Carol Perry: 401Ks aren’t good primary retirement accounts

Prior to 2008, only 27 percent of working people in this country felt that Social Security would be their primary source of income at retirement. As of last year, 33 percent now feel this way. In reality, 57 percent of current retirees rely on Social Security as their primary source of income. There has always been a sizable gap between expectations and reality when the subject of retiring comes up, but things have never been so uncertain.

Prior to 1974, many companies provided pension plans but did not fund them separately. When a company would go bust, so did the pension plan, leaving workers empty-handed at retirement age. When 401K plans became popular in the 1980s, they were primarily used by highly compensated executives who already had pensions and wanted to save additional money, tax-deferred for retirement. When the IRS caught wind of this, 401K plans were made available to everyone as a supplement to pension plans. But they were supposed to be “supplements,” not the only option.

As manufacturers in the United States lost market share to cheap overseas labor, the bargaining power of the U.S. worker was diminished. Pensions were no longer the most cost-effective retirement vehicle for corporations, so the 401K plan became the primary savings vehicle for much of the private U.S. labor force.

Now instead of measuring retirement income by the years a person worked for their employer, the employee must figure out on their own how much to save in a 401K plan and what that plan should be invested in. The big problem is that unless all employees are professional investors, the 401K plan is a very serious gamble.

That fact became painfully obvious when the stock markets took huge losses in the financial crisis of 2008. For many close to retiring, not only did their primary source of income in retirement lose around half its value, so did the pre-retiree’s home. Many soon-to-be-retired folks had planned to sell their home, downsize and keep the remaining gains to feather their nest eggs. That capital gain, along with Social Security income and a growing balance in their 401K plan, would allow a retiree to live comfortably after leaving the work force. Today, many of those who had planned on retiring over the next decade are still in the work force and may remain there until death. This is not very good news to the generation of employees behind them who, through their supervisor’s retirement, would get promoted.

I have never liked 401K plans as a primary retirement account and consider them a failure. Pensions and Social Security income are easy for the average worker to calculate. Both rely on years in the workplace; there are no fancy savings calculations or sub-account rebalancing. The 401K places most of the burden on the worker and allows for the plan providers to reap huge profits in fees for these plans without providing any advice on how to manage them.

When I was a financial planner and adviser, I saw so many 401K plans that did not offer the employee a variety of choice reflective of the global markets. Also, I did not see many employers that offered their employees help with saving and investment choices. Instead, they were coming to me for help, but how many people currently working can afford professional help with their retirement plans?

When left to their own devices, employees think that fixed accounts, usually paying a low rate of return, are safest because there is no risk of loss to principal. Nothing could be further from the truth, though, since fixed accounts do not grow enough in time to meet future retirement income needs. How many employees, already uncomfortable with stock and bond market choices, buried their heads and never opened their statements until 2008? By then, it was too late. Granted, now the Dow and S&P have regained their previous highs, but the average employee who saw the value of his or her plan plummet has still not come back into the markets to recapture losses.

Many feel markets are not fair to the average Joe, and they are right. Today, markets favor institutional investors and high-frequency traders using computer models for short-term profit. This places the long-term investor at a real disadvantage. The 401K is a long-term savings vehicle, not a day trader’s delight.

What is going to happen to a generation of workers who, by definition of their birth date, have been forced to use the 401K, 457 or 403B plans for retirement? My guess is that many will never fully retire due to the losses taken in both stock and real estate markets from 2000-08. Without consideration to these employees, the taxes that were withheld from their paychecks went to bailing out the financial institutions directly involved in the crash, instead of the retirement products they sold. I was really angry about this injustice. I am still amazed at how many people just went quietly into the night rather than raise hell about the speculation taken by banks, brokerage firms and insurance companies with their customers’ money. Perhaps it would have happened if more people had understood the concept of moral hazard back then. But I’m guessing that most folks had enough on their plate just trying to get by.

Carol Perry is a retired financial adviser and has been a Northern Nevada resident since 1983. She can be reached at Carol_Perry@att.net.