With all the talk about public pensions and their liabilities, the imminent arrival a real crisis has gone dramatically underreported. It’ll soon become clear that 401(k) plans – into which millions of Americans workers were forced – have failed to meet their stated purpose of funding a dignified, secure retirement.
The original purpose of 401(k) plans was to provide extra retirement money for highly compensated executives. But with no long term data on these plans’ viability, and with employers privately admitting that a 401(k) plan would prove inadequate for retirement, the 401(k) idea was seized on by American employers as a way to rid themselves of the burden of providing defined benefit pension plans.
Now, as the first generation of Americans placed into these plans near retirement, the failure of the 401(k) as a retirement vehicle is becoming painfully obvious.
Only eight percent of households nearing retirement had accumulated in their 401(k) plan the amount necessary to maintain their current standard of living post-retirement, according to a recent study commissioned by the Wall Street Journal. Even the most optimistic survey shows that workers who’ve been with the same employer for 30 years and are in their 60s have an average balance of only $158,754.
The inherent flaws of the 401(k) plan include leaving participants at the mercy of market cycles, and leaving them with scant time to recover from losses, especially if they occur later in life when the market turns down for a medium or extended period. Participants face the ongoing risk of outliving their assets, no matter how carefully they invest, and with the added burden of high fees for mediocre returns.
The 401(k) plan is a serious failure that is going to haunt and bring a lot of pain to this nation for decades to come.