The 401(k) Reaches 40 With Flaws Left to Fix

How can a retirement plan be effective if it focuses only on savings and not the income necessary for retirement itself?

(Image credit: efesan)

On its 40th anniversary, let us celebrate the 401(k). And then let’s get to work solving the problems left unresolved a generation ago.

The 401(k) has enabled millions of everyday workers to put away substantial sums for retirement, do it conveniently and get some tax savings. Without this mechanism and without the discipline of regular savings, future retirees might be left with just Social Security to rely on.

Pensions’ disappearing act

As you have probably heard, over the years, corporations that experienced the rising and fluctuating cost of traditional pensions stopped offering this lifelong, guaranteed source of retirement income. Instead, employees were steered toward the 401(k), where they could save pretax dollars for use when they stopped working.

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A recent New Yorker cartoon shows an older gentleman sitting on a couch with a couple of youngsters. One of them asks, “Grandpa, tell us again about pensions!”

Ah, pensions. The 401(k) has proved to be a useful savings tool, with a total of $7.6 trillion currently invested nationally. But we look back on pensions wistfully, knowing that for most of us, they will never return.

Now, as we light the birthday candles — 401(k)s came into being with the passage of the Revenue Act of 1978 — let’s talk about the second part of the story: The 401(k) does not do the job many thought it would do, which was to replace traditional pensions and their guaranteed, lifelong payments.

Today, workers shoulder the risk

Corporations have successfully shifted the risk of providing lifelong retirement income to employees, and the 401(k) alone does not equip employees with the means to prepare for retirement.

Gone are the days when workers could ignore the stock market while knowing that their pension checks would arrive in the mail every month. Today, people approaching retirement have to educate themselves on finance.

At the same time, an industry of financial advisers counsels us on how to roll out of a 401(k) and invest the money in a rollover IRA. Few, however, offer guidance on how to turn those savings into sustainable income.

What is the solution?

Continue to work on your financial education. Even if you find it daunting, take it in small bites and find sources that are easy to understand. The government could also help by requiring 401(k) plan sponsors to automatically enroll employees in a program where a portion of their 401(k) savings is converted into income annuities in retirement. Employees should have the right to opt out, but those who stayed in would enjoy the pension-like benefits that income annuities offer.

In my view, everyone who has built substantial savings in their 401(k) should consider buying an income annuity to provide some guaranteed income through retirement. There are plenty of options and many strong insurance companies that offer them.

Take control of your financial future

More than 3.5 million people in the United States are turning 65 each year. Let’s hope that on the 50th anniversary of the 401(k) we have addressed how to adjust this excellent savings tool so that it helps provide dependable, spendable income after we stop working.

As the venerable 401(k) reaches 40, it can’t legitimately be called a retirement account until it addresses retirement, and not just savings.


This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Jerry Golden, Investment Adviser Representative
President, Golden Retirement Advisors Inc.

Jerry Golden is the founder and CEO of Golden Retirement Advisors Inc. He specializes in helping consumers create retirement plans that provide income that cannot be outlived. Find out more at, where consumers can explore all types of income annuity options, anonymously and at no cost.