Birth of 401(k) plans allows worker’s input
SavingsPension plans often rebalance themselves, experts say
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By Jim Stafford
Published: October 12, 2008
A quiet revolution was unleashed on American workers in 1981 that continues today and impacts millions.
It was the debut of the 401(k), the retirement savings plan that puts much of the responsibility of both funding and investing on the shoulders of employees. The Johnson Cos. designed the first 401(k) for its employees, which allowed them to defer a portion of their salary tax free into a retirement fund.
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A defined shift
Both employees and employers found a lot to like in the so-called "defined contribution” retirement plans. The plans are portable, allow employees to direct the investments and reduce responsibilities on employers.
As a result, the number of traditional "defined benefit” retirement plans controlled by employers has declined dramatically. From a high of about 170,000 in 1985, traditional retirement plans have dwindled to about 25,000 today, said Dudley Hyde, an attorney with Oklahoma City-based McAfee-Taft and a pension specialist.
"Employers have frozen those plans, they have terminated those plans and they have said ‘we are shifting the retirement risk to the employee, we are out of that business,” Hyde said.
The downside to 401(k) plans is the risk that employees take in controlling their own retirement accounts. Most accounts are invested in stock mutual funds, which are vulnerable to market fluctuations.
"The irony of this is that during good times like in the late ’90s when the stock market was going through the roof, everybody wanted to be in a defined contribution plan because their account was their account and would run up with the market,” Hyde said.
Best of both worlds
But when markets are roiled by a crisis such as the one that major Wall Street banks have endured lately, the nest-egg is vulnerable.
"When the market goes south and times are difficult, everybody wants to have that promised benefit of a defined benefit plan,” he said. "‘I don’t have to worry about the investment outcome.’ So, employees, understandably, want the best of both worlds.”
But the retirement course for the nation’s employees appears to be set, and it doesn’t include resurrection of traditional retirement plans, Hyde said.
"I don’t think they are going to come back,” he said. "What I do see is that this situation where the employee is directing his own investment needs to be revisited.”
In fact, some plans already have taken the requirement to direct the investment out of the employee’s hands by creating accounts that automatically rebalance and reallocate the fund as the employee ages from ages 30 to 65.
"Each five or 10 years that fund automatically rebalances without the employee doing anything,” Hyde said. "It is on auto-pilot. I think that is going to be very helpful because it is professionally managed. I’ve just (seen) too many situations where people have mismanaged their own account.”
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That said, the companies dropped the pension plans, the ones that would have allowed you to retire with a monthly payment (also called a defined benefits plan), adn replaced it with the vrious 401k options.
The reason this is dramatically important is because the companies only have to, at best, match the employee contribution, ( the employee is now funding their own plan, instead of the company) and the TOTAL AMOUNT that you can put aside or save, is dramatically limited compared to a pension plan.
The end result is that you have to save your own retirement, matched by your employer, at a rate that is 70% less than you would have had had it been a pension plan. Second you are not going to have jack in it even if you fully fund it, bc 100-200k isnt going to allow you to retire comfortably after your years of labor.
That is the accuracy of the history of the 401k and the shift away from the pesnions plans and the reason for it.
What McCain and or Obama and our worthless congress needs to do, is to allow each person to set aside as much as they want out of their wages and salaries into the 401k plan, no limits as there are now, ie $12.5k a year is not going to allow you to retire in 20 years. Let everyone at least have the opportunity to save by putting every penny they want into their IRA/401k.