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Early champions of the most ubiquitous retirement plan in the US say it hasn’t lived up to its promise — 5 financial advisers break down where it shines and fails

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America has a saving problem. But the 401(k) isn’t to blame.

The 401(k) — perhaps the most ubiquitous but frequently underutilized retirement vehicle in the US — came under fire last week in a gloomy article from The Wall Street Journal, in which the very same people who championed the retirement plan decades ago now say that it hasn’t served average Americans all that well.

Named after a tweak in the tax code back in 1978, the 401(k) came to life in an era when pensions offered and funded by private employers were the prominent form of retirement savings. For employers, pensions are expensive, and 401(k)s are comparatively cheap. Unsurprisingly, pensions declined precipitously in the decades since as businesses instead embraced the thriftier 401(k), which primarily depends on employees funding it with their pretax salaries. 

But the 401(k) was never designed as a replacement for the pension, and, according to the WSJ story, some of the influential “human-resources executives, consultants, economists and policy experts” who initially blew air into the 401(k)’s sails for its potential to encourage saving now bemoan America’s reliance on it. The investment gains they projected proved too optimistic, and high plan fees combined with significant market drops in the 2000s have left many 401(k) adopters behind on their savings goals. 

Americans do have a saving problem. More than half of US households are in danger of not having enough money to live on in retirement. And 47% of the country wouldn’t have the money to pay for an unexpected $400 expense, according to the Federal Reserve.

But the 401(k) isn’t the problem, according to a handful of financial advisers all interviewed by Business Insider — none of whom work for companies that sell 401(k) plans and all of whom are bound by the fiduciary duty to act in their clients’ best interests. They acknowledged the savings plan isn’t perfect, but they largely defended its utility for helping people achieve a comfortable retirement.

Here are their thoughts on the 401(k), nearly 40 years after its creation:

Alan Moore, financial planner and founder of the XY Planning Network

401(k)s were created as a way for employees to add savings on their own, which would layer on top of pensions that employers funded at the time. They envisioned a dual savings system which would allow for regular retirement income from their pension, and additional savings that could be withdrawn and used as needed for additional expenses. Employers however began to see the elimination of pensions as a major cost reduction, and used 401(k)’s as a way to transition savings responsibilities from employers to employees.

“Now the truth is, pensions are extremely expensive and they aren’t economically viable for most businesses given market conditions over the last several decades, but there was a lack of communication and education on the transition which has led the founders of 401(k)’s to feel like they messed up. 

“I believe 401(k)’s are a wonderful savings tool, however adjustments should be made to make them even more useful, such as:

1.  Auto opt-in for all new employees

2.  Raising the limit to allow for higher contributions

3.  Mandated low cost index funds

4.  Auto asset allocation to a target dated retirement mix of low cost funds”

Katie Brewer, financial planner and founder of Your Richest Life

“At the end of the day, people have few options for retirement savings. People can put money into an IRA or Roth IRA, but those have smaller yearly limits than 401(k) plans and also have income limits on who can contribute. People can put money into a 401(k) or other retirement plan. People can save into a regular brokerage account, but every dividend or capital gain is taxed along the way, and the money could be taxed again when investments are sold.

“So even though a 401(k) may not be the perfect place, it is often the best choice for many people due to the simplicity of having it taken out of the paycheck, the ability to contribute regardless of income (as long as the 401(k) isn’t deemed to be top-heavy), the possibility of gaining an employer match, and the avoidance of any ‘minimum initial investment’ in the underlying mutual funds.”

Michael Solari, financial planner and founder of Solari Financial Planning

“Overall — I don’t think 401(k)s are a bad retirement vehicle. We are seeing a bit of what happens when you make a change (from pension to 401(k)) without truly educating people of the importance of saving. If managed well, people can end up with a nice nest egg.

“Most people do not fully understand the intricacies of the stock market and they tend to make bad decisions when there’s a downturn. I really think there needs to be a better effort educating people about why it’s important to save, how much they should be saving and how their investments should be allocated. “

Jonathan K. DeYoe, wealth adviser and founder of DeYoe Wealth Management

The pensions of old would have died whether or not 401(k)s had been invented. Companies that kept them on the books would have failed (and the pension promises they had made would have failed with them). The incomes being paid out were not supportable by their contributions and investment returns after fees — especially as people lived longer and longer lives. This is still true of modern pensions that should know better. The heart of the issue around pensions is the same issue at the heart of 401(k)s.

“The real issues are:

•  We are all very bad at deferred gratification — we don’t like to save.

•  We are all living longer — which means we need to save even more (see above, we don’t like this).

•  We are not good at investing — we get greedy and fearful (and we act) at the wrong times for the wrong reasons.

•  We are willing to pay high fees for empty promises in lieu of understanding how things work.”

Bob Gavlak, financial planner and wealth advisor with Strategic Wealth Partners

“Businesses did not choose to change the way they provide retirement plans solely due to the push of 401(k) plans — they did it as a way to save money in a marketplace that continues to be more and more competitive. Businesses will always find the best, most profitable ways to take advantage of the market, and that includes any piece of the tax code.

“The adoption of the 401(k) plan (and a number of other retirement plans) by more and more companies is simply the process of evolution of business, where these companies are moving to a more profitable approach in any circumstance.

“Honestly, this does not change my view of 401(k) plans and the advice I give to my clients. For most people, the tax savings alone on an annual basis is worth the ‘costs’ of putting money in. 

“A 401(k) is only one piece of the puzzle. It’s important to understand all of your options, weigh those against your goals, and make decisions that fit best for you. Because today, unlike fifty years ago, your retirement readiness is up to you – not your employer.”