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Time taking aim at 401k plans


J Simmons

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Time magazine here takes aim at 401k plans. Apparently, 401k plans are the problem to all of America's retirement woes. 401k plans are apparentently a 'lousy idea'. And the "idea that we could ever save enough to pay for 30 years of leisure is a relatively recent invention." No mention in the article how lengthening durations of retirement (unproductive years) at the end of life due to retirement in mid-60s but life expectancies growing to mid-80s impacts DB plans and the companies that sponsor them.

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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John, whenever I see an article on qualified plans in the "popular press", like Time, I know that at best it will be laughable. It's to bad they rarely get the facts straight on any topic. Don't get too worried or mad since their readership is shrinking.

Having braved the blizzard, I take a moment to contemplate the meaning of life. Should I really be riding in such cold? Why are my goggles covered with a thin layer of ice? Will this effect coverage testing?

QPA, QKA

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Geez... Good writer, bad journalist.

1) Wow, let's take some statistics w/out citing a reference, draw some broad conclusions and misapply them to people at an individual level.

2) So if I read the article correctly... the day someone leaves employment is the day that the value of their 401(k) is fixed in stone and it will never change, ever again, except for withdrawals???

3) The words "retirement", "leisure" and "luxury" are all three very different things. I refuse to feel bad that someone can't afford to buy a house in Florida and play golf every day.

4) Um.. so on the last page, the whole point of the article is to justify some group's idea of offering private retirement annuities to our workers?!?!? Don't tell me why 401(k)s are bad; tell me how you're going to fix insurance regulations so private-insurance annuities are actually a reasonable alternative.

5) And finally, the article completely fails to comprehend the modern "3-legged stool" retirement philosophy... Social Security, employer retirement plans and personal savings. The article would have you think that someone can't save for retirement w/out a 401(k). Guess I'm breaking the rules and should close my brokerage account and blow it all on a new car.

Kurt Vonnegut: 'To be is to do'-Socrates 'To do is to be'-Jean-Paul Sartre 'Do be do be do'-Frank Sinatra

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An article is subject to space and topic limitations, and therfore cannot cover every aspect of its topic and definitely cannot cover related issues.

The article was about 401(k) and not about retirement in general.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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This reminds me of a humorous argument I once heard about the human thumb. In and of itself, the thumb has pretty limited utility. In fact, by itself the thumb has so little use, we would probably be better off without them it was argued.

Off with their thumbs I say!

We are being funny aren't we George?

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How come Ned Ryerson hasn't weighed in on this? The answer to retirement funds is, of course...

Ignoring the sort of "tabloid journalism" slant of the article, it does highlight a basic point that all of us are quite familiar with, as retirement plan professionals. That is, the "old" model of paternalistic corporations providing comfortable defined benefit plans with little or no employee contribution is, at least for now with the current swing of the pendulum, largely over. I disagree that 401(k) plans are bad - the problem is, and it is true, that most most people:

A. don't understand how much money it takes to provide a monthly payment of, say, 40-50% of their pre-retirement income, and therefore,

B. don't save enough even if they CAN, and,

C. many simply cannot afford to save the requisite amount.

So the point that the average 401(k) participant will not have enough on which to retire "comfortably" is well taken. That fact is unfortunately misapplied to somehow shift the blame for this societal woe to 401(k) plans themselves. Which is, of course, absurd.

The people in the (B) category above generally have only themselves to blame. I'm sorry if that sounds hard-hearted, but if I choose the expensive house over the moderate house, the fancy trips, the three cars instead of 1 or 2, etc., etc. and therefore don't have as much money at retirement - then I shouldn't hold 401(k) plans to blame. For those people in the © category, I sympathise - if every day is a struggle to simply survive, then you aren't going to be able to save a lot. I have no answers (or at least not good ones) to that dilemma, but I surely don't blame the 401(k) as being a "failure."

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Obviously, the solution is to have more DB plans!

:D

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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I read the article (and saw the author interviewed on CNBC yesterday), and while I agree the treatment is somewhat superficial, it points out some of the problems we in the industry have failed to address.

Over the last 25 years or so we HAVE witnessed the transfer of retirement responsibility from professional money managers to employee participants and we HAVE NOT also transferred (successfully) the knowledge and tools for those employee participants to be able to have a reasonable chance at a successful retirement. We are only now beginning to see any penetration of advice products and managed accounts - which are necessary for those without an aptitude or interest in money management (which would be a majority of those out there, based on the stats of 1) the number of people who even access their accounts annually; 2) the number who do (or rather don't) diversify, rebalance, and otherwise employ even the most basic of investment tactics; and 3) the amount of money still held in cash and cash equivalents in qualified retirement plans).

While the article focuses on retirement as an "event" (i.e. what the balance is on the date contributions stop), the author's real intent is to convey the total lack of preparation a participant has for making that balance last a lifetime. He could have equally as well pointed out that an annuity at retirement is also subkect to current economic conditions at the "event" horizon - that is, even if you through up your hands and admitted to not being able to manage money like a pro, and bough an annuity, do so at a single point in time subjects you to current interest rates which can have a huge impact on your payment stream (retire when rates are high and you'll get a better flow than if you retire when rates are low - like now.... As an industry, we haven't perfected a retirement annuity that allows a participant to "dollar cost average" in to a portable, cost effective solution to this problem (although there are some products out there, and others in development), and we'll have to re-address the issue of re-educating the masses to realize that they can't be the next Peter Lynch, no matter how hard the average participant tries, and that buying into a retirement annuity would be a good thing.

For decades, we've been trying to educate people to be investors - and we need to realize that the best we can do (for them) is to educate them to be savers, and leave the investing to professionals. We've taught them that they are "in charge" and left them to their own devices - now we need to unlearn the "control" part of it and teach the proper use of delegation (through the right tools and products) for success.

The reason for this article now is simply the beating the markets have taken over the last couple of years - that show the volatility of a DC account, and yet, we have no solution to that, except keep working, and save more.....

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.

Over the last 25 years or so we HAVE witnessed the transfer of retirement responsibility from professional money managers to employee participants and we HAVE NOT also transferred (successfully) the knowledge and tools for those employee participants to be able to have a reasonable chance at a successful retirement.

.

we need to realize that the best we can do (for them) is to educate them to be savers, and leave the investing to professionals. We've taught them that they are "in charge" and left them to their own devices - now we need to unlearn the "control" part of it and teach the proper use of delegation (through the right tools and products) for success.

.

Those statements I most certainly agree with.

Kurt Vonnegut: 'To be is to do'-Socrates 'To do is to be'-Jean-Paul Sartre 'Do be do be do'-Frank Sinatra

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If we're going to compare DB and 401(k) plans, and I'm not saying it is appropriate to do so, the biggest difference in practice is that there's a lot less money going into 401(k) plans. All the talk about investment advice and the market is easier to "solve" so that gets most of the attention, but if the typical 401(k) plan had 5-10% of pay going in as an employer contribution on a regular basis, there'd be a lot more money at the end of the rainbow, duh.

I don't think there's any question that the typical employee either 1) doesn't understand the value of benefits accruing in a DB plan, 2) doesn't care, or 3) feels powerless to do anything about the replacement of a more valuable DB plan with a 401(k) plan. That's unfortunate.

I'm not saying DB plans are better or that we should make any attempts to bring them back. In fact, since the sentiment coming from the article is "gee, I had a retirement plan, why can't I retire?", I often wonder if we'd be better off with no tax-qualified retirement system at all. At least there wouldn't be false comfort in being "covered" by an employer plan.

Ed Snyder

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The point made by the article is that the shift from traditional DB plans to 401(k) plans is not working out well for the individual: "two and a half decades ago, his then employer, Occidental Petroleum Corp., cut its traditional defined pension plan in favor of a 401(k)-type system."

Employers transferred the responsibility for funding as well as investment experience to the individual employee. There were very few altruistic motives behind the move to 401(k) plans I believe. As a replacement for DB plans, these CODAs are less favorable to the employee.

In many circles 401(k)-type plans are overhyped and superstitiously worshipped. These plans are not the panacea for the world's retirement ailments.

PensionPro, CPC, TGPC

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The issue is not db vs dc plans, in my opinion. Rather, the issue is signficant employer contributions vs. little or no employer contributions. Perhaps this is justified due to the resources dedicated to health insurance, as compared to prior generations, or the substitution for more cash up front in place of retirement benefits. However, at the end of the day the problem is the loss of forced savings by employers for their employees, coupled with employees' inability or refusal to save enough. I don't have a solution, but I know getting rid of 401ks is not the solution.

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I'm not saying DB plans are better or that we should make any attempts to bring them back.

I'll say it.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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I'm not saying DB plans are better or that we should make any attempts to bring them back.

I'll say it.

I'll second that....

Since I'm now rapidly approaching "that age," my appreciation of the value of a DB plan is increasing....

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One great flaw of the DB plan is general lack of portability / continuity amongst employers. After 8 years at former job, I can now look forward to ~$325/month at age 65. Allowing for 25 years of inflation, that should almost pay my cable bill.

Which that said... I suddenly see the attraction of a broadbased private annuity pool as proposed at the end of the above article. However that's a solution to DB portability and not to the enumerated problems in 401(k)s.

Kurt Vonnegut: 'To be is to do'-Socrates 'To do is to be'-Jean-Paul Sartre 'Do be do be do'-Frank Sinatra

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I suggest that BOTH DB and 401(k) Plans have a time and place. To be fair, you need to recognize the basic differences AND purposes for the programs.

401(k) Plans are not pension plans. They are profit sharing plans (typically) with CODA provisions. They do not provide the security of the DB Plan, and were never intended to do so. They are not the solution for problems being experienced with retirement income, but they are also not the problem.

DB Plans are also not the solution. It should not be forgotten that many firms do not use a DB Plan given the inability to bear the funding burden. Is the employee really better off with the DB Plan if it results in the firm not being able to offer employment?

Perhaps "worship at the alter" for either the 401(k) or DB Plan is foolish. Instead, we may considering using both whenever possible, allowing for the costs and benefits that both have. Also, is it totally the private employers burden? Does not the person also have some responsibility?

Looking at earlier posts I must say that #6 by Belgrath made the most sense to me. If you want a solution, don't ignore any of the tools available. One is NOT better than the other. They serve in different ways. Keep that in mind and you will better serve your clients, in my opinion.

As final comments, investment markets go up and they go down. Since, as I understand, there is a historical upward trend, does it make sense to trash the program that is tied to the markets simply because the markets are currently down? Maybe it make sense to transfer all risks and cost to firms that are already struggling to survive? Perhaps we should mandate that companies cover all needs of retirees? Didn't that work for GM? Perhaps workers be better off unemployed, or with no benefits? Just some random thoughts.

Having braved the blizzard, I take a moment to contemplate the meaning of life. Should I really be riding in such cold? Why are my goggles covered with a thin layer of ice? Will this effect coverage testing?

QPA, QKA

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I finally read the TIME article and thought that it was filled with misleading numerical comparisons. I think that the article's main point -- that 401(k) plans often don't generate sufficient retirement savings -- has some validity but this article doesn't inform us at all (in my opinion) of the magnitude of the problem.

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It might have been a more useful approach for the Time reporter simply to have based his piece on the fact that while we are living longer (i.e., longer periods post productive work lives), there is a greater need for retirement resources both for basic living expenses and rising medical costs for geriatrics. And given the current economic downturn, there is less in 401k accounts than there was a 15 months ago, less in DB funds, and less in corporate coffers, and governments are collecting less tax money--reducing the resources needed for longer and longer retirements. It seems the answer is for people to work longer.

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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We all know that, no matter what you tell them, many participants try to defer enough to get the maximum match and hope that will be enough.

And many of those who know they should save more, don't or can't.

Regardless of how the account is invested, the primary factor in determining the final total is how much is contributed. So, 401(k)'s do not provide a sufficient level of retirement income, because most people don't defer at the level necessary to provide what they will need.

Just wondering - If public opinion could be turned against 401(k)'s, and all 401(k) accounts were banned and closed and distributed, approximately how much federal tax revenue would that generate relative to, say, the total federal debt? (Not that anyone would consider doing such a thing.)

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GMK - I would say nothing if you were wondering if the money would be used to retire debt. It would just be spent, IMHO.

Having braved the blizzard, I take a moment to contemplate the meaning of life. Should I really be riding in such cold? Why are my goggles covered with a thin layer of ice? Will this effect coverage testing?

QPA, QKA

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GMK - I would say nothing if you were wondering if the money would be used to retire debt. It would just be spent, IMHO.

I agree, BG. Probably all spent and then some. I just figured I needed a big number if there were to be a comparison.

So, is there an estimate of how much higher tax revenues would be each year if there weren't any 401(k) deferrals?

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So, is there an estimate of how much higher tax revenues would be each year if there weren't any 401(k) deferrals?

You can probably find a CBO estimate of any hypothetical situation. Then you have to decide if it has any validity.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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I couldn't find an exact answer to the cost of tax deferrals into retirement plans but found the following interesting (in 2002 dollars):

http://www.cbo.gov/ftpdocs/54xx/doc5418/05...mentSavings.pdf

As of the end of 2002, $10.1 trillion was in tax-deferred retirement plans, of which $9.0 trillion was taxable upon withdrawal. Despite the recent trend toward defined-contribution plans, most of those funds were still in defined-benefit plans: $3.1 trillion in private plans (both employment-based pensions and individual annuities) and $2.9 trillion in government plans. The remaining $4.1 trillion was in private-sector defined-contribution plans and IRAs.

Kurt Vonnegut: 'To be is to do'-Socrates 'To do is to be'-Jean-Paul Sartre 'Do be do be do'-Frank Sinatra

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