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.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
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.
-
Stock Market Today: Have We Seen the Bottom for Stocks?Solid first-quarter earnings suggest fundamentals remain solid, and recent price action is encouraging too.
-
Is the GOP Secretly Planning to Raise Taxes on the Rich?Tax Reform As high-stakes tax reform talks resume on Capitol Hill, questions are swirling about what Republicans and President Trump will do.
-
Social Security Is Taxable, But There Are WorkaroundsIf you're strategic about your retirement account withdrawals, you can potentially minimize the taxes you'll pay on your Social Security benefits.
-
Serious Medical Diagnosis? Four Financial Steps to TakeA serious medical diagnosis calls for updates of your financial, health care and estate plans as well as open conversations with those who'll fulfill your wishes.
-
To Stay on Track for Retirement, Consider Doing ThisWriting down your retirement and income plan in an investment policy statement can help you resist letting a bear market upend your retirement.
-
How to Make Changing Interest Rates Work for Your RetirementHigher (or lower) rates can be painful in some ways and helpful in others. The key is being prepared to take advantage of the situation.
-
Within Five Years of Retirement? Five Things to Do NowIf you're retiring in the next five years, your to-do list should contain some financial planning and, according to current retirees, a few life goals, too.
-
The Home Stretch: Seven Essential Steps for Pre-RetireesThe decade before retirement is the home stretch in the race to quit work — but there are crucial financial decisions to make before you reach the finish line.
-
Three Options for Retirees With Concentrated Stock PositionsIf a significant chunk of your portfolio is tied up in a single stock, you'll need to make sure it won't disrupt your retirement and legacy goals. Here's how.
-
Four Reasons It May Be Time to Shop for New InsuranceYou may be unhappy with your insurance for any number of reasons, so once you've decided to shop, what is appropriate (or inappropriate) timing?
