution might be somewhat biased here, but I think it’s spot-on.

That solution is to be active with your money … such that you are able to grow your investments over the course of your working life so that you never have to worry about money when you retire.

Yes, this is easier said than done.

Yet there are thousands of individuals retiring each year with plenty of money to fund decades of post-employment activity.

How did they do it?

Well, some started saving early, and that’s good. I mean, there really is no substitute for the power of multi-year compounding.

Also, some people just make a lot of money in their work lives. This gives them the ability to put more money to work, save more and just have more in retirement.

Yet there are those who made what could be called a decent, above-average salary during their work years. And some of these folks saved a decent amount of money during their life. (Decent here is about 10% of their annual income, on average.)

The difference in this last group — and what allows them to retire comfortably — is that they’ve taken advantage of the investment opportunities in various equity, bond, commodities and options markets.

These are what you might call the "active investor class," a class of smart people who make up the core of our readership here at Uncommon Wisdom Daily.

In 2017, our commitment is to help those in the active investor class achieve their investing goals, and to help them buttress their retirement situation such that they don’t ever have to lament any investment choices …

Even their choice to save via a 401(k).

***

OK, here is where I need some information from you. Is your 401(k) your primary savings and investment tool for retirement? Or, do you use it in conjunction with either a pension or your own investment accounts?

Knowing this will help me craft our messages going forward, both in the Afternoon Edition and in our newsletters going forward. So, please share your thoughts with me by leaving me a comment on our website or sending me an e-mail.

***

The markets started the first trading day of 2017 with gusto. The Dow gained as much as 177 points within the first half-hour of Tuesday’s session, but pared that advance to 119 points (+0.6%) by the end of the session.

Some highlights from the year that was:

• The Dow gained 13.4% in 2016, coming within 22 points of 20,000. Goldman Sachs (GS) was credited with the bulk of the Industrials’ gains, adding more than 400 points post-election. This after being the Dow’s worst performer (down 20%) after the Brexit vote in June.

• The S&P 500 gained 9.5%. Like the Dow, bank stocks were big contributors to its gains with their 19% advance. But it was energy that outshined the rest, with the sector gaining 23%.

• Crude oil rose 45%: This was West Texas Intermediate’s biggest annual gain since 2009, when it surged 71%.

• The Nasdaq gained 7.5% despite a dearth of tech IPOs (and none scheduled yet for Q1 2017), a swath of tweets from politicians about sky-high drug prices, and concerns that techs that have manufacturing operations overseas could see a big dent in their profits during a Trump administration.

• The greenback gained more than 3.7% for the year, as measured by the Dollar Index, which tracks the dollar’s performance against a basket of other world currencies. This after a 7% gain just in Q4.

• Treasury yields hit an all-time low of 1.366% in July. The 10-year note is starting off the new year at 2.5%.

• Gold gained 8.5%: That’s down about 16% from its high-water mark of $1,364.90 in July. But even though the yellow metal felt the pressure of late-year selling, this gain means an end to its three-year losing streak.

• Silver also ended 2016 above where it started, notching a 15.7% gain for the year.

And here in the new year …

• Oil fell 2.6% in Tuesday’s session to a two-week low thanks to a stronger greenback.

• Gold climbed 0.9% to a three-week high despite positive economic data. (See the next two items.)

• November construction spending rose 0.9%, to $1.2 trillion — a 10.5-year high. (And up 4.1% from a year ago.)

• More manufacturing activity in December: The Institute for Supply Management’s gauge rose 1.5% to 54.7. It’s been above 50 (a level that denotes expansion in the sector) for nine out of the last 10 months.

• The deal signed by OPEC, Russia and other exporters to slash daily oil output by almost 1.8 million barrels a day kicked in on Jan. 1.

• The Earth will be at its closest point to the sun tomorrow, Jan. 4. At 9:18 a.m. Eastern, we will be 91.4 million miles away from the bright yellow orb. We will be an extra 3 million miles away at our farthest point from the sun for the year, which is likely to be July 3.

Good luck and happy investing,

Brad Hoppmann
Publisher
Uncommon Wisdom Daily

Your thoughts on “The 401(k): A Regrettable Revolution?”

  1. Both my wife and I have a pension, 401k, and social security. I have also funded a Roth IRA for the maximum amount since 2010. I plan on working 3 more years and will be 66+ when I retire. I expect that my wife will retire around the same time and will be just short of being 62.

  2. I am planning on using my 401k and IRA as my main source of retirement funds as my pension has been reduced to practically nothing. I can’t count on SS to actually being as fully available when I reach 66 2/3 as my age of 61 now leaves a lot to change in the next 5 years.
    I do wish there was more advice in using mutual funds since my 401k doesn’t allow stocks.

  3. Hi Brad,

    I’m a member and am one of the lucky few with a pension and a 401K. New people coming into the company get an enhanced 401k, which is supposedly better than the one I have, but no pension.

    My concern with Mr Whithouse’s comments is whether they might be used sometime in the future to seize or force 401k/IRA assets into government bonds to “protect” us from market forces or our inability to invest properly.

  4. My wife and myself use what I refer to as our “five legged stool” for retirement planning. We all know the “three legged stool” refers to pension, social security and personal savings. Ours consists of her 401(k), social security, ROTH IRA’s and my SEP IRA, personal savings AND my choosing to work longer as I will not receive a pension. She retired three years ago at age 61 and I am still working at age 71. I am a registered investment advisor and will retire in the next few months. This is a direct result of the DOL’s new 1034 page Fiduciary rule that goes into effect in April. We are already regulated and audited by the SEC and FINRA and the additional cost in terms of dollars, time and personal risk to implement these new regulations into my practice makes it a good time to step aside.

  5. I always knew what I had in my 401k, and have always assumed that Social security being bankrupt before I retire. Which during my working years has gone from 55 to I think somewhere between 67 & 70 years old. My employer laid me off after 18.5 years and gave me a 93K pension. My 401k is 3x that… but going backwards since it’s been well over a year being unemployed. I am not yet 50, & hope I can turn this picture around and get my retirement funds growing again. Because the government & employers aren’t going to save me or the majority of others that are around my age and haven’t saved anything! I’m very afraid of the government taking my retirement funds.
    I’m actively trying to do something, but still seem to be flatlining…

  6. I would be interested in how to invest the money when you roll out of a 401K into an IRA nearing retirement. Another note: I only invested money in a 401K up to the company match. Then I invested some money in a Roth. Then money into regular taxable mutual funds. Just because the mutual funds aren’t in a 401K or IRA doesn’t mean you can’t leave them untouched until retirement. The fact that you have control of those accounts means you can move money around, and still save for retirement. When you take that money out during retirement it’s already been taxed during its growth.

  7. If I were younger and knew what I know now lol 🙂 I would have done everything via a Roth 401(k), with a diversified portfolio at 8-10% per year. I’ve done fairly well and have no big regrets about my choices!!!!. I plan to retire at 70 and have been doing extensive research on annuities—-I’ll see how it all shakes out!!!! Thanks!!! 🙂

  8. I am turning 70 this year, and living in a beautiful, but very expensive place because all my friends live here (Santa Barbara California). I live on my Social Security check, a CAL PERS retirement check (as long as Caifornia’s State plan remains viable), and a part-time post-retirement job. I use Weiss Research to guide me with investing my $100,000 savings. I come out ahead, but the annual subscription dues cut into my earnings considerably. I
    I enjoy reading your columns.

  9. I agree with the above comment regarding vesting. If your company gives you no pension and your 401k matches and/or profit sharing are typically lowballed, why should they then get to claw back those contributions if you haven’t met their vesting schedule (typically 20% per year for 5 years). This allows them to bail out of both pension and 401k contributions to a large degree.

    I spent the last 21 years working as support staff for a few of the largest most profitable lawfirms in the U.S., and the most generous of them gave 7.5% of gross salary at the end of the year for 401k contribution. Others were less. And all of them had a 5 year vesting schedule, except the last two employer/lawfirms made you first put in one full year BEFORE you started receiving their contributions OR vesting in them. So 6 years to become fully vested.

    To me the 401k was much more about cutting employer costs than replacing a pension with a self-directed individual retirement fund. No wonder the Boomers are getting very scared about the status of Social Security.

  10. In today’s economy (both US & Global) one cannot count on one’s government or private-sector companies to provide more than a minimum toward one’s ultimate combination of retirement fund sources. So the key is to START EARLY in one’s working life to accumulate that future retirement “nest egg”. FIRST, as pointed out, one needs to become an active participant in managing these monies–NOT A PASSIVE INVESTOR leaving monies in investment sectors that are declining in value. Better to become informed financially as to how Wall Street and other major World Markets manipulate world currency values and investment vehicles such as, but not limited to, stocks & bonds. In this manner, one can move retirement funds in 401K sub-sectors to safer sectors (going to cash is not bad!!) when markets decline and into more aggressive sectors when markets rebound upward.

    SECOND, and perhaps more important in these days of lower incomes—particularly for young Millennials after the Great Financial Recession of 2008, is to develop and execute the personal discipline to cut their monthly personal spending to make room for their 401K contributions. It may mean cutting back spending on leisure activities or delaying a first home acquisition or getting that new/newer car but it will be well worth it 30-40 years in the future. Also, you will not be leaving your employer’s “matching contribution” on the table by not taking it. Both your contribution and your employer’s matching contribution are “pre-tax” such that your taxable employment income is reduced by those amounts and therefore your annual income tax is reduced. So, in this manner, your employer match & the your personal income tax savings are providing additional dollars beyond just your personal contributions into your future retirement nest egg. THE EARLIER YOU START THE BETTER—EVEN IF IT REQUIRES SACRIFICE NOW!!!

  11. 401(k)s Are Not a Retirement Plan.

    Reason #1: The Tax-Deferral Scam

    In our immediate-gratification society, deferring your taxes by funding your 401(k) sounds so good. But when the tax man eventually comes calling, he won’t ask you to pay what your tax liability would have been if you’d been paying taxes all along. He’ll tell you what your tax liability is at the time your taxes are due. Can you tell what your tax rate will be 30 years from now? IF tax rates do go up and you’re successful in growing your nest-egg, you’ll only be paying higher taxes on a bigger number.

    Reason #2: The “Free Money” Scam

    Who doesn’t love getting “free money” in the form of the 401(k) employer match? Do you really believe your employer is giving you something for nothing? The Center for Retirement Research did a study based on tax data and found that for every dollar an employer contributes to your 401(k) match, they pay 99 cents less salary on average.
    Plus, you don’t even get all of the employer match during the first several years you work for the company – you need to be “vested” first. If you leave your job before that, you typically don’t get the full match. And…according to the Bureau of Labor Statistics, the average time a person stays on the job is only 4.6 years.

    Reason #3: Fees that Devour Your Hard-Earned Money

    In spite of the rules passed a few years ago requiring better 401(k) fee disclosure, surveys show most participants still have NO clue how much they’re actually paying. But according to Brightscope, participants in small plans pay 1.9% in fees annually, and participants in large plans pay 1.08% per year. If those fees sound like “small change” to you, then here’s a wake-up call: Fees of only 1% per year can slash the value of your savings by 28% over the next 35 years, according to the Department of Labor.

    Reason #4: Funding a 401(k) is Like Putting Your Money in Prison

    It’s like a trade with the devil: Give me all your savings in return for tax-deferral (a scam as we’ve seen) and an employer match (another scam), and I’ll keep it under lock and key for you until you’re 59.5 years old. You have to beg for permission to use your own money! There are all kinds of restrictions and penalties for accessing YOUR money.

    Reason #5: The Myth of Market Returns

    You’re told that over the long term, you can do well in the stock market. But over the last three decades, the average equity mutual fund investor has earned only 3.66% per year, beating inflation by only 1% per year, according to the DALBAR studies. And God forbid you hit another 50% decline just as you retire. You’ll have no more “long run” left to recover.

    Reason #6: After Decades of Being Lab Rats in the Great 401(k) Experiment, Most Pre-Retirees Still Don’t Have Enough Saved. Even the “father” of the 401(k), Ted Benna, has called it an “out of control monster” that should be blown up.

    Perhaps the most accurate name for a 401(k) is…….a hope and pray plan.

  12. IMO, most of your readers either did or didn’t with their retirement funds, and it’s too late to help (or hurt) most of them. Personally, I don’t like any retirement advice that includes options (save maybe for covered calls) or currency trading (often promoted on your site) or inverse ETFs, especially leveraged ones (also promoted) or gold bug schemes. You seem to mix quite conservative advice with frankly outrageous advice (at least vis a vis retirement)–and I mean across your various Weiss advisors.

  13. Brad, concerning 401K’s. The 401K’s are a godsend for employees who change jobs often. From what I can find out, the main objections are limited investment selection and high fees. That is where improvements need to be made.

  14. Brad —401(k)
    My pension was frozen at the age of 52–it literally cut me in half. My wife started getting a pension plan (for only 19 years maximum)–she was able to buy 5 years pension time (public
    pension). we have saved in IRA’s since ’82. with social security we’ll be ok for another 25 years. We are retiring at the end of 2017–65 years old. we have IRA’s, Roth IRA’s, savings and SS.
    children : They have been putting 10% (at least) into 401’s since they started working..the youngest is 32 oldest is 36.
    only one has a pension…one has a cash account that the company puts 4%..the youngest has only the 401.
    I try and give advice to all. Your column in our case would have to cover all scenarios.
    have fun

  15. I am not very stock market investing wise and I am two years away from retirement. My main savings is my 401K, which has not been very lucrative for me an investment dummy. How can I maximize my returns inside my 401K environment over the next two years?

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