Are people relying too much on the 401(k) system?

by **PHPagency** » Wed Jun 15, 2011 1:23 pm

From our blog: http://phpagencyblog.com/2011/06/02/financial-fundamentals-the-ups-and-downs-of-a-401k/What can financial advisors do to reach the millions who think their 401(k) + SSI alone will provide for their retirement?

According to the chart on the blog, a lot of retirees 401(k) plans are falling way short.

Have we created a false sense of security with employee-sponsored 401(k) plans?

by **Bradly T.** » Thu Jun 16, 2011 9:33 am

Every accumulation/savings device is but a mere tool. There has always been those who spend less than earned and those who spend it all and those perpetually upside down. It's a poor craftsmen that blames his/her tools for poor outcomes. The 401k has far more potential than has been realized thanks to the ERISA and DOL's liability and education and advice elements/restrictions, leaving 98% of all participants clueless about how to manage/allocate/utilize this tool.

Far too many clients do retire with insufficient assets but even more retire with NO nonqualified assets, making lump sum purchases (home improvements, autos, vacations, gifts, etc.) very expensive. There's nothing wrong with tax incentives for savings and there's nothing wrong with the 401k - families need more knowledge and help with basic wealth creation and protection planning....and they sure don't get it at work or through ERISA.

The problem with retirement planning is simply the rediculous demands for accumulation required by 30-40 year long retirement aspirations. Just how can one earn enough in 35 years to support oneself for 70 years? Economic reality will shorten retirements; economic decline will eliminate it, making it a historical 2 generation experience, enjoyed by few for a short time. No one retired prior to WWII - you worked until you died or were too disabled. Any planners recommending that financial strategy yet? We will be.........

by **Bradly T.** » Fri Jun 17, 2011 10:25 am

Spam bump.

by **Tad Borek** » Fri Jun 17, 2011 11:21 am

I didn't click your link but I'll take the subject line at face value.

The issue isn't Sec. 401(k) - $16,500 + match per year, saved over a lifetime, will provide for egregiously high consumption during retirement even if stuck in a GIC - it's the basic trade-off between consumption today and years in the future. It's a saving problem...low savings rates. All the EBRI surveys show this. Based on the balances most people aren't sticking much if any money in their plans, they're spending it instead. At lower income levels there's a "working poor" issue but in a country like ours with a high standard of living, this comes out as higher discretionary spending in some form for most people.

Cynically: is it a problem? Or is it just that there's a system available that we can all make use of, that some choose not to (in exchange for the low consumption that results from living off Social Security)? Bradly does that argument appeal to your libertarian side?

-Tad

by **Bradly T.** » Fri Jun 17, 2011 12:05 pm

Tad - as usual, you're on point. Even without the VERY good tax incentives to save, prudence would suggest significantly higher savings rates than experienced in USA. It is strictly a cultural (read decadent) phenom - we are spoiled, spoiled, spoiled!! I believe from 1990-2008 we actually had a national household NEGATIVE savings rate!! Borrowing from the future to have what is not needed but wanted NOW! And now Uncle Sam is spending $3 for every $2 in tax revenue.

I am not opposed to the SS system....it IS funded by employees and employers - not by taxpayers per se (although I would prefer a funded pension as opposed to an unfunded future promise paid by future payroll deductions from others - I mean, MY money is gone - pooof - to my parents - hope MY kids work and pay taxes long enough!). I also support social safety net funding for those who cannot work or support themselves (this would not include drunks, addicts, and many SSI claims). I really support tax incentives to save earned income for future needs.....including medical, education, and retirement. I have several criticisms of ERISA structural impacts on both results and participation rates but hey, it can and does work (if you have a professional at your elbow)!

But mostly I support RESPONSIBILITY which does NOT require tax incentives and complex regulatory structures - it takes discipline and judgement!! Blaming anything for spending too much and saving too little seems juvenile and an invitation for Big Brother "solutions".