August 28, 2016
Over the last generation there has been a shift from pensions to do it yourself 401k plans. The idea was pitched during a time when the stock market was in a bull run and Wall Street was excited to open up additional streams of revenue. But now a generation later, the results are rather clear. The 401k has simply not lived up to the promise for millions of Americans. Where pensions had a forced saving mechanism, the 401k with absurd fees, buffet style choices, and complicated structures simply kept many Americans out of the system from investing. This also meant decades of lost compounding and now that millions are entering retirement, they are looking at paltry nest eggs. How did the 401k destroy retirement for millions of Americans?
The 401k fantasy versus reality
The big advantage of traditional pensions was that it was automatic. People had a set amount yanked out and it was managed by professionals. Most had to participate in this plan and in the end, it allowed for a nice amount to accumulate. But the 401k was opt-in for many and the litany of options left many Americans out in the dark. The results are terrible especially for Americans with less education:
For those with less than a high school education, about 30 percent participate in a 401k or pension. For those with a high school education, it rises to near 50 percent. But keep in mind that most Americans do not have a college degree. And many that do get a college degree are then in a position of being mired in deep student debt.
The problem is that as a working career ends, the chance to save money becomes more difficult as costs rise in areas like healthcare. Social Security has become the default backup and the primary source of retirement income for millions of Americans.
Here are some figures:
1980: 38 percent of private sector had a pension
19 percent had a 401k
Today: 15 percent of private sector have a pension
43 percent have a 401k
This shift has resulted in many Americans being completely ill prepared for retirement. During a record stock market run from the 1980s to today, many Americans don’t even own one stock. The typical 401k for those that actually have one is ridiculously low. This is why many people are now on the new retirement model: working until you die.
So set aside that most don’t even have a 401k. How are people doing when they do have a 401k?
The median amount for those 55 to 64 is $76,381. That is not much when you consider one health problem in the hospital for a few days can wipe out that entire amount in one swing. And keep in mind the above table is for people that actually utilize the 401k which is a minority.
In the end, the 401k simply did not have the intended impact and people would have been better off with a pension like forced savings.