Everyday Economy

401(k)'s: When you advise yourself

If you've been spooked by the big negatives on your 401(k) statements, you've got plenty of company.

The widespread dent in the retirement savings accounts now has some experts questioning whether the whole program is fundamentally flawed, since it puts untrained, unskilled people in charge of their own investments. The Wall Street Journal has a deep report on this issue today.

After watching her account drop 44% last year, Kristine Gardner, a 35-year-old information-technology project manager in Longview, Wash., feels no sense of security. "There's just no guarantee that when you're ready to retire you're going to have the money," she says. "You either put it in a money market which pays 1%, which isn't enough to retire, or you expose yourself to huge market risk and you can lose half your retirement in one year."

Many retirement experts have come to a similar conclusion: The 401(k) system, which has turned countless amateurs like Ms. Gardner into their own pension-fund managers, has serious shortcomings.

"This is the biggest test that the 401(k) plan has seen to date, and it has failed," says Robyn Credico, head of defined-contribution consulting at Watson Wyatt Worldwide, noting that many baby boomers are ready to retire. "We've put people close to retirement in a very challenging position."

Read the full post here. It notes that proposals for changing or reforming the system of retirement plans has already begun in Congress -- with plans ranging from universal retirement coverage to simply providing better education.

Part of the problem, critics say, is that the 401(k) is trying to fill a role it was never designed to play. The plans were born with little fanfare in 1978 when Congress added section 401(k) to the Internal Revenue Code. Initially, many employers saw them as a supplement to company-funded defined-benefit plans and Social Security -- and a way for executives to stash some of their compensation in tax-deferred accounts.

But the legislation marked the beginning of the end of professionally managed pensions that provided guaranteed benefits to retirees. As big employers recognized that 401(k)s are substantially cheaper than defined-benefit plans, the employee-managed accounts moved from supporting role to center stage. Many workers didn't even participate in the voluntary plans, which meant that employers didn't have to make matching contributions. What's more, employers aren't required to contribute to the plans at all.

One problems, experts say, is that investors may respond too quickly to losses -- dumping unprofitable stocks and locking in their losses, while shifting their money to low-paying, conservative returns. But the WSJ says that even if investors acted wisely, there is an element of luck in the 401(k) system.

Even if workers follow the golden rules of 401(k) investing -- saving early and diligently, holding a broadly diversified investment mix, never tapping their savings until retirement -- their success can still depend largely on the luck of the stock-market draw.

Boston College's retirement-research center recently ran scenarios that assumed workers had contributed 6% of pay to a plan for 40 years, had invested in a target-date fund, had never touched their savings until retiring and had annuitized the assets at retirement. The chunk of preretirement income these savers could replace in retirement varied dramatically depending on when they retired. Those retiring in 1948 could replace just 19%; those retiring in 1999, 51%; and 2008 retirees, 28%.

How has the plummeting stock market affected your plans for retirement? Do you have a 401(k), and have you been happy with it, in general, as a tool for retirement savings?

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Shawn Vestal
Shawn Vestal writes a news column three times a week.

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