
Champions of the 401(k) Lament the Revolution They Started - slededit
http://www.wsj.com/articles/the-champions-of-the-401-k-lament-the-revolution-they-started-1483382348
======
phkahler
I think the key to having more people achieve a good retirement is to reduce
the cost of existing as much as possible. That means zero property tax for
individuals or at least non-working people. One should be able to buy some
property, put a dwelling on it and grow a garden if they choose without any
ongoing costs. That would be an idea retirement for some, and the rest can
upgrade from there by having more money. But instead we created a society
where there are recurring costs to existence and people struggling the most to
achieve independence pay the highest tax rates.

Just some thoughts, I'm not proposing a comprehensive solution. It's just that
we keep wondering how people will fund retirement and I keep coming back to -
if it didn't cost so much to exist, there wouldn't be the concern about where
the money will come from.

~~~
NTDF9
>> That means zero property tax

As a tangent, I've always wondered if my understanding that property is no
guarantee of survival is incorrect.

When I was younger, I used to think having a fully-owned house is survival
forever, since you have no more payments to make (besides utils). As I grew up
and looked into the details, I realized property taxes stick with a property
forever.

This begs the question. Why buy a house at all? It's not like if you are laid
off, disabled or just incapable of finding and keeping a job, you will still
have a dwelling to squat and survive in.

This makes a house a liability more than an asset (in survival terms, not
monetary terms) in my mind.

Am I thinking right?

~~~
Tactic
It has value. And thus you can sell it or borrow against that value. The
alternative of renting does not maintain value. You pay to live there for a
month and then at the end of that month your value disappears.

It is true that a house has its downsides and requires more effort. That is
true of most anything with value.

~~~
NTDF9
>> The alternative of renting does not maintain value

What if renting is cheaper than buying (example SF bay area)?

More importantly, what if the purchase of house is made with the expectation
of growth in value of the house and that expectation turns out to be incorrect
after 30 years (as in Detroit)?

Beyond a certain cost of a house, wouldn't it be advisable to plunk money in
funds rather than a house (and hoping it builds equity)?

------
smallnamespace
As with many things, Singapore seems to have a sensible plan that is neither
100% government managed nor 100% private:

\- Saving is compulsory and amounts to around 15% of wages for the worker, and
another 15% to the employer

\- Principal growth depends on how the investment performs, but government
guarantees at least 2.5%, which is around what you can get from just buying a
30-year Singapore gov't bond

\- Account holders can choose a restricted number of asset classes to invest
in (e.g. ETFs, bonds, gold), but you can't just put it all in a penny stock

\- You can use the saved funds for health care, housing, education, and a
limited number of other needs until retirement -- no taking all the money out
and betting it on black

Long-term financial planning is inherently risky. Governments aren't
necessarily good at managing that risk, but then shoving all that
responsibility onto individuals doesn't work that well either, because the
truth is that if someone screws up and becomes totally indigent, society still
needs to bail them out, if only through paying huge emergency room bills.

This seems like a sane compromise: the worker and the government split the
risk, but the government also sets _sane defaults_ for employees. [2]

[1]
[https://en.wikipedia.org/wiki/Central_Provident_Fund](https://en.wikipedia.org/wiki/Central_Provident_Fund)

[2]
[https://en.wikipedia.org/wiki/Libertarian_paternalism](https://en.wikipedia.org/wiki/Libertarian_paternalism)

~~~
hackerboos
Why are so many people Singapore working into their 70s?

[https://www.bloomberg.com/news/articles/2015-01-06/what-
reti...](https://www.bloomberg.com/news/articles/2015-01-06/what-retirement-
singapore-older-workers-stay-on-the-job)

~~~
smallnamespace
Probably because their savings were still insufficient for their needs,
because they didn't get paid enough during their working years.

I'm not claiming that Singapore's system solves all edge cases (no system
can), just that the current scheme seems like a sane, rational compromise
between total or zero freedom.

------
kobeya
With a 491k I own my retirement savings and they can't be taken from me. I
control what investments can be made and my risk tolerances. 401k replaced
pensions? Good riddance!

The only crime here is 401ks being tied to employment and contribution limits.

~~~
ceejayoz
> With a 491k I own my retirement savings and they can't be taken from me.

Sure it can. Congress just has to pass a new tax (or increase the existing
brackets) on your distributions.

~~~
koolba
Yep. Either that or when they decide to " _more fairly redistribute_ " 401k
savings between the haves and have-nots. I seriously doubt that would happen
but it's not outside the realm of possibility.

~~~
smallnamespace
I doubt that would ever happen -- people take property rights very seriously
here, and 401k money is very clearly the fruit of the owner's labor.

The easier way to move money from savers to debtors is to cause inflation, but
good luck getting that to happen in today's environment.

~~~
koolba
You could say the same thing about social security too though I don't think
I'll get back >= 100% of what I put in. Between "means testing" (which is
stupid because it _disincentives_ saving) and raising the retirement age for
non-boomers, it's not looking probable so don't consider your 401k untouchable
either.

~~~
crdoconnor
>You could say the same thing about social security too though I don't think
I'll get back >= 100% of what I put in.

You rarely get back your insurance premiums either.

It's called social _security_ for a reason.

~~~
koolba
When I started paying into social security they promised me retirement at 65.
If an insurance company changed the terms of my payout after collecting years
of premiums, they'd have a fun lawsuit to defend.

~~~
dragonwriter
> If an insurance company changed the terms of my payout after collecting
> years of premiums, they'd have a fun lawsuit to defend.

Unless there was a bankruptcy involved. Which, you know, happens to insurance
companies.

~~~
smallnamespace
Insurance company policies are backstopped by state and federal government
guarantees (with amount limits).

~~~
dragonwriter
For the most part, they are backstopped by state-mandated-private guarantors
(who in principle also have a bankruptcy risk), but not federal guarantees,
and with fairly low limits (and sometimes at less than full value even before
the limit, e.g., life insurance products on CA are at 80% up to either a
$100K, $250K, or $300K limit, depending on the type of product.)

------
pensionguy
Posting anonymously - I work for a non-public company where I qualify for a
pension along with a standard 401K. As of 8 or 9 years ago, new employees no
longer are in the pension plan.

When I retire in a few years, after 30 or so years of work, my pension will be
around 1/3 of my working salary. Not bad. I realize there's a risk that the
fund will go under so I don't plan on depending on it, but it will be a nice
supplement.

From a quick google search, the plan is currently underfunded by 15%, but that
number will ebb and flow with the market. Over the years, the company would
talk about our "total compensation" which would include how much was
contributed to the pension fund so you can think of it just as part of our
salary. I've never seen the numbers, but I have heard people talk that within
our company, the average retiree only collects for 5-10 years before they pass
away - depressing!

~~~
mikekchar
When I worked at Nortel (formerly Bell Northern Research) they gave me a
pension. After 5 years at that job I left and received a letter from HR to the
effect: "We have cancelled your pension. You are welcome to sue us, but
because the amount of your pension was small, we don't think it will be worth
your while." A few years after I left, the company ran into trouble (including
accounting fraud). At it's height, this was a company of over 100K employees.
Once the company went into bankruptcy proceedings, it appealed to the judge to
allow them to use the pension money to pay "executive retension bonuses". The
idea was that since it was a sinking ship, all the executives would leave,
meaning that no financial restructure would be possible. In exchange for
pocketing the pension money, they agreed to stay on to the bitter end. True to
their word, they did. And people who had pensions were invited to join the
list of creditors (in a non-preferred position).

Don't rely on your pension.

------
koolba
People talk of pension like they're a sacred right of workers yet nobody will
address the fact that they're entirely unsustainable. Any system that tells a
worker they can work for 25 years somewhere then receive 25+ years of pensions
at their inflation adjusted final salary is a crock. The money has to come
from somewhere (and don't give me a bullshit about compounding ... we're
talking way more than that).

The non-employer ( _or even worse municipal - yuck!_ ) pension can be created
synthetically through a combination of annuities and life insurance. The
problem with that approach is that since the other side is a private company
that cares about the pay outs (and not just promising obligations to be paid
by someone else), it ends up costing way more. Guaranteeing a perpetual
$X/month (inflation adjusted) pay out twenty-five years from now is way more
expensive than people realize or would be willing to pay for.

The real answer is: Accept that fact that most people cannot retire at the
same lifestyle the enjoyed while working _or_ adjust the latter well in
advance so that instead of saving 5-10% you're saving 50+% of your money.

~~~
ams6110
If you save 10% of your income from your early 20s to 65 you should be quite
well set, presuming your expenses drop after retirement (kids are supporting
themselves, house is paid off or you downsize to a lower cost smaller
residence). If you can save a little more than 10% even better.

Problem is most people don't really think about it until they're in their mid
30s at earliest. When you are in your 20s or early 30s and have young kids so
many things seem like more important priorities. And most people in their 20s
can't even really conceptualize retirement. It seems impossibly far away,
time-wise. But missing that first 15 years has a huge impact on the total
compounding potential. If you start saving at 35 you have to save a lot more.

~~~
closeparen
It's amusing to me that people in the tech community think they will get to
work that long.

Look around your office. Do you see anyone over 40? No? Are you saving enough
to retire at 40? Then what do you think is going to happen?

EDIT: I will point out that this comment has fluctuated quite a bit between +2
and -2. So, clearly some very different experiences, which is good to hear.
Perhaps not as dire as it looks.

~~~
skookum
By this logic, there must be millions of unemployable past-40 software
engineers out on the streets. Or maybe the simpler explanation: Our industry
has been growing exponentially for two decades and the cohorts that are past
40 are small compared to the ones that came later.

Further, the "look around your office" result varies wildly from office to
office. Looking around your average SV startup will skew to gullible, er, I
mean risk-tolerant mid-20s engineers. My office is more than half composed of
experienced engineers in their mid 30s and up who know their market rate.

~~~
closeparen
Well, not millions. The unemployment rate for software engineers is nearly
double for 55+ year olds compared to younger workers [0]. Still, I guess at
"only" 9.6% it's not so bad.

[http://www.computerworld.com/article/2512708/it-
industry/rec...](http://www.computerworld.com/article/2512708/it-
industry/recession-hit-older-tech-workers-harder--labor-data-shows.html)

~~~
skookum
Since those stats aren't for software engineers, it would be enlightening if
there was a breakout of the IT workers who couldn't find jobs to see how much
of the more-affected population was some variation of manager or pseudo-
manager, as those roles tend to skew older and are also the roles that
(anecdotally at least) I saw less hiring of. When I think back to the people
I'd worked with who had trouble finding their next gigs during the recession,
100% of them were some variation of PM, scrum master, and so on. Almost
universally their resumes/LinkedIn profiles had very vague descriptions of
what it was they did for the 5+ years leading up to the recession. There may
be a lesson in that as well.

------
uiri
_Financial experts recommend people amass at least eight times their annual
salary to retire._

How exactly does this translate into 25-30x annual expenses (assuming safe
withdrawal rate of 3-4%) ? Let's say that taxes eat 25% and these "experts"
assume no mortgage (so, what, another 15%? 20%? of gross salary). Eight times
will still only cover annual spending of ~30% their gross salary. If these
people are spending 50% their gross salary (not unlikely given the abysmal
savings rates) they're still in for quite a shock.

 _low interest rates have diluted investment gains_

This is also quite the non-sequitur given the consistent bull market of the 5+
years. Interest rates go down means bonds go down and money moves to stocks.
Interest rates go up means bonds go up and money moves out of stocks. In
neither case do investment gains get "diluted" by interest rates being either
high or low.

~~~
euphoria
I think they are assuming that some type of social security will be included
to make up the difference of that.

If I go to ssa.gov's quick calculator and type information corresponding to a
full retirement date this year, and a current salary of $80,000, then SSA
estimates $2058 monthly benefits, or about $24,700 a year.

If this person's personal savings was 8 times $80,000, it would be $640,000.
If the safe withdrawal rate were 4%, this would be a withdrawal rate of
$25,600 a year.

Combining personal savings withdrawals and SSA would yield $50,300 a year,
which is probably not far from what a person making $80,000 needs in
retirement (62.8% of gross salary). Granted, 4% is maybe only a mostly-safe
assumption, and SSA continuing at current levels is probably a mostly-unsafe
assumption, but given these assumptions it seems reasonable. I myself would be
more comfortable with 10-12x.

------
twblalock
I think the real problem is not the loss of pensions: 401k savings can easily
replace pensions _if savers make good decisions_. The problem is, most people
don't make good investment decisions.

A single poor decision, such as panic selling during the 2008 recession, can
irreversibly ruin peoples' retirement unless they are young and have time to
catch back up.

Imagine how much worse the impact of the 2008 recession would have been if we
had privatized social security and allowed savers to invest the money like
they did in their 401ks.

On the other hand, I know someone who retired from United Airlines after
decades of work as a mechanic, and lost all of his pension because of the
financial and legal problems the company and the pension fund were going
through. He had to go back to work at a retail store in his late 60s in order
to pay the bills. I bet he would have rather had a 401k and some control over
his own investments.

~~~
orangecat
_A single poor decision, such as panic selling during the 2008 recession, can
irreversibly ruin peoples ' retirement unless they are young and have time to
catch back up._

I hear this a lot, but does anyone have actual statistics on how often people
try to micromanage their 401k or other retirement accounts? Everyone I've
talked to just picks one of the target retirement date funds and leaves it on
autopilot.

------
scottlegrand2
Easy but impossible to implement fix: Everyone can pre or post tax save up to
$50K a year in their IRA, no restrictions, phaseouts, or alt min BS, etc. Also
no RMDs whatsoever but taxed upon inheritance past $10M like anything else.

~~~
kobeya
Why limit contributions?

~~~
scottlegrand2
Personally I agree. Practically and politically, good luck convincing the 99%
to go along with the 1% deferring taxes on their income indefinitely.

~~~
chimeracoder
It's not indefinite. Traditional IRAs have mandatory withdrawals, and
lifespans are finite, so there's a clear bound on how long the taxes could be
deferred.

------
jogjayr
There are definitely problems with the 401(k) system but I think the article
missed a couple of the big ones or misattributed causes:

1\. High fees - this is largely because as an employee you're stuck with
whatever 401(k) provider your company signed a contract with and which funds
are available to invest into. Instead of letting you invest up to the annual
limit into the most competitive brokerage account (just like you would for an
IRA) and taking a deduction on your taxes.

2\. Contribution limits - I'm not actually sure why these exist (maybe someone
could educate me). As long as you can't touch the money before age 59.5 (and
maybe disallow or restrict borrowing), why is there any sort of limit at all?
There's two possible ways uncapped 401(k) might play out -

    
    
      a. people spend most of their money, put the rest into 401(k) - no different than what's happening right now, little different to income tax collected
      b. people spend a judicious amount of money, put most of it into 401(k) - these people (for now, a minority) would pay significantly less in income taxes. But they'd continue working through to at least 59.5 and they'd be financially secure upon retirement and likely to need less government assistance
    

3\. Availability and complexity - As things stand, there's a 2-tier (or even
3-tier, if you count self-employed 401(k)) retirement savings system in
America. There's IRA (Roth and traditional) which anyone can access, but has
lower limits and less favorable tax treatment at higher incomes. There's
401(k) which has the problems I described above, plus you need to work at an
employer that offers this benefit which seems unfair to people who aren't so
fortunate. And there's the self-employed 401(k) which I know almost nothing
about except that it has a higher contribution limit ($54k). No wonder most
people struggle to manage their retirement savings; it's a very complex system
that provides preferential tax treatment to people based on their job and
employer.

Also, this gem about pensions:

> Unlike defined-benefit pensions, which provide set payouts for life, 401(k)
> accounts rise and fall with financial markets.

I consider this a bug, not a feature. Pensions pay out the same amount of
money to retirees regardless of market performance but the _pension fund
itself is still invested in the market_. They're shielding current
beneficiaries from market performance at the expense of future beneficiaries
by (IIUC) raiding principal to pay out yields that haven't been realized.
(correct me if I'm missing something here)

------
rubyfan
So what's the alternative? Corporations don't have the ability to fund
pensions any longer. Margins and benefits have thinned out.

The numbers on how many have retirement accounts are quite scary. Who's going
to be there to fill that shortfall, social security? Doubtful it'll be there
for anyone under 50.

~~~
up_and_up
> Corporations don't have the ability to fund pensions any longer. Margins and
> benefits have thinned out.

That's true. Interesting then that executive pay, golden parachutes etc keep
climbing...

------
Decade
“Eight states, including Illinois, Massachusetts and California, have plans to
set up their own programs for the uncovered that will offer _guaranteed
returns_ …”

This is the scariest part of the article. Every time I am aware of, wherever
price controls are imposed, then that leads to disruptions and shortages. That
leads to Venezuela’s collapse, that leads to San Francisco’s housing state of
emergency, that even leads to AT&T’s rent seeking approach to innovation.

It sucks to contemplate retiring without any guaranteed income, but it’s safer
for society as a whole.

