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15 Little Life Hacks

Is the 401(k) a failed experiment?

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New York Times writer Joe Nocera recently penned an article decrying the 401(k) as a “failed experiment.” As he writes,

“…I’m not planning to retire. More accurately, I can’t retire. My 401(k) plan, which was supposed to take care of my retirement, is in tatters.


The bull market ended with the bursting of that bubble in 2000. My tech-laden portfolio was cut in half. A half-dozen years later, I got divorced, cutting my 401(k) in half again. A few years after that, I bought a house that needed some costly renovations. Since my retirement account was now hopelessly inadequate for actual retirement, I reasoned that I might as well get some use out of the money while I could. So I threw another chunk of my 401(k) at the renovation. That’s where I stand today.”

I’m curious: If you believe the 401(k) is a “failed experiment,” what would you do instead? Some of the comments on the above article are brutal. Let’s try a little nuance.

On one hand, investing forums are filled with Chicken Little kooks who insist the end is near…but when challenged on what they would do instead of long-term investing, they have few answers. “Uhh..” they say, “I would definitely go back to the gold standard. That’s why I want to elect Ron Paul!” You, sir, are a moron.

On the other hand, considering the “average savings for someone near retirement in America right now is $100,000,” something isn’t working. What would you change?

Leave your answer in the comments.

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  1. People are always looking for someone to blame. I, too, would like like to know why the 401k is a failed experiment. My reasons are as follows:

    – if you don’t like stock market investing, 401ks typically offer a few bond, money market, and fixed options. Nobody is forcing you to invest in the stock market.
    – if you take money out of your 401k,even if it is for a home purchase, of course it will impact your 401k balance. Nobody is forcing you take the distribution. Novel idea: save for your home improvement costs outside of your retirement.
    – saving for retirement is our own responsibility. The 401k just provides us with a more tax efficient way of achieving it.

    Would love to hear legitimate ideas on what would be better than this “failed experiment.”

    • Purely because you’re at the top, I’ll answer your question, since so many people seem to need it.

      The 401(k) system is a failed experiment because it did not accomplish its objective, i.e. to improve the circumstance of retired Americans. It is a mistake to evaluate the 401(k) by how well it has served the part of the population it has served best.

      I’ve only been reading the blog (the archive, really) for a few weeks, but I’ve clued in that part of Ramit’s core message is about setting goals and reaching testable conclusions. It’s mind blowing that so many commenters today miss how that applies to his question today (totally trolling for replies).

    • I agree with you totally! Another thing that we all need to consider is: What all are they including honestly that made them come to the decision of a “failed experiment”? Did they do all of the figures and try to fix everything that they could or are they just assuming that it is a failed experiment?I’m going to school for an Accounting Major and can tell you ..there are ways to fix this issue that they might not have considered;however, not being fully educated right now makes it difficult to give the complete outline that would assist in the recovery processes of the 401k. This is an interesting issue, thank you!

  2. Automation. Make it easier for most companies to have their 401(k) be an “opt-out” retirement program rather than an “opt-in.”

    That is, have folks be automatically enrolled in a 401(k) invested in either a target date fund, or a diversified portfolio based on low-cost index funds. They then have the option of changing their investment mix or opting-out of the company 401(k).

    In theory, this should take care of the biggest problem with the 401(k): people not starting one at all–out of fear, ignorance, disinterest or laziness–until it’s too late, losing out on the magic of compound interest over time. At the same time, it retains the benefit of investment choices for people who are more engaged in planning for retirement (a nice-to-have would be requiring low-cost index funds in all plans, so folks aren’t stuck with only high-expense actively-managed funds as their choices).

    I won’t pretend that this would necessarily have protected Joe Nocera, whose biggest mistake was probably heavily weighting his portfolio with volatile tech stocks. But it probably would help raise that $100,000 retirement savings average, since I suspect that low number is from people not starting to save until too late–if at all.

    • I agree with this opt-out method. I was looking at how the average citizen spent their money in 1950 and 2010. Food and clothes are way cheaper. Housing costs have increased pretty dramatically. Saving rates have hardly moved… even though we have more money. We are spending our money on better cars (depreciating asset) and bigger houses (in most cases.. a depreciating asset if you are borrowing too much money!).

      This person held too many tech stocks – did not have a balanced portfolio. It seems a basic education on diversification could have also helped. Perhaps a mandatory high school class on finances?

    • This is already being done. In 2006 legislation was passed allowing employers to do just this. The question is how many employers are actually doing so (I haven’t attempted to look up #s on this).

  3. Don’t get rid of the 401(k). We should make enrollment opt-out and, as importantly, we should make the contribution rate default to the company match (if there is one) and make that opt-out too.

    Once people are enrolled we should require companies to report a saver’s 401(k) balances not only at market value but also at estimated future cash flows vs. an estimate of the cash flow that saver might need at retirement. Then maybe put a button online right next to this comparison that will bump up the savings rate to bridge any gap.

  4. Euthanize anyone with a net worth below $80m

    • I’m sure you’re being facetious, but I can’t resist biting anyway.

      I think some folks forget that the ‘little people’ are the legs they stand on. If your lifestyle requires other people to pull off, what happens when everyone has that lifestyle?

  5. Sounds like Joe’s 401K is a failed experiment, mine is doing quite well. I can’t change much for those about to retire, but those who are planning to retire the equation is simple, save more, save often.

  6. I live off the grid of this discussion, seeing the current 401k as another savings tool with potential tax benefits, and nothing more. Certainly it is irrelevant in my retirement plan. For starters, I don’t think of retirement as a point at which I’ll stop earning and live on laurels. I am planning for a chapter when I choose how I spend my time without concern for earning. (I choose my time now, but always with an eye on sustaining my income.) My intention is to accelerate earning now, still while doing what gives me energy and sustains my quality of life, and to create revenue-earning models that don’t require my presence for future continued earning. En route, I will use whatever financial tools are available to make the most of my moula, the least of my tax liability, and the best of my quality of life.

  7. My expectation is just not to ever retire. I love what I do, and if I ever stop loving it or stop being good at it, I’ll find something else to do. And if all else fails, I expect to be able to fall back on the social safety network. Maybe I’m a little unusual: I don’t really care about having a lot of money when I’m old and won’t necessarily have much use for it. I’d rather enjoy things now, save whatever I don’t feel like spending, and accept the potential consequences down the road. About the worst thing that can happen is that my life gets less interesting because I let it get less interesting.

    • In that case, try not to have children. Because by the time they’re adult and you’re battling with disease in your last years without a dime to your name and depending on social security, your short term view on life and finances will become a financial and emotional burden for them. Some food for thought.

  8. Was there anything wrong with the old 3 legged stool of a pension, SS, and savings*? *= if you were the one receiving those benefits that you earned?

    Seriously, I see the phenomenon of 401ks like a lot of things – someone wasn’t making enough money from them as they were and lobbied hard to allow them to be sexy. What happens when you make safe things sexy? You get seniors working till 75 as Wal-Mart greeters. You get Jefferson County Alabama – which went belly up in a bad muni bond deal. You get companies making private profits but asking for socialized losses.

    If I could be king of the retirement financial world for a day; I’d 1) remove the cap on SS contributions (i.e. all income would then have a SS deduction) 2) require companies with over n-amount employees to offer a defined contribution pension. (something like this may already be on the books. don’t know) 3) Push the Volcker rule. Basically – strengthen what’s already on the books where they are enforceable.
    Rant over.

  9. I would say that Nocera is the one that failed. not diversifying his position, not changing when he saw the writing on the wall, and using the money for his house are all very bad ideas.

    If I felt my 401k failed me, I would do something about it rather than complain on the internet and blame the 401k itself. Options? Savings account, bonds, real estate, DRIPS, CDs, and most importantly living within your means. Why buy a house you know you have to fix up and don’t have the money to do so?

    What a whiner.

    • “not changing when he saw the writing on the wall”
      Are you referring to his divorce? That’s rather harsh, ehh?

      Also, it’s very easy in 2012 to say a portfolio invested in too many tech stocks back in 2000 was “not diversified enough” and a “bad idea”, but from 1995-2000 the owners of those same portfolios looked like geniuses.

    • “…from 1995-2000 the owners of those same portfolios looked like geniuses.”

      And very shortly afterward they looked like fools who did not properly mitigate their risk. Thanks for making the point.

  10. For those of you not planning to retire-have you never met a sick or disabled elderly person? Have you never met someone with a sick or disabled family member that requires care? I’m assuming people not planning to retire have an insane emergency fund in lieu of retirement savings.. or maybe they just speak differently and mean that they hope to keep working, but understand that this decision may not be up to them? Or that social security is likely to be massively eroded by the time we’re old? I hope to always work, but I plan to save within retirement vehicles just in case.

    • Well said. A large percentage of people who retire are people who HAVE TO retire due to health reasons. They may want to work, but simply can’t, at least not to the capacity that they did before. Obviously, there are people who are healthy enough to continue working and not retire, but nothing guarantees that.

    • Case in point: Sandra Day O’Connor, former Supreme Court Justice. She likely would have continued on the bench but retired because her husband got sick.