http://www.wsj.com/articles/the-champions-of-the-401-k-lament-the-revolution-they-started-1483382348 interesting read
I read this yesterday, but I’m still not sure what the article is trying to say. The main issue with retirements, as the article describes, is that people are not saving enough. This has nothing to do with whether the plan is defined benefit or defined contribution.
its also saying ppl are not smart enough to chose their own asset mix and fees are killing returns.
at least a pension plan had a CFA choosing the investments
The problem with 401k is mostly behavioral, it seems. I’ve seen research that simple things like automatic opt in make huge differences in outcome.
Hmm… it seems that the asset allocation problem can be solved by simply defaulting to a target date fund. Many 401ks in fact do this.
While 401k plans have fees - who are we kidding? Pension plans have costs too. In fact, matching a very specific stream of future liabilities undoubtedly means more work than just parking money in an index fund.
The main disadvantage of 401k is that your returns might not meet your expectations. However, the article only briefly touches upon this, does not substantiate the lifestyle shortfall of people who are claimed to have lost money in market downturns, and focuses 90% of it lamentation on low participation or under contribution of investors to retirement plans.
Mandatory participation in 401k could have solved almost all the problems described in the article.
Anyone that believes DB plans are better than DC plans, please explain.
401k plans have their faults. The biggest being too much control is in the hands of the participants. The most crucial part, your contribution rate, is up to you. And your investment decisions are up to you. The contribution rate is really the issue. People need to save 15% (including company match). The second part isn’t as big a deal because most people won’t change the QDIA option they were placed into when they first started in the plan.
This article is actually pretty old. Forget where I read it last year, but it kind of surprises me that WSJ is rerunning old content…guess they aren’t above that.
Anyways, thought it was a dumb article then and still think that now. Similar to StL thoughts…participants have the power to save as much as they want (up to the limits of course). If they choose to save 2% a year they’re going to suffer the consequences. If they take responsibility and save 30-40% of their income, they’ll be financially independent in no time. Nothing wrong with the 401k, its the education that needs work.
i think mandatory participation is a good idea, employers should enroll employees and put them in a target date fund with 5% contribution rate
Auto-enrollment is becoming the norm. We’re seeing a lot of re-enrollments where everyone is automatically enrolled unless they opt out; automatically set at 4% (it varies but this is pretty typical); and put into their appropriate target date vintage. A feature that’s gaining a lot of traction is having the company raise the employee’s contribution by 1% every year unless they opt out.
People very rarely opt out or make changes.