Is the 401(k) a failed experiment?

Ramit Sethi

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. R Wilson

    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.”

    • Evan Douglas

      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).

    • DeeAnne Hedrick

      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. Aliotsy

    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.

    • Christine Wilson

      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?

    • Travis

      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. Kevin

    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. Mitt R

    Euthanize anyone with a net worth below $80m

    • Jason

      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. Adam

    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. Dodie Jacobi

    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.

    • shuddayrmouth

      Your broke within 5 years

  7. Gordon Worley

    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.

    • Tyler

      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. Brian

    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. Laura

    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.

    • Will

      “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.

    • Xenocles

      “…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. Jessie

    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.

    • Sandy

      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.

    • Jill

      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.

  11. Susan

    I always looked at my 401K as a tax advantage, not a retirement plan. For retirement (if I should ever get there), I automatically put 30% of my earnings away in savings of one form or another, every year. I take some out of these savings for things like buying a home or car, but never empty the kitty and never stop the automatic deductions. This may not be a very intelligent plan, but I know I’ll have something to fall back on.

    • Jill

      Wow, must be nice. I make $50,000 a year (after 15 years in my profession) and take home about $35,000 after taxes and health insurance is deducted. If I saved 30% (which seems like the necessary amount to save if you want a secure retirement in the future) I would only have $20,000 a year to live on. Not easy to do. I could do it, but most people in these lower income brackets – actually I think I’m middle, middle class – cannot afford to save so much. 401k benefit upper income folks who can get a decent match from their employers. Other people, ie, most Americans, do not benefit from such programs.

  12. John

    It seems that most of his problems were bad decisions/planning. (With one institutional problem.)

    1. Value lost in a couple busts – If his retirement account was huge a decade ago that means he’s older, and probably shouldn’t have had such a large percentage in the market. Lifecycle funds would have automatically lessened the impact.

    2. He lost half the value in divorce – The divorce rules should change to have him make payments to her as a portion of his withdrawals instead of lump sum. Similar to how it would work with a pension. (Same result, but psychologically different. He won’t feel the pain of seeing the value disappear)

    3. He took money out – There’s no cure for bad judgement. Withdrawals should be eliminated or have a dollar cap. Another option is something I have on one of my accounts; No withdrawals, but I can take a loan against it and pay the interest to myself.

    • Stacey

      John, show me a wife who is willing to wait for her divorce settlement. HINT: She doesn’t exist.

      Since Joe is apparently lousy with investment choices (lack of diversification) and worse with self control (tapping retirement money not once, but twice, for remodeling) perhaps there wouldn’t be anything left for the ex the way things are going. Also consider she might be financially savvy and will position those funds (QDRO) to work for her and have time on her side.

      Also, re: point #3, you might trick yourself that the money is coming back to you in the form of interest, but you’ve lost time for it to compound in the investments. Beware of this!

    • Judith

      Re point 1: He’s 60 in 2012. That means, he was in his mid-40s during the bubble, and 48 when it burst. The divorce apparently happened 2006, and he was maybe 54 then.

      I don’t see why you should already play it really really safe when in your mid-40s (especially during a boom when nobody thinks there could be a bubble burst ahead). Of course, in hindsight that seems stupid. What about your mortgage in 2008?

  13. Charles

    The only failure is that it is too easy for people to make bad choices (insufficient contributions, badly chosen funds, inappropriate allocations). Clearly it can work if managed properly, but without better defaults it will fail for many.

  14. Thomas

    I don’t endorse political candidates and I wouldnt vote for Ron Paul but Ramit, surely you must agree that our debt based economy is not the most logical way to run a country. A lot of people don’t understand exactly how the Federal Reserve operates and many are content using money that isn’t worth the paper it is printed on.

    As for retirement funds, if you want to fix it properly we cannot just speak about what to invest and where- we need to begin from the ground up and look around at problems that face average Americans nowhere near retirement age. Before we fix anything we need to look at taxes- all kinds of taxes- in modern America we are faced with a myriad of taxes from every angle and most of them are arbitrary and their purposes; misunderstood.

  15. jason

    The problem I see with many companies, investment accounts, etc. is the lack of transparency. No one saw BOFA, Enron, Madoff, worldview, etc.
    What if the goal was not to increase your retirement money, but preserve your assets? Why gamble with high risk, high rewards investments? I’m not saying gold- it has plenty of risk! what about muni bonds, I-series savings bonds, tips treasury bonds, etc?

    • paul

      Bonds have as much risk as stocks. The risk is that your money won’t grow enough to allow you to meet your financial goals. Over the long term stocks are less risky than bonds.

  16. charles

    The failed experiment seems to be working very well for me (15 yrs in). With freedom comes responsibility, the potential for great success and its mirror – absolute failure. Perhaps we increase social security tax on individuals who don’t meet savings:income ratios over time in Ira/401k/3b etc. The extra funds revert back to them later. So many unintended consequences lurking…

  17. Ricky

    I do not care for Mr. Nocera’s type of reporting. He is blaming the 401K instead of his poor life life choices for his lack of retirement. Exercise doesn’t help you loose weight if you don’t eat properly. Should we decry exercise?

    I believe the 401K can work if you start early, invest enough, can handle the ups and downs of the market, and you wait till you retire to use your retirement fund.

  18. Lance@MoneyLife&More

    I think the best way to make 401(k)s not fail is to automatically enroll all new participants at a 25% savings rate. It is high but if it started at your first job you’d never miss the money. It would automatically go into a target retirement date fund corresponding to their age with low fees. People could opt out or lower their rate of saving but most are too lazy to look into it.

  19. steve

    Really, tech laden portfolio? Really??!!

    The 401K at my company has selection of Vanguard funds.

  20. Mike

    Charles is correct. The main problem with 401k is that it allows people to make bad choices. In the past there was no choice. You collected social security and in many cases a pension. There was no choice, no opting in or out. This is just the way it was. Now, with most pensions having gone away, social security not keeping up and 401k becoming the main retirement vehicle it is too easy for people to get it wrong. The first big problem was most people investing most or all of the money in company stock. Along with that was the bursting of the tech bubble. Then if people are given the choice to invest or not and to pick their own investments many are doomed to fail. You have to have a disciplined investment strategy, constantly monitoring and re-balancing as needed. And NEVER, EVER take money out until you retire. Even then you must do it in a planned manner.

  21. Ornella


    I’ve met people like this already. Typically, they are not invested appropriately based on their investment time horizon. They are not diversified and they don’t have the proper asset allocation. They don’t review their accounts and emotionally driven when making investment decisions. Granted, some of these mistakes has to do with a lack of financial education. But even with financial education many people make decisions based on their emotions which produce poor decisions.

    A heavy weight tech portfolio is very risky…again, there was no diversification or asset allocation.

    • AJ

      100% agree with you – diversification is the key here. Granted, there are all kinds of systemic issues playing out right now, but on an individual level, you have to take the responsibility and the initiative to PROTECT YOURSELF. I can’t say what the market will do in 15, 30 or 50 years, that’s why I don’t put all of my faith in any one company, type of investment or even sector. Sometimes people get caught up in trying to get in on the next big thing, thinking that it will allow them to cash in and retire early (think the next Apple or Google). It is precisely this type of mentality that leads to the situation above. Also, why would you take MORE money out of retirement for renovations? This guy has himself to blame for a lot of his problems.

  22. q

    his column proves that the typical person is lame at anything that takes discipline, especially if there is a delayed affect – our brains say: you won’t die, worry about money later! you won’t get fat, eat! you won’t get old, spend!

    if you can, find a company that offers a pension. whether you find a company with a pension or not, make automatic savings and investment deductions – put your money into those funds that automatically decrease risk as you age.

    i’m old – 56 years. most of my career was IT stuff (i made an average salary). i’ve been saving 10% (or more) of my gross income since the age of 22. not rich, but i do have a pension, my 401k is very healthy, got zero debt, i expect to get some social security. 2,000 sqft house (small in a little texas town) with a used pick up, used lexus, used toyota (daughter at texas tech), and a 10 year old explorer (daughter about to start college). we will send the girls to school on our dime – we don’t want them entering life with debt. my wife has not worked for 12 years. i will retire at 62.

    our whole marriage we have seen others buy new cars every 2 years, buy boats, jet skis, some even airplanes, the houses have gotten bigger and bigger, the vacations longer and more extravagant. we’ve had friends buy a new house because they needed a 5 car garage! birthday parties for kids went from a cake and some balloons to renting laser tag facilities and bufffet meals – are you kidding me!?!

    my whole life i could have had these things but opted for financial peace of mind. IT IS A CHOICE.

  23. Sean Capaloff-Jones

    Opt out method is a very successful way to make younger people think about retirement as many have already stated. I would also say that one of the big reasons why costs for retirement are so astronomical is because of health care costs. Besides applying political pressure and electing the folks you feel are most likely to contain costs, taking out Long Term Health Insurance will be a huge part of my retirement as it will contain costs not just for me, but for my future children. One of the reasons why a lot of people aren’t doing so well now is because they have to take care of their parents and their kids. Not planning to retire and thus not investing in Roth IRAs (a no brainier for retirement savings) and not taking out Long Term Health Insurance could multiply the wealth opportunities lost for your kids.

  24. Jay S

    Ramit loves stirring up the pot. Have you read Predictably Irrational by Dan Ariely yet? Check out the videos on his website.

    Invest in yourself! It is the one thing you have full control over.

    You can spend 6k per year investing in something that may or may not work. Or, you can spend 6k per year learning to build your own business, or trying to build businesses and failing. In the case of the latter, you are still developing invaluable skills.

    The moment, even after 10 years, you get a business that makes 1-2k a month on autopilot, you have won the game. It is easy to scale up from there, and you have the rest of your life to do it. Would you rather have that or the promise of a 401k that could collapse at anytime no matter how much research you do?

    • JV

      Right on Jay! I can’t agree more.

    • mitch m

      Absolutely that’s a great idea – but it’s not just about you. Building your own passive income stream is in no way a solution for society to address how will people be taken care of when they get old. Most people will never be entrepreneurs, and society would not be sustainable if they were. Somebody has to take out your trash, educate your kids, cook and serve your food in restaurants, administer your money in the bank, re-pave the roads, build and repair your car, and etc, etc. These people as much as anybody deserve a decent standard of living in old age.
      I agree with the opt-out option on 401(k)s, removing the cap on SS tax, and some sort of institutional oversight to make sure the financial industry isn’t free to take ridiculous risks with working peoples’ retirement funds – unless people specifically opt to agree to high risk investments.

  25. Robin

    Make any employer retirement plan automatic opt-in. People would need to actively opt-out if they don’t need or want it.

    Make the default investment a Target-date fund or life-cycle fund that’s automatically diversified.

    Offer more financial education at the high school level. Make financial learning more interesting, fun and relevant. As a financial planner, I’m always looking for ways to “connect the dots” and make it more fun. After all, what’s more fun than having the resources you need for a fulfilling life/

  26. Angela

    Do what i did…invest in something that saves me money when it comes to property taxes, pays for itself. Buy rental in good neighborhoods. It’s a wash on a month to month basis, gives me a tax break, and the equity continues to grow. I’m not “flipping” homes. I’m going for along term investment.

  27. Terry Sullivan

    I suspect something like the Federal government savings plan, it makes available a savings or pension function plus an investment function.

    I think even adults need some sort of guaranteed pension. Left to their own devices most people do not have the skill or resources to get it done.

    • Melinda

      Exactly. That’s what the research shows.

  28. Doug

    I’ve given this some thought, and I agree that the 401(k) system has to be seen as a failure. No matter how many times you say how simple or good a system is, if the vast majority of people using it fail to achieve their goals,the flaw lies in the system rather than with people.

    So, with what do we replace it?

    First, get the most reliable source of retirement income — Social Security — on a sound actuarial footing. It’s not that far off at the moment, and despite what you may be hearing, a rather modest combination of increased retirement age, increasing the earnings cap, and increasing tax revenues would cover the existing gap. Then, build automatic adjustments into the law to keep it solvent, requring Congress to either act when the GAO says the system won’t be able to pay future benefits, or raising the retirement age if it fails to do so.

    Second, take employers completely out of the retirement equation. It’s an unnecessary expense built into payroll, and you need look no further than mismanagement of pension funds and the large number of really crappy 401(k) plans to see the problems.

    Replace it with two things:

    1) A nationwide system that allows anyone earning W-2 or 1099 income to contribute to a plan that purchases infinite-duration, inflation-adjusted government bonds, so that each month’s contribution buys a known increment of monthly income. Interest rates are set either by trading similar bonds on the open market, or pegging them to the 30-year inflation-index rate. Start everyone at 10% when they file their W-2, and let them file an additional form if they want to raise or lower their precentage. Choose between Roth (tax on contribution, payments tax-free) or Standard (Contributions deductible, payments taxed). The bonds will continue paying forever (unless the government buys them back at market rates) and can be left to anyone the owner chooses — spouse, kids, whatever.

    Finally, encourage the creation of “pension co-ops.” Essentially, these are Defined Benefit plans that are “owned” by the beneficiaries rather than an employer. Unlike the government-bonds only plan, they can invest in the full range of assets on behalf of their owner/beneficiaries. Those that meet safety/stability criteria and pay a fee will be eligible for the same type of federal insurance “backstop” currently enjoyed by DB plans covered by the PBGC. Again, the key is that a defined contribution buys a defined level of monthy benefit. Essentially, these are annuities purchased on the installment plan. People will be free to pick any one they want.

    Obviously, the main objection to these plans is that the purchased monthy benefit has to be low, because there is very little uncertainty. For people who feel that way, the markets will still be there, and I’m sure the mutual fund industry isn’t going to dry up an blow away.

    However, for the vast majority who neither like nor understand investment-based retirement planning, this approach provides a way to make realistic plans, set your money aside, buy the benefit that you need, and get on with your life.

  29. Donna

    401K’s have not failed. Education to those of you who use it has. When they were offered in 1974 when I got mine, there was NO education on what to invest in or why you should. It was created so companies could eventually eliminate the pension system The companies no longer wanted the responsibility to provide the retirement income. Many also had no idea what they were doing in the stock market which is another reason they did not want the risk of providing retirement income. Also this freed up much of the pension fund for them to raid to invest back into the company. Which is why many companies pension plans are woefully under funded. This was not a gift to the public. It was a gift to employers disguised as a gift.

    What to do? Learn about investing. Learn how to make choices. 401K’s can be great provided you know what you are doing. The matching income from the employer increases your income AND your retirement funds. Many times it also reduced the taxes and increased your take home pay. My starting amount was $5 a week. I got total with mine & company match $10 in investments in company stock which after 3 months I moved to another investment. I knew how risky it was to invest in my own companies stock alone. Diversity was needed. But in doing so, I still had the same take home pay. The savings was there and it did not affect my money I needed to live.

    All raises were saved. Eventually I was putting, with matches, $15,000 a year away. I did once take a loan to pay off credit card debit but paid it back in 2 years. It was cheaper to pay the cards off ($30,000 worth) which had 15% interest and only pay the 5% my loan was. NOTE the interest went back to ME! Yes, I borrowed against my self while still saving for retirement. It worked. But not everyone has the tenacity to do so. So beware!

    I retired at 50. Am now 61 and have no debts. I plan to wait until 70 to collect my social security as long as my health is good. So far it is. Disease will chew through your bank account and devour your life. (not my quote can not remember who said this.)

    Mainly if you are going to invest for anything-especially retirement-you need to educate yourself before you make those choices. Then have the tenacity to stick with it.

  30. Chris

    I cringed at the word “experiment” being used to describe the 401(k) – that’s a hell of a large plan to be calling an “experiment”. It’s a tool – no more, no less. Nocera didn’t use the tool appropriately, and cried when it cut off his thumb. Boo hoo.

    I too agree with automation and opt-out policies. I’ve worked for a couple of different companies, and in some the pension contributions were actually mandatory for all employees. People whined about that, but frankly, if you invest money before you ever see it, you’ll never miss it.

  31. Edgar

    I have to take the Zen approach here and say that many of our illusions with retirement are based on an idea that we’ll be able to afford going to Atlantis Casino every quarter when we retire. . Instead we should take a strategized approach and determine what we want to do when we retire and develop a retirement based on that. Whether it’s a quiet retirement in some country cottage or weekends in Monte Carlo, seeing what it will take to get you there will give people different prospective and requires research, research, research.

  32. Kelly

    First, do work that you love…because the future is unpredictable and people die faster when they retire and do nothing. So, if you love your work…then you won’t want to totally retire.

    Second, I invested in value stocks…at Tweedy, Browne Co. Value is the way to go….(Hello! Warren Buffett!!) and then your investments are based on true intrinsic value of companies…not playing the stock market like Vegas. My portfolio isn’t totally creamed by the market and bounces back relatively quick. Of course, if the market stinks the year you want to retire then you might suffer some loss…but overall it is less volatile.

    Third, retire somewhere like Costa Rica or Ecuador where the cost of living is super cheap 🙂

  33. Mari

    I agree with Terry Sullivan. Looking at people I know, who are not 20 somethings with 50k/year jobs, but average people who have worked hard for their lives and who’ve had their shares of successes and misfortunes, they don’t have the resources to put aside enough for retirement and don’t have any or adequate retirement offered through their jobs. The government has the responsibility to provide a guaranteed pension for these folks.

    • Melinda

      There are so many folks in the situation you describe. The lack of empathy I read in the other posts is astounding. Just because one person has not had a misfortune that changed their life for the worse and/or has the ability to handle finances for their own benefit doesn’t give them the right to judge other people and their choices.
      There are some people that would be better off with a defined benefits plan (if it were even available) while others may profit from a 401K plan if that is their interest. Why we judge our fellow human beings so easily on a blog is astounding. They would never make these statements to someone’s face.

  34. Kathryn C

    pulling money out of 401k for renovations = MORON

    Here’s an idea, buy a smaller house or one that doesn’t need renovating.

    I wouldn’t change anything. People need to pony up and start saving, early. Like in their 20’s. Heaven forbid take a job the you just “kinda” like, so that you can get a paid “a little” more, and then save in your 401k. Those jobs exist.

    It’s a choice, as q says above. It’s not that complicated. It’s just a choice on how you want to design your life.

    And try to marry the right person so you can avoid getting a divorce (and getting robbed of all your monies).

    • Stacey

      I wouldn’t say a divorcing person was “robbed” of his money. That’s insulting to all stay at home parents. Also, in the case of dual earners, say one had better matching opportunities at work and thus was the one to contribute to the 401k. My bet is the couple understood this 401k to be a joint asset and rightfully should be split in the case of a divorce.

    • DS

      Upon divorce the 401K balances just like any other asset are negotiable. I say kudo’s to this guys ex wife (or her lawyers) for not giving up half of the 401K for other marital assets.

      If he felt at that time that his own retirement account was not funded he could have moved the house equity into an individual IRA or a Roth, but once again took a course that ended up shortchanging his retirement.

      My husband and I are targeting an aggressive total retirement package that if it needed to be split or borrowed against or weather another downturn would still provide money to live at an acceptable standard of living.

      They don’t give you loans for retirement…

  35. Robert Williams

    Ron Paul doesn’t want to go back to the gold standard… He wants competing currencies. There is a difference.

    • T. Freston

      This. I love Ramit & 90% of what he says, but his blind faith in fiat needs to be examined. The readers here would be well served to check out on occasion for valuable insights into the world of finance. Whether Mr. Sethi wants to believe it or not, precious metals are one of the best ways to protect your wealth. They are not an ‘investment’ per se but a hedge against the government’s propensity to inflate their way out of the hole they have dug themselves by grossly overspending.

  36. Matt

    If the corporations as a group go into the toilet, everyone is screwed no matter what they did. If they do okay, having a 401k is going to go well.

    A solid financial education would go a long way to help people plan for retirement. I had a mandatory personal finance class in high school, and that helped me quite a bit. My siblings and I all started retirement savings very early on. The opt-out idea is also a very good one, I think.

    Also, the author lost a bunch of money and proceeded to blow all the rest of his retirement funds, and the 401k is a bad idea? 401k plans lock up the money to a certain extent. They don’t overcome more extreme forms of idiocy, but what does? We need a way to get people to not be jackasses.

  37. Jaren Barnes

    Its obivous that this guy didnt have a good system in place. Just because you hurt your self by not saving and taking money out of a retirement fund, doesnt mean the investment has failed, it means your planning failed. This guy didnt need to touch his 401K, but did and now blames the investment instead of himself. This is stupid.

    What we need to do is focus on the real problem which is education. Ramit, before I read your book, I didnt know that banks made money by lending my money, or even the difference between a checking and savings account. How did they let me graduate?

    We need to develope a better system to teach people on the importance of financial planning, that way we will know not to touch the retirement fund, except for retirement!

    People cannot be blamed for ignorance when they from the crib are bred for it.

    The mindsets of people have to shift, thats the only way people will get this stuff.

  38. BG

    Retirement for the generation under the age of 35 is going to be expensive. It doesn’t matter if you’ve been a rock star, diversifying your portfolio with stocks, bonds, pension plans, and yes, a 401K plan. Not only does this generation (myself included) face inflation, but advances in medicine will extend their lives. Ironically, the extension of life will eat away their retirement savings.

    I don’t think any retirement plan addresses this new reality, including the 401K. For this reason, I agree with the NYT author that the 401K is indeed a “failed experiment,” but so is the nation’s retirement planning for its younger generations.

    Solutions? SAVE! A LOT! You don’t have to feed your money to the stock market, but at minimum, try to protect it from inflation.

    Above saving, the most important thing one can do is to preserve their physical and mental health for as long as possible. If medicine advances to the point of adding years to our life spans, it’s important that the individual maintains control of their financial life for as long as possible. When you can’t make these decisions for yourself is when when the money begins to bleed out.

  39. Derek

    I would put a sushi dictator in charge of 401k plans for people, because right now, 401ks empower people to make bad decisions with their money.

    For example, with this guy from the NYT:

    Bad decision #1: At age 48, the guy admits to having a huge chunk of his 401k wiped out from the tech bust. But, at age 48, his stocks should have been in more low risk investments like bonds.

    Bad decision #2: The guy admits to using his 401k money to renovate his house… twice. That’s not what the money was for. The money was for his retirement… not renovations that he supposedly “needed.”

    Why did this guy make such horrible decisions? And why do people, as a whole make decisions that are just as bad?

    Look no further than delay discounting… People discount future rewards in favor of instant gratification. In this case, house renovations now vs. cushy retirement later.

    Now how does the sushi dictator solve this? Well, I know you know the story Ramit, but for those who don’t, when you sit down at a restaurant controlled by a sushi dictator, you’re not allowed to order food. The sushi dictator makes the decisions for you because he knows best.

    With 401ks, once people surrender their money to the 401k, they shouldn’t be allowed to “invest” or access their money until it’s time for retirement. Until then, their money should be controlled by a sushi dictator who does it for them, which would successfully eliminate the problem… the problem that 401ks empower people to make bad decisions with their money.

    And if people wanted to access their 401k money for anything other than retirement… the sushi dictator should threaten to stab the person with a chopstick.

    Or more seriously, once people put money into their 401k, it should be much harder to get the money out.

    Right now there are penalties and taxes, which were designed to stop people from taking money out of their 401k, but it doesn’t because of delay discounting.

    Instead, people should need to build a case… and the sushi dictator should be allowed to either approve or disapprove their reason. And that decision should be final.

    And there, problem solved. The sushi dictator would save people from themselves.

    (On a side note, while I’d like to say my sushi dictator solution is perfect, unfortunately it’s not. Once something like that got implemented, there would be a slew of payday loan style companies that popped up that offered to give people money now in exchange for a huge portion of their retirement later, successfully empowering people to mess up their finances once again.).

    • Xenocles

      Sushi dictator works great until he serves up a panko-fried roll to a person with Celiac disease. Oops.

  40. Sharkman

    As pensions and life long care from a company become a thing of the past and social security remains at jeopardy, corporations and the federal government have looked for ways to shift the “burden” of a secure retirement onto the individual [and I don’t fault them. Ultimately it is the individual’s responsibility]. Thus, the proliferation of 401k plans. 401k plans are very effective for a number of reasons:
    – Utilizing the CAGR method, the average return of the S&P 500 from January 1, 1957 to December 2011 is 9.62%. (This is lower than the simple average of 11.12%.) With a 9.62% return, $1 invested in 1957 would be worth $156.57 today. While we just lived through the “lost decade,” long time horizons not only smooth out volatility but allow the magic of compound interest to do its work.
    – Given the above facts, the importance of starting early becomes clear.
    – Given the above facts, the importance of a systematic and automated investment regime becomes clear. (that’s why Ramit talks a LOT about automating finances)
    – 401k’s not only provide for retirement but offer some excellent tax benefits as well. [either today or in the future depending on whether you choose a traditional 401k or a Roth 401k]

    401k’s should be required for employees at any employer that offers them on an Opt Out basis. Contributions should be maxed out or at the least, cover any employer matching that is available. People wait too long to start investing and do not do it on a consistent, automated basis (thereby also removing emotion from the equation). How else can we explain the average savings @ retirement of only 100k. And anybody that raids their 401k for anything other than a downpayment on a house is a complete idiot. This person unfortunately ran their 401k like a moron and received the appropriate results. Their bashing of the “system” is an attempt to absolve themselves from the personal blame of making some very poor final decisions. Unfortunate but true.

    I’m not a financial advisor and have not formal financial training. You don’t need to be a rocket scientist to know this stuff. It’s not that hard.

  41. Chris

    If I’m not mistaken you can get paid through a corporation and buy undervalued assets (real estate right now) through a separate holding company. Tax-deferred growth. The benefit of a 401k is now moot.

    Bottom line for me…is the bottom line. Buy things that are undervalued and sell them when, like our stock market indices right now, they get overvalued. Just like uncle Warren did it.

  42. Tim

    firstly, like most have mentioned, 401k’s are not a failed experiment. you can’t blame the concept of the 401k on the morons that don’t know what they’re doing.

    secondly, there are multiple solutions (imo) of how to make things better.

    1) education. no, not more college and debt. most people don’t understand that 401k’s are NOT REQUIRED to invest in the stock market. that is what most of the mainstream would have you believe because they make soooo much money off of you it’s ridiculous. it depends on your specific company’s plan. most large companies, or even small ones for that matter, just pick an investment group to handle the 401k plan for them. if you are self-employed (or run a side-business), you can look into individual/solo 401k plans and invest in almost anything you want. These are similar to the ‘checkbook ira’, but better imo.

    2) you can’t fix stupid. a lot of people will always make decisions based on the here and now, and they will likely not make good decisions in general. we need to stop this concept of making everyone responsible for everyone else’s decisions. if you don’t save for your own retirement, that’s your own fault and you should have to deal with the consequences. Granted, the divorce system needs fixed as well, but that’s a discussion for another time. Our concept of social security is a failed and bankrupt system, and only contributes further to the debt problem.

    3) eliminate the crux of the problem. i don’t want to get into a political debate here, but suffice it to say, if we elminated the Fed, we could eliminate the income tax. Once that’s done, 401k’s, ira’s, etc would have no benefit and/or wouldn’t exist anymore. This would allow people to invest in whatever they wanted with their own money, whether it be stocks, bonds, real estate, businesses, personal loans, foreign currencies, or whatever you can possibly imagine.

  43. Justin Knechtel

    This is interesting. I just finished a book last night (Local Dollars, Local Sense – Michael Shuman) that brought this up a bit, and it’s gone through some great alternatives to the 401k / stock market bonanza. To sum it up, invest dollars locally in your community businesses and local economy.

  44. Shannon

    Umm, the 401k didn’t fail, this guy did a bad job of managing. That’s like saying, I’ve been taking those fat melting pills for a couple of weeks and haven’t lost any weight yet! Wah.

    Like others mentioned, an opt out policy would help most people, as would a default investment into index funds, like SPY. The guy who wrote the original legislation creating it was wanting a simplified system for tax advantaged investing so that people would do it.

    Honestly what the country needs is required personal finance management classes for high school kids, especially something that goes beyond checkbook balancing.

  45. David

    I direct my clients to setting up a tax-free 7702 private plan. It’s based on market performance, but that’s where the similarities end. I have one myself and I am getting my family set up as well. My parents lost 40% of their savings in their 401k in 2008, so I began to search for something that made more sense.

  46. jr

    Investing isn’t the problem the people who you are trusting your money with is. The 401k just like any other savings device takes discipline.

  47. Steven

    The truth is that most people are a step or two away from financial failure.

    It made sense for him and everyone who invested in stocks in the way that they did when they did. That’s all the experts were saying then and experts are still giving the same types of advices.

    We must learn to take action and to take responsibility for our actions.

    Our attitude and our habits generally dictate our financial future.

  48. Brent

    I don’t think the 401(k) is a failure. It is a valid tool, but just like any tool it must be properly used.

  49. Doug

    I think several commenters are ignoring the question in favor of talking about themselves. It’s easy (and gratifying) to judge people who can’t play the game, but even if we concede that anyone competent could make a 401(k) system work, that misses the point. Retirement systems are designed by policymakers not to reward people for ‘getting it right’, but to keep the country running smoothly. By that standard, the 401(k) system has indeed failed.

    Ramit, I think the suggestions about automation that several other commenters have made are great. The same way you should make it easy for a potential employer to say ‘yes’ to you, policymakers should make it easy for workers to say ‘yes’ to the optimal retirement strategy. Politically, I think this is also the best reform that has a real chance of becoming law.

    On a more ambitious scale, I would take a hard look at going back to some sort of pension system. Having employer provided pensions would be more problematic today than a few decades ago, but perhaps some sort of public option (oh man, them’s fighting words) could be developed?

    Or what about making annuities the default retirement system? Each paycheck, Vanguard (or whoever) sells you an annuity that activates on [your retirement date] with a present value of [your contribution plus your employer match], and adds it to your retirement account. Now that I’ve written it, it seems obvious that someone actually familiar with finance is going to respond “That’s already a thing, maroon”, but I’d still contend that this makes more sense for a national retirement system than investment accounts.

    Among other benefits, it shifts the risk onto large institutions (who are presumably better able to understand, mitigate, and bear it) and someone contributing and planning for retirement with this system will face “You will have [$4000] per month to live on”, rather than “You will have [$1,200,000] to live on for the rest of your life”. My gut feeling is that people used to dealing with monthly budgets all their lives will feel more comfortable (and have more success) under the former circumstance.

    • Doug

      I should note for the record that I’m not the same Doug as the Doug who posted while I was typing. Whoops.

  50. tom anderson

    1- RS, thank you for doing what you do – your intelligence is a part of the 401k solution.
    2- the 401k can not be NOT the problem – an immediate 50% untaxed ROI is a fantastic benefit.
    3 – the “problem” is the person who owns the 401k. Lack of education and basic reasoning skills are the tools used by the average investor to destroy their account balances.
    4- the “solution” is education and a reasoned risk avoidance based approach to keeping as much of your 50% return intact until you can roll the $ into a self directed IRA and out of the hands of the criminals who run Wall Street.
    5 – RS, if you would like more Solutions, contact me and let’s do lunch in PALO ALTO, I am down in Sunnyvale. OH, btw I am buying!

  51. Joel

    It’s going to get worse for everyone. Once the Fed announces a rise in interest rates and/or QE3, the dollar will become devalued significantly as foreign nations abandon the U.S. Dollar and dump it into the open market. That means prices everywhere will go up dramatically while people’s incomes remain the same. This quickly translates to a much higher cost of living. People will pull out money out of the stock market, 401Ks, etc en masse to pay off their higher cost of living and these markets will drop significantly. People will pour money into precious metals such as gold and silver, which will skyrocket in price.

    Things in the U.S. will not remain “normal” much longer, economically speaking. It is clear that the ruling elite want to put everyone deep into debt and enslave/control everyone, including entire nations. They distribute money via lending like crack, people gobble it up, and they quickly and easily rule over / gain control over nations. They influence a nation’s laws and politicians, even putting their own people into power.

    The truth is, retirement accounts and all other accounts are just depositories of your money with which the elite use to 1) leverage it many times over, 2) make gigantic bets with to 3) profit for their own sake. They were not meant to benefit the general population. That’s why the only strategy they publicize is “buy and hold”. They never want you to take your money out, so they can keep on playing with it. Not to say that an individual can’t benefit from this Ponzi scheme, but keep in mind that these markets were not meant to benefit you.

    If you want to plan for “retirement”, plan for the things I just talked about. It’s coming.

    • Ham


      Can you please explain why foreign countries would dump the dollar if interest rates went up via the Fed? I always thought that increasing interest rates by a central bank is a vote of confidence that the economy is growing and it is also a move to lower/contain inflation. All plus signs if I am holding dollars as a foreigner.

      Now, if I was a foreigner holding dollar denominated debt, a large interest rate hike could destroy the value of my debt, however, a small hike, I would think, would help tame inflation, so a country (host country of the debt) is not inflating their currency to payback debt quickly and less painfully.


  52. Stacy

    I’m with Brian on the pension, ssi, and savings thing. My uncle retired from American Airlines in the 80s with a pension and retiree medical Insurance that covered him and my aunt until their deaths 20 years later. My mother started at AA in the 70s and through subsequent mergers with sabre, EDS, and now HP, she’s lost her pension plan, her flight benefits, retiree medical, all despite working in the same building she started in in 1978. I don’t necessarily think the 401k is a failed experiment, but the slash-and-burn-and-eff-the-employee policies that make corporate America run, those have failed us. I just hope folks my age (late 20s) see it and change it before we get there, since it’s already too late for folks my moms age. I fully intend on sharing the costs of taking care of my parents in retirement and beyond with my little brother since her employers have failed her, but what about our student loans, our mortgages, our kids needs? I guess we can thank AA for all their years of “service” to our family.

  53. Paul P

    I don’t think it’s necessarily the 401(k) itself that is to blame for anything but rather the person deciding where that money is invested. Stock investing is fairly difficult to do correctly, if one has not thoroughly and properly evaluated the stocks one invests in, it will likely end badly. Same situation if one only invests when the market is good and sell when the market is bad (the opposite of this seems to be the optimal behavior).

    So really, I think the solution is that anyone that intends to retire needs to learn HOW to invest, not just TO invest. If all of one’s investments are in bad stocks of course the 401(k) is going to fail. On the other hand, someone could avoid a 401(k) altogether and invest in real estate (for one example) instead and possibly even retire early. And opt-in or opt-out, a 401(k) takes effort and education from the investor. The company you work for will NOT do this for you. It is up to the individual to do the research and learn how to get the best returns on their money.

  54. martin

    According to the article it wasn’t the 401k that failed. It was his decisions that failed.

    There are certain instances one can take from their Roth such as education and some medical expenses. Why not make the same limitations for a 401k. And no, home improvements would never ever be one of those limitations.

    I wonder how much money he would still have if he wasn’t able to touch the money for home improvements.

    This isnt a failure of 401ks, or the stock market, this is a failure of not having a savings account.

    Limit what you can withdraw from a 401K for. Thats what I would do.

  55. Kevin

    Well, the author may have sensationalized the issue to make his article more readable, but he had a valid point.

    How many people do you know that retired at a “normal” age (60, 65 or somewhere around there), and lived soley on their 401k savings? (They did not continue working, had no pension from a previous employer, did not rely significantly on social security, etc.)

    I’m sure there are some, but not as many as we would like to pretend. So, the point isn’t “don’t save”, but rather admit that for many or most it is only part of the solution
    which may include continuing working, downsizing your house, using money from SS, and using 401k money.

  56. Saumitra

    Hey Fellow Readers,

    Time magazine had a great article in late 2009 about the 401k. It exams retirees from one of the first large companies to offer a 401k instead of a pension. It also talks about how 401k came into existence, how most Americans are going to struggle in retirement, and the future of the 401k. The article is still relevant today.

    “Why It’s Time to Retire the 401(k)” by Stephen Gandel,9171,1929233,00.html

    • Mei

      Saumitra’s link is well-placed. Whether something is or isn’t a failure depends upon the expectations, or hypothesis, justifying the experiment. The 401K may not have started out as a way of testing whether people are able to plan their own retirement but it has certainly proved that people are usually not good at it. And why would they be?

      You can’t tell millions of people in one generation, you will have a pension, etc. and the next generation, you are on your own, and have that be a SUCCESS without some serious preparation to transition from one retirement system to the next.

      If we wanted people to successfully invest on their own, they would need to be trained on how to do that. Our whole educational system and culture would need to be focused on raising millions of investment-savvy people. That is not the culture we have. At minimum, we would at need to have a high LITERACY rate so that people can at least understand basic mutual fund prospectuses and other investment literature, (and not the 8th grade reading level and low literacy rate we currently possess as a country) and secondly, educate people so that they are not afraid of math – most adults are intimidated by even simple percentages and so on when they visit the supermarket. I know many people who cannot calculate simple discounts on cereal and so on. This is not a recipe for churning out a populace prepared to take on the challenges of making bets on the stock market.

      The 401k is just another way in which we invest a lot of emotional energy as a culture in the myth of individual effort. If you do this right, if you do that right, you will be rewarded, as though there is some sort of free-market Santa Claus. There isn’t. And in the end, so much of say the value of the 401k has to do with the market conditions when you retire – not your savvy, etc. You cannot control the market.

      Here’s the thing about retirement in America. If we were serious about letting people actually retire, we would not leave it up to individual choice. That is basically leaving it up to chance. Yes, that sounds radical. Instead, we would pool the money as a matter of mandate – whether that’s income tax, corporate tax, the money has to come from somewhere. But that’s not what we do.

      It’s as though we pretend that we are not all going to get old, which is a certainty. How can we support ourselves in our old age if we leave things up to chance? I know many people who have worked hard their entire lives, and have experienced the “income shock” Ghilarducci mentions in Nocera’s article. Whatever plans they made were undone by circumstances beyond their control: a health emergency, a divorce, a layoff. I don’t know what the answer is – but the 401k is not it.

      We are facing a hollowing out of the middle class (yes-, procter and gamble views the US as having income disparities similar to the Phillipines…. – low-paying service jobs will increase, and there will be some high-paying jobs. But those mid-level jobs associated with good benefits and good pay are dwindling. So how to plan for retirement when most people are not even going to be earning very much at all? The 401k discussion we are having now will seem like a quaint and relatively pleasant quibble in comparison with the very difficult future immediately before us.

  57. arto

    Hah! The Ron Paul answer is the only one close. We’re in a rigged system and not getting correct data. Warren Buffet just happened to live in largest financial run-up in history AND he’s Warren Buffet and finance is his job.

    When I started putting in my 401k it was 1992 and it was ALWAYS about putting that money in the stock market (managed funds back then), EVERYBODY saying always said “the stock market historically returns 8%”. I don’t know what they’re telling you now.

    If you invested right after the crash of ’87 (25 years), indexed to the Dow/S&P500, today you would have a 7.8/7% ROI, not even the “8% ave”. With perfect timing (selling at the peak in 2008 21 years) you would have 9.8/9%. Enter in ’97, 3.8% now, 5% if you timed it perfectly and bought in the bottom in 2002.

    Perfect timing and you only do 2% better than “historical”?? Where’s Spock when you need him.

    We ain’t living in any free market, the market and government is living for free on US (that’s us the people who give them our investment $$), and not even Ron Paul’s financial sanity will stop that.

    With Ron Paul at least the country (U.S.) AND us won’t be bankrupt… just us. And you young turks will pay for it all.

  58. Moo

    IMO, ERISA is a failed experiment. As Robert Kiyosaki once said, you can’t turn an employee into an investor by changing a law.

    I believe we can fix the entire 401k and retirement mess by:

    1. Requiring every company operating in the US to make a standard 10% deduction with an opt-out requirement for a 401k.

    2. Mandating every company save 10% of what it makes, like they do in China.

    3. Demanding that every company place a separate amount equal to 10% of each employee’s pay into a broad-market, dividend-paying index (I like DVY, the Dow Jones Dividend Select, personally), in order to create an independent “shareholder society” effect like they do in Australia.

    4. Confiscate the medical industry and institute a tax on all individuals and companies to create a single-payer universal health care system, like they do in most of the civilized world.

    5. Require banks and other home lenders to hold no less than 75% of the loans they initiate instead of selling them, to discourage the irresponsible lending practices that have harmed so many people and businesses.

    6. Require all individuals to have a bank account at all times, and scale out cash by 2020. It’s hard to see cash as “real” money, so people just blow it because their self-images see cash as something to get rid of as quickly as possible. On top of that, the government can save a fortune on printing and minting.

    7. Set a budget surplus amendment, and slash spending on government handouts and military operations until our government it putting away at least 10% per year. Cutting out all active wars, phasing out Social Security and Medicare for those under 40 and ceasing the “cash mistake” above should get this goal handled within 30 years.

    I believe these would stabilize the monetary system, cut down the worst bills most people have to pay (huge and/or ongoing medical expenses) and lead to an overall more affluent society.

    • Moo

      Oh, and cease the welfare, WIC, food stamp and other handout mentality that half the country is using to drain the other half. That will save a fortune in and of itself, and mere self-interest will FORCE people to find a way to earn their keep — or they’ll die and we’ll be rid of them.

      And on top of that, re-institute the cyanide capsule as a “retirement alternative” for those who insist on hurting themselves. I can’t find those things anywhere, but they’re crucial for when things get REALLY bad.

    • Stacey

      Usually one spends less when using cash than non-cash alternatives. I don’t agree with your point of phasing out cash. Plus you’d have an angry mob of babysitters (and drug-dealers!)

  59. dle2956

    Why not just do an IRA?
    I’m 23 years old, and I just started putting 50 dollars a month into my own Roth IRA, can’t take it out until i’m 59 1/2. You can only put up to 5k a year into it though. but Just putting 50 dollars a month, every month, until i’m 59, I’ll have about 3 million by the time i’m 60.
    No one else my age that i know even know’s what an IRA is. They’re more worried about where they are going to go party tonight.

  60. Puck

    I cringe every time I read someone on this thread cry “education is the solution,” as I can’t help but picture Ramit screaming at his monitor.

    Like most arguments, we need to establish definitions before continuing. What is failure?
    1) Has the 401(k) failed as a tax sheltered investment vehicle? It doesn’t look like it.
    2) Has the 401(k) failed as a replacement for pensions? There’s argument for and against.
    3) Has the 401(k) failed as the main vehicle to see that the nation’s elderly will be taken care of until they meet a natural end? Probably.
    It’s not a bad idea to establish which of these definitions (or of a number of other definitions) you’re talking about before commenting.

    If we’re talking about the third definition, saying things like “there’s nothing wrong with the vehicle, it’s just the people and their choices that are the problem” is like saying “there’s nothing wrong with the Prequel Trilogy, it’s just the plot, dialogue, and characters that are the problem.” Failure of one or two links in a system means failure in the system as a whole.

    As for solutions to a failing system, I have none. My goal is much more short-term: cleaning up the dialogue in this thread.

    • Craig

      Right on Puck. Every time I hear someone say education is the panacea of something, I hear “if they knew what I know, they would have the same opinion I do.” There’s something inherently arrogant in arguing that other people need to be educated.

  61. Jake

    As others have mentioned, there are generally available target (retirement date) mutual funds and broad index funds.

    As long as there are low-cost choices, one way to partially address this issue is to nudge people with defaults:
    1) Automatically enrolled into 401k when you start working at a company
    2) Automatically have the 401k amount invested in a couple of broad low-cost index funds (50% stock/50% bond) or a target retirement fund

    I am pretty sure some companies do #1, but I think the amount is typically small, say 2-4% of your pay.

    I’m not so sure about #2.

    Other options are to automatically take part of a pay raise to be directed towards the 401k. Say you get a 3% raise, but you only see 2%, as 1% was added to your 401k.


  62. kyle

    asset allocation, save 10-15% of your salary,diversify investments.

    save for home repairs, don’t steal from your retirement.

    education or an opt-out may help, but how do you stop people from taking distribtuions??

  63. Maxie

    Most of the nyt author’s 401k woes were his own doing. He made the choice to over invest in one sector, get a divorce, steal from his own retirement. That said, financial education should be a requirement starting in grade school. The main crux of such education needs to emphasize living beneath one’s means. We are inundated since birth to be mindless consumers of crap we really don’t need. Proper education for all to combat the bs & take control of one’s own finances.

  64. BigBeluga

    We have enough data to prove that people are, as a group, incapable of saving for their own retirements. I like the idea of mandatory, self-funded pensions. Some percentage of your paycheck goes to funding your own pension (10-15%, whatever is necessary). Unlike money used for social security, people would fund benefits they will receive in the future, rather than the current regime of the young funding the old. This money would need to be firewalled off from taxes of course, otherwise politicians will spend it on unnecessary wars, subsidies for Monsanto, and God knows what else.

    I love the idea of finding something you love doing so you do not necessarily need to retire. That can work for some number of knowledge workers, but that’s about it. There will always be factory workers and such who will be compelled to retire due to age, hence the need for something society-wide.

  65. Andy

    What is flawed about the 401k is the individual who owns it. There are many paths to a successful retirement, but individuals have to plan. I think the best solution is to increase personal finance education in the schools and in the workplace. Maybe, I Will Teach You to Be Rich, could be required reading for college freshman orientation.

  66. Rob

    Trying knocking down your debt and payoff your house for retirement instead. NO DEBT instead of investing is other option. Paying off debt always saves and it’s volatile like the stock market.

  67. Tim Rosanelli

    I think that it is dangerous to think of a 401K as your only investment source for retirement. Remember that you relinquish much control by investing all your money in a 401K to brokers, the limited choices available, limited diversity, are subject to changes mandated by the government, and the mood of other investors. Trusting your money in one source is a mistake and risky option.

    Just like a business having many streams of income or investments is the smarter option. Widening your retirement net is wise. For many years, I invested the max into my 401K and after 12 years, I realized that your savings don’t appreciate like the 8% growth rate charts that broker sell you on.

    At that point, I decided to invest elsewhere. I started a business and know no longer have that corporate job, but my business provides income and has become an asset. I’ve used the business to create an additional passive source of income through YouTube. My next step is to leverage my business success to purchase some commercial real estate to house my business in.

    I calculated that it would take 10 years of investing to save the amount of money required to earn at an 8% appreciation as much as my YouTube Channel generates.

    The moral of the stories… Investing in a 401K is not diversifying in my book.

  68. steve ward

    odd, the more i read the more i was amazed by the people give decent advice, as for my take on 401k.

    My take on the 401k experiment (btw why is it called an experiment?)

    1) why on earth are they called retirement funds, i dont get it and the reason i dont get it is.

    2) that 401,000 investments that you have too look for IT IS YOUR MONEY after all which leads me too

    3) How many people take the time or have the time to look through 401,000 investments which leads me too

    4) a investment is not granted to make money, so why would that be the only thing you put retirement money in?

    5) education for this investing is not there so again why are you putting money in something for retirement if you know nothing about it?

    6) How many people have energy after the day is over to do there homework?

    7) for those who will say to me Steve just throw it in there it dont matter, to me that sounds like something a gambler would say when he/she goes to the tables to bet?

    now as for the person who lost a lot in 401k

    1) how much energy do you have to spend

    2) how you eating and sleeping

    3) fix those things if broke (for those who wonder what that has to do with money without energy you cannot make money)

    4) get a job, i did not read the whole post so that person may still have there job

    5) use that income to start a business, invent something, make deal’s etc (general advice i know)

    6) get good advice, that means read sites like Ramits here

    7) if you have to move to a different country like say Bali why because you can have a good place to live at a fraction of the cost of living in the states.


  69. Tracy

    In a sense – 401K is a failed experiment because it runs counter to human emotion and way we consider long term planning. I’m in my mid 50’s, and so many of my peers have saved nothing, have no pension… Now mind you – I’m not saying good or bad – human emotions and the way we reach long term decisions… it simply IS. If you can set politics aside … I think people should be required to invest into something like Social Security that is solid, predictable, and can always be counted on (and yes – run by the government, not an investment firm with no regulations). There would be some sort of sliding scale…where we continue to contribute into the plan for folks older than us, and at some point – we are contributing strictly for ourselves. Contributions would be REQUIRED. Plain and simple – folks won’t do it on their own.

  70. Russ

    The 401 k hasn’t failed, it’s doing exactly what is was designed to do.

    Somewhere around the 70’s executives, mostly bankers and lawyers, were using a then little known section of the tax code to delay paying taxes on their bonuses. The IRS stepped in and while they said this was legal, they put limits on contribution amounts, employees that were covered by the plan and penalties for withdrawing money early.

    In the 80’s finance firms, led by Fidelity, realized this was a fantastic way to attract a lot of “sticky” money that would stay with them for a long time and off of which they would earn a lot of fee income so they began to aggressively market 401 k plans.

    They targeted the company by saying it was a great benefit to offer employees and targeted workers by saying it was a way to save more for retirement. And it worked, almost every major company signed up and 401 k participation skyrocketed.

    The early 90’s came and brought with it corporate cost control and downsizing. Companies figured that since they were offering 401 k plans and giving workers a way to save for retirement that they could get rid of their pension plan and save a lot of money. Workers didn’t like it very much but were generally happy to even have a job with the concerns over Japanese financial world dominance.

    Today, after a series of stock market booms and busts over the last 10 years, we have a situation where many people are without traditional pensions and without adequate 401 k savings. But that isn’t the fault of the 401 k, it was designed to delay paying taxes, and it still does exactly that.

    However, given that the 401 k is now the primary retirement savings tool for most employees, there are ways employers could make it better:
    1) change the default to auto enroll so you have to opt out
    2) set the default contribution to 6% (fully capturing the standard 50% up to 3% match), increasing 1% each year
    3) set the default fund to a target retirement fund

    Beyond changing the defaults for enrollment the employee statements should change to show not only the current balance but also the projected balance (based on their current savings rate and a conservative rate of return) as well as how much income they could conservatively turn that projected benefit into either by purchasing an annuity or using something like a 3% withdrawal rate.

    This will help remove the time distortion around savings where many people seem to think that saving $1,000 a year will make them millionaires when they retire, only to reach 65 with $50,000 and blame the system for failing and giving them lousy retirement options.

    These aren’t perfect solutions but I think they would go a long way to helping a lot more people save a lot more money for retirement.

  71. Andrew N

    I sympathize with him. He does seem to be the rule rather than the exception.
    When people keep having accidents at the same corner, we put up stop signs or traffic lights. That’s what regulation is for.
    I’ve read a few of the comments and they suffer from the same root problem as Nocera’s; overconfidence in their own abilities. Reasoned decisions (momentum investing, using renovations to increase value by more than the cost incurred) are destroyed by events that seem obvious only in hindsight. A lifetime of careful planning can be destroyed by a few human mistakes. This idea of outsourcing the responsibility of investment retirment hasn’t worked. To paraphrase Buffett, if you can’t pick stocks, what makes you think you can pick fund managers? Or advisers? My parents are good at many things but they can’t pick and monitor investments (no computer to read all these blogs, for one).
    My suggestions are:
    1. mandatory financial planning classes from an early age (along with gym, math and chemistry)
    2. consolidation of all 401K plans at the state or federal level to a single pool of 3-5 investments. Think of China’s sovereign funds. Investment costs will drop because of the pool’s size. Bigger deals are suddenly possible (buying entire companies, utilities and railroads, Buffett style). Monitoring is automated and managers are transparent and accountable. There is only an opt-out, and the opt-out has to be confirmed every year.

  72. J. King

    The key to retirement is not in “saving” money. The key is generating “residual cash flow.” That is what the rich do, they invest time or money in generating cash flows that continue to pay them for work they did in the past. The classic examples are investing in dividend paying stocks, buying investment real-estate to rent out, or writing a book, movie or song. But if you don’t have hundreds of thousands to invest in stocks or real estate; or if you don’t have the talent to write a book, movie, or a song, your best shot is investing time in a business that generates residual income. Warren Buffet and Bill Gates say that deregulation in the energy market will result in the in THE GREATEST TRANSFER OF WEALTH IN HISTORY! So I am investing my time in the deregulated energy market.

  73. Bill Curry

    There is a way to protect a 401k portfolio from the brutal drawdowns we’ve seen recently. It is called Adaptive Asset Allocation and it is explained here:
    Unfortunately this is hard to do for average investors because their portfolios have to be rebalanced monthly based on momentum and volatility. If someone would create a fund of funds that does this rebalancing automatically it would be the best option for almost anyone’s 401k.

  74. Steve M

    “The 401(k) system is a failed experiment because it did not accomplish its objective…”

    I think this is correct. Mr. Nocera, however, goes on to list personal reasons, which takes the focus off the systemic issues. My pet peeve is personal accountability, but you have to start looking elsewhere for causes when half of people are overweight or don’t save enough money. If you don’t agree with this in principle, then you must in practicality, because those who stay in shape and save money are still going to end up paying for those who don’t, one way or another. There is just no escaping it…

  75. PJ

    join me in self directing you IRA!

  76. Aaron

    It’s fun to blame the 401(k) for our failure to gain the benefits that the 401(k) ACTUALLY HAS. Interesting.

    First, I recognize I am susceptible to this failure as well.

    As my earnings increase, my inclination will be to raise my standard of living to match, which is a bad idea. Because: 1) my standard of living is just fine the way it is and 2) raising it would doubly screw my retirement. Not only would I divert money from my retirement, I would also need more money in my retirement account to maintain this higher standard of living, which as we know, does not completely translate to a higher quality of life. What with the hedonic treadmill and all.

    My solution for myself is to manually override my natural tendency and make a habit of diverting windfalls into investments for my future, so I don’t feel the pain of investing. In fact, over 40% of my current income goes automatically to debt reduction, and I feel great. It should be natural to put it in a 401(k) or other interest-free account when the debt is gone.

  77. jim

    I cannot give a final answer to the question. I would add that today and in recent years many employers have implemented “automatic enrollment” and employees must op out if they do not want to participate.

    The oriiginal plans were primarily set up as auto- opt out and employees must take some action to participate.

    As an HR person my experience that the auto-enrollment has made a significant difference in the percentage of employees participating.

  78. Robin Bright

    401(k) are racked with hidden fees and eat up a large percentage of potential earnings. Other, much more profitable options include…setting up multiple streams of passive income and continuing to cultivate these earnings and taking a percentage of the earnings and investing in low fee index funds, a broadly diversified portfolio to minimize risk, and regular rebalancing so you are always selling off gains and investing in poorer performers (buy low / sell high…basic investing 101).

    Right now, the NY Times author isn’t thinking outside the box. He is an established writer. He could easily set up multiple streams of income, just because of his name and credibility. How about offering tutorials on improving your writing, insider information in the writing industry, where to find big dollar clients, etc. etc…whatever his niche is.

    By SAYING he will work til he drops because he can’t retire, well…he is proclaiming his future and he’ll probably have what he says, unless he turns his thinking around. There are a million ways to make money, especially online. I’ve got more projects in the works than I can handle and I’m quite sure I’ll be able to retire (if that’s what I truly want). I realize this is a topic that affects so many Americans but you have to take yourself outside of the general population in order to experience extreme success and you can’t really let circumstances dictate how you’ll end up. I’m divorced. I made bad choices in life, plenty of them. I also hit the ground running every time and that’s what this guy needs to do. Sorry for the tangent, but I hate to see people put things in print like that: “I can’t retire because of a failed system”….no, you can’t retire because you just declared it to be true. Otherwise, get on your horse and keep riding.

  79. AS

    Make any employer retirement plan automatic. It currently is opt-in. Some have suggested opt-out (people would need to actively opt-out if they don’t need or want it. But even with “Opt-out”, many people would end up with no savings at age 65, and on the dole.

    And while we’re at it it, I would also have some of the Social Security trust fund invested in the S&P500 index, instead of 100% in Treasuries as it is now.

  80. Craig

    One of the failings of the 401(k) is that you do have to take less risk as you approach retirement. One of the benefits of pensions is that they spread the risk across hundreds or thousands of people at all stages of life. The downside is that you’re tied to one employer.

    I’d like to see a way to get the best of both worlds. Something like an employer sponsored annuity. It could be something you take with you if you change employers. And it would give you guaranteed payouts for life based on your contributions. There is research that suggests people are happier in retirement with this type of payout vs a lump sum they see dwindling like an hourglass.

  81. Terry Gillespie

    Putting money each month in my tax-sheltered annuity forced me to live within my income. I never missed the money I put aside and now I have retired and have that money to spend. No regrets.

  82. Anne

    Thoughtful post, Ramit! I don’t know that I would call the 401(k) “failed” but my own experience has been that the returns over the past 10 years have been extremely disappointing, even for a young person years away from retirement and even someone with a diversified investment mix. Younger people probably are best counseled to count on no more than a 4% realistic annual rate of return, the likelihood that Social Security and Medicare will be meager at best and the likelihood that we will probably not be able to live alone and will need to live with our children and/or rely on their financial assistance as we age. It’s not doom and gloom but it is very different than the “independence” of old age we see today. Kids born today will probably be even more squeezed than 20-somethings today having to pay for increased taxes, college loans, save for their own retirement AND help their parents. We will need to look for more non-monetary ways of valuing the “good life.”

  83. Anthony

    The 401k has failed the same way health insurance has failed; they’re both tied to the company you work for. Most people are at the whims of the company’s plan that they chose from the amount they match to the options they provide. Retirement, and health insurance, should not be tied to your employer.

  84. Niki

    I would have to say that the 401k is not a failed experiment “yet.” Since not too many have actually retired with the 401k as their main or only source of retirement income, once the number of people who moronically decided to do nothing for their own retirement in hopes that a) they would never grow old b) they could work til their death, c) the government (those of us who did save or those young enough to be working) would bail them out-where would they get such an idea? Maybe when the children of today see that doing nothing does not work, then perhaps the “experiment” wasn’t a total failure, it just took multiple generations to see the wisdom in it. Only morons need to be forced to save for the future. I hate to pay the price of freedom to do it the way I want, because a few won’t get off the couch, figure out what delayed gratification is, and do what is right!

  85. Curtis

    I have a employer sponsored 401K. They are a small company and the 401 is administered by a insurance company. I will not say which one, but it has a elk as its logo. Administration fees on the plan are 3.8% with fund fees of 1.5 to 2 %. I have no other option except to put my money in the lowest cost, lowest return fund in this POS. There is not way I could ever have a decent retirement with this administrator and fund family. I use the 401K to pull my income down to allow funding Roth’s and a self directed IRA. I feel sorry for those that are stuck with this garbage.

  86. Willard

    I would just buy more rental real estate. I seem to be doing fine with the homes that I have. Don’t see myself taking the leap to apartments. I like single family homes.

  87. Kathleen

    I think he was a moron to buy the house and use his 401 K to refurbish it. Secondly his attitude sucks. He should continue to put money into his retirement acct, sell the house and rent a simple place. Save save save!!

  88. Kim

    Three-legged stool. Make it unsexy but safe. Let people gamble with their savings. Dont force them to.

  89. Eugene

    I have been greatly concerned about the investment volatility over the past decade. Many of my older colleagues will probably never be able to retire.

    We work for the state and our retirement is not 401k exactly, but similar in characteristics. The worst part they take 11% of my salary REGARDLESS. They match about 8%, but they invest it in such a way, that every few years the custodian company changes and the old one is sued… In other words, I have to plan something else.

    Over the past year I started “Bank On Yourself” plan, which is based on whole life insurance policy. Return is limited, but at least I am protected from loss…

  90. Jon

    The classic “want your cake and eat it too” type of argument. If the average retiree savings is $100,000, from my point of view, that’s excellent. No, it may not take care of all of ones WANTS, but is the gov’t responsible for that?

    This has nothing to do with moral condemnation; it’s simple mathematics. We want to all be millionaires when we retire, doesn’t that come with all the risks and responsibilities of some of our choices not working out as originally planned?

  91. Matthew Dowd

    1. Make up contributions. If you don’t max out your 401K one year, you can contribute in later years to make up for it.
    2. Once you put it in, you can’t it out until retirement.
    3. Investments managed by professional portfolio managers. Investment based on actuarial table to make sure they properly invested for the age of the beneficiary.
    4. Government regulated to keep the dirt bags out.

  92. Victoria

    I’ve never had an employer sponsored 401K plan. Instead I’ve had a Roth IRA the past 4 years, maxing my contributions each year ($5k/year), saving/making a total of $25k after 4 years.

    I opened a Roth IRA because I was an independent contractor and didn’t have a 401K option. Last year I worked as a book keeper and had the option to open a 401K, but turned it down because it was such a crappy plan. With access to everyone’s 401K plan, I saw that all my co-workers had significantly lower returns on their 401K plan than my Roth IRA. One woman in her 40s had been on the company plan for 8 years and had only $8K in her 401K — after contributing 4%, plus 50% employer match up to 4%, and never taking any money out. Looking at everyone’s 401k made it clear that no one could possibly retire on the abysmal company 401k plan.

    This company also offered a crappy health insurance plan that cost employees twice as much as my independent insurance with the same benefits. Much like the 401K plan, all employees (but me) chose to be on this plan because it was offered by the company. Had they done their homework they’d find out they can easily get a much better plan for that price or the same plan for much cheaper.

    The problem isn’t that the 401K is a failure. It’s that some are failures and some are successes. People just aren’t willing to do the research to understand if the one offered to them is crap and should be turned down. You shouldn’t join your company’s 401K plan just because “it’s the right thing to do”. You should join if it’s actually beneficial and better than other retirement options.

    Realistically most people aren’t willing to research something as dry as 401K plans vs other retirement options. Maybe employers need to evaluate their 401K plan on an annual basis to see if it should be changed, make employees opt-out of a 401K plan that saves a higher percentage of their pay (10-20%), and match a higher percentage so it’s more worthwhile (50% up to 10%).

  93. mark grove

    I personally don’t put money into a retirement account anymore. I’m here in Canada and we have exactly the same of types of investments here we can go into like a registered retirement savings plan, which is the same as a 401 K, and Pension plans through our employers.

    I don’t trust our government at all or investment companies.

    There are only two ways to make money in my view. Either a job or a business of your own. Or a combination of both. But for a business, only invest money you can afford to lose. I’m in the music business as an agent for musicians and writer for musicians and record labels.

    I don’t make a boatload of cash on the side, but it helps while I build my business. I also work a job still. My money is all in cash and GIC’s which are exactly the same as CD’s in the US. Keep your money in the bank. Don’t worry about how much an investment will pay you. Worry about ever getting your money back at all.

    I realize my money could be taken away if a North American meltdown of the financial system happens with the banks. I’m very concerned, but I keep my money safe. Just heed my words. Maybe I’m wrong but I’ll keep doing what I’m doing.

    Much success to all Ramit’s readers.

    Mark G

  94. karen

    I think that 401k funds should be allowed be put i
    n cds or usa bonds… Although I have always contributed the max and never taken money out poor fund management the lack of choice of funds and the ups and downs of the stock market have left any funds in 401ks far below other saving strategies.

  95. Andrew G

    I think the really issue is the concept of modern retirement is flawed. Correct me in I’m wrong, but only 100 years ago did people not spend the vast majority of there time trying to survive (working). They worked sun up to sun down on farms everyday. They did this until basically the die they died

    Some where along the line we decided the standard should be to work 40 hours a week, and just stop working 10-15 years before we die? The math just doesn’t add up.

    As a society we produce and we consume. We can’t just stop producing as much (work less), start consuming more (live longer more lavish lifestyles) and expect it all to work out.

    • Andrew G

      I just re-read my post. Holy poop my spelling and grammar are terrible. Note to self, proof read more often….

      I think the general idea still comes through.

  96. Michelle

    In Australia we have a slightly different system 401(k) is similar to superannuation. All Australian employers must pay 9% of their employees income into their super. In addition the government won’t let you access it until around 60 so you can’t take money out for anything. This system along with other investments will work well for all young workers that do it their whole lives. However for people who are older and only started investing halfway through their careers will struggle.

    Retirement is much harder now as people live longer. I think retiring at 60 and living another 20 or so years on savings is not an option for most people.

    401(k) and super are really good tools but they should only be considered one arm of a diverse plan.

  97. Carter

    So he’s telling us that the 401k is pointless?

    He’s also telling us that he:
    1) Mismanaged the allocation of his funds in his 401k
    2) Made bad relationship decisions which impacted how much his 401k was left with
    3) Made other poor financial decisions by buying a house that needed renovations beyond what he could afford
    4) On top of all of that, he decided to gut his retirement plan to pay for renovations on a house that he shouldn’t have bought because it was outside of his means at the time

    So… what exactly is his argument? I don’t understand how he thinks he can call the 401k a failed experiment when he didn’t even follow the guidelines or rules of the 401k. It would be like crying about losing a game of chess when you were playing it like it was checkers. It just doesn’t follow.

  98. ADH

    I believe the move to 401K / 403B was a move to increase corporate profits, decrease the employees take home pay, purposefully push the working class to borrow more money (debt) systematically, and move back to endentured servitude (slavery). Proof exists in that senior execuitve salaries are exponentially greater than the average workers. Profits have recovered in the USA corporate board room, but the working class continue to struggle to make a life. And as Ramit points out, the average person looking to retire has $100,000 which will not pay for their own medical bills when they die.

    Since this is a systematic loss of a safety net (through federal law (401K/B etc.)) and corporations (and their executives) are the beneficiaries of the financial loss for workers, plus corporations fund politicians, I don’t see a fix. The fix is to improve access to education and job skills. The fix is to instill corporate fairness and profit sharing. The fix is to increase parental involvement. The fix is to recognize that energy and food are actually part of inflation. The fix is to help women who are unwed mothers. The fix is teach basic financial skills at all levels of school. The fix is to get rid of ‘high fructos corn syrup’. The fix is to increase not-for-profit corporations.

    I appreciate all that the USA has to offer. However, it is Lincoln we celebrate and not JP Morgan. It is JF Kennedy was revere and not Sen. Byrd. Fear is very powerful…

  99. Mike P

    The 401K is great, I have only been working since 2000 with it and I still have come out way ahead of a normal savings account. It is my hope that this tax deferral is kept.

    I do think that most individuals in this country are not capable of using this type of tax shelter to their advantage. Also in general individuals are greedy short term thinkers, this is evidenced by my many coworkers who spend their days constantly shifting their mutual fund balances around in anticipation of the market, more often than not they are buying high and selling low. The default option should be that 10% of their wages be added to a lifecycle fund. If the investor wants additional fund options then they can op-out of it.

    It is my hope that the few of us that can use the 401K responsibly be allowed to continue doing so. My fellow Gen X’ers are for the most part lazy and expect instant gratification, when it is our turn to retire things will be even more screwed up and the whining and blame throwing will be an exponential multiple compared to what you hear from the baby boomers.

  100. scott hollander

    what has failed is an american public that is financially illiterate and overly focused on what can i have now. I’ve been through seveeral busts on the stock market and have managed to be frugal and prudent and paid attention to what is going on in the US and world economy and taken the time to educate myself. Ii has been rough but if people’s 401(k)’s have failed miserably then they have either not been paying attention or they have been overly greedy. teh 401(K) and noe the Roth plans are the only hope most people will have for a decent retirement, but they have to get eductaed, they have to plan, and they have to be more prudent and not run out to but that new car or that new TV, or spend a small fortune on their data driven cell phone and PDA plans –

  101. Kim

    The problem isn’t with 401ks. The problem is with Joe. He made all the classic investing mistakes–not having a diversified enough portfolio (tech-heavy), only putting money in when the market was going up, taking it out when the market was down, etc. You need to put money in regularly, biweekly, etc. no matter if the market is going up and down. It’s called dollar-cost averaging. You will at times buy stocks when they’re on sale…which is why you keep putting it in when the market is down. You also should never take money out of a 401k because that will set you back big-time no matter if you have a well-diversified portfolio and the market is going up. I stayed fully invested throughout the 2008 market meltdown (didn’t pull out) and continued investing, making shifts towards slightly more conservative position when it seemed like a good time (by the advice of my broker), and am quite happy with the results. BTW if your employer gives you any kind of match on your 401k you are a complete fool not to take advantage of it. And even if they don’t, it’s one of the few tax breaks many of us can take advantage of.

  102. SB

    Just clarifying that it was not Joe Nocera who called the 401k a failed experiment but Theresa Ghilarducci. About half the article is her research and quotes but she is completely omitted from the snippets that Ramit picked.
    My thoughts:
    Everyone invests in the Thrift Savings Plan. That is it.

  103. Kate

    In Australia we have compulsory 9% (of total income) contributions to retirement that kick in when you earn over $450 a month. The employer pays the contribution to your retirement fund just like they pay your income taxes to the government and you never actually see the money. You can’t pull the money out before retirement except in cases of severe financial hardship (like permanent and total disability). You maintain control over where you invest the money but you can’t withdraw it until retirement or contribute less than 9%.

    This means that as a university student earning minimum wage and working casually in the hospitality industry I’m still contributing to retirement. I think that compulsory contributions and the inability to withdraw money prior to retirement is probably the only way to get everybody (not just those that are good with money and capable of making responsible life choices) to save for retirement. So my suggestion for fixing 410K- make it mandatory and don’t allow people to withdraw money prior to retirement.

  104. Matt B.

    Retirements accounts are fucking confusing. I’m grateful that I found Ramit’s book and was able to wrap my head around pragmatic investing. But not everyone is going to follow in Ramit’s beliefs, nor are they going to magically become educated. America isn’t a panacea and it never will be.

    I think the IRA and the 401(k) unintentionally setup people to fail. We make them optional, for starters. They’re very, very complicated, and often have too many choices. We become paralyzed because we don’t know what to do with retirement accounts.

    Doesn’t the whole retirement system just SCREAM for the need to be simplified?

  105. Financial Advice for Young Professionals

    The main caveat of the 401k is that you have to contribute a significant amount. No matter what your AA is, if you contribute 25% a year for 20 years you will have enough money to retire. It’s pretty simple IMO.

  106. murph

    A 200 year up trend in the market does not end when the bull market in your undiversified portfolio does. Let’s also not forget the S&P 500 is only 16% below it’s all time highs.

    Why do these bearish articles come out when the market has just sold off? Everything usually looks and feels the worst near the bottom.

    This dude has money management issues, the system is in tact and should remain the same.

  107. Susan

    Speaking of nuance, Ramit, how carefully have you examined the work of Ludwig van Mises, Henry Haziltt, and Nobel prize-winner F.A. Hayek? I’m neither a “sir” nor a moron, and I’m able to distinguish between Ron Paul and story-book characters like Chicken Little.

    Freedom and self-responsibility are key to all kinds of success, including financial success. Data and a modicum of intelligence help too. I admire your emphasis on providing value to customers and employers as a means to earning money. I’m less impressed by facile insults and mischaracterizations.

  108. Lucille

    I’m in Europe and the 401k sounds like a crazy experiment!
    I’ve heard that you can borrow from the fund too which is even crazier. A pension fund is something you pay into from the day you start working and take out at retirement. The state provides you with a fund too but it’s only as good as the contributions you’ve made to it through your working life.
    Whaty happened to the “American Dream” – has that failed too?

  109. Pat

    I don’t have any easy answers for this one, Ramit. Yet I would like to hear what you think and what you feel are the best long term investment plans? Life ebbs and flows just like 401K accounts. In our family we are like the tortoise just plugging along, consistently contributing every month to take advantage of dollar cost averaging. There are times when we’ve felt we would have used this money wisely by borrowing from it to renovate our house, especially after losing so much a few years ago (we lost enough that had we borrowed before the fall the bath and kitchen could have both been redone!). Yet, we leave it untouched. Given the volatile nature of the economy lately I’m not sure if we are doing the right thing.

  110. Andrew Craig

    It is very, very simple:
    Read the Gone Fishin’ Portfolio by Alex Green and the Ivy Portfolio by Mebane Faber and Eric Richardson. Set up your investments so you own a vast range of global equities, bonds, real estate, commodities and precious metals, you will then be geographically and asset hedged and will make money even when “the market” crashes. Then stop worrying about money for the rest of your life.
    Most people’s problem with money and investment is they know nothing about it, do nothing about getting to know something about it and then blame everyone else when “my 401k gets cut in half”.
    It just isn’t that complicated.

  111. Jim

    I can’t call “the 401k” a failed experiment just because it doesn’t work for everyone. Automobiles aren’t a failed experiment because some people crash. Marriage isn’t a failed experiment because some people get divorced.

    The 401k system is evolving to include incredibly simple target date funds and low fee index funds. Young people who started automating their 401Ks from their first day on the job will most likely benefit greatly. I would like to see companies offer free (or better yet mandatory) financial advising to employees to set up their 401k’s for them properly.

  112. Trevor

    I think a handful of folks have identified some key points, and I’ll echo and add outs.

    1: 401(k)s and other retirement planning shifts the responsibility to the individual.
    2: This is different many Baby Boomers and the previous generation, in so much that there were pensions and theoretically, social security.
    3: The likelihood of 401(k)s and others being successful is not high for the larger population. As a result, whether we want it or not, entitltements are here to stay until such time as the country realizes it cannot pay for said entitltements…. That would be revolutionary though, because it was likely completely remix the compensation structure… or so I would think..

  113. VoiceOfReason

    Not for nothing, but this Joe guy made a series of horrible financial decisions, and the 401k system is failed because of that? Perhaps there should be general, age-appropriate, auto-diversified mutual funds for people who don’t want to make important financial decisions… Oh wait, there totally are.

    Don’t ban cars because some drive recklessly.

  114. Jason

    Step 1: Don’t invest in things you don’t understand. No one could explain why tech stocks were riding so high before the bubble burst. If this means you can’t invest at all, you’ve got two options. Educate yourself, or stick to CDs. Random tactics lead to random results, and for every success story there will be tons of failures. Corollary 1: Lower risk investments are easier to understand. If you don’t have confidence in your ability to learn, start there.

    Step 2: Understand that marriage, and divorce, make a significant impact on your financial situation, and you can’t act like it’s a surprise when that impact makes itself known. Corollary 2: You can’t blame 401ks for not providing *additional* protection beyond what you’d get anywhere else for your money.

    Step 3: Remember that if you spend money, it won’t be saved anymore. Corollary 3: Even if your savings have had a bite taken out of them, it’s always better to start with something rather than nothing.

    Takeaway: The 401k is an account. That account provides measurable advantages that are relatively simple to use. What you do with your money within that account is your responsibility, just like it is anywhere else, and if you find your 401k hasn’t performed like you’d hoped, understand that the breakdown didn’t occur in the structure of the account but how you managed it. This will direct you where you need to go: further education.

    If something has failed about 401ks, I suppose you could say it has introduced many people to investing who otherwise wouldn’t have ever had the initiative to get started, without giving them similarly easy access to educate themselves about how to manage it. But I’m not really sure lack of financial education is something there’s a reasonable solution for, since it requires a certain amount of interest and initiative on the part of the investor. You could hand new participants a packet and make them sign that they’ve read and understood it (yeah right), or make them take a class (the cost of which would ultimately get passed back to the investors likely through the cost structure of the investment options provided through the financial institution managing the accounts), but ultimately I doubt either option would improve matters much for most people.

    I’m not sure there’s something else to fix with 401ks. Not to say they’re perfect, I mean, really I’d prefer they just automatically fill up with all the money I’ll ever need, but they’re remarkably light on disadvantages.

  115. Tigellinus

    I think it’s a combination of the following items.

    -People keep reverting back to “keeping up with the Joneses” when their daily routines become too mundane, perhaps even a bit depressing.

    -Some people always think they have stocks and derivatives down to an art.

    -People want to maintain a high standard of living across the board for all of their purchasing decisions.

    -Young adults are prematurely starting families. Mind set is: It’s what you’re supposed to do at this age! Also: My friends are already married and have kids! I need to catch up! *Settles for less than stellar partner to commence family* This is especially stagnating to the growth of your wealth if you come out into “the real world” mired in student debt or credit card debt.

    -Many people would rather indulge in activities that require frequent purchasing (going to dinner, bars/night clubs, sporting events, movies, etc.) instead of “classical activities” (learning to play an instrument on your own, reading, learning a language, just taking a fracking walk in the park outside for once).

    -The States’ poor standard of health: Consumption of terrible foods, never walking or hiking anymore, never the random moments of hormesis or intense strength training to keep the body functioning properly. Poor health often leads to surprise expenses. Despite insurance, there are often other consequences that go along with it that can attribute to a lack of retirement savings.

    -Financial dependents who never left the nest, or who took flight and flew into a clear glass window, only to return back home.

    -Most citizens settling for wage stagnation, while cost of living increases.

    -People who believe there’s a cut-off point for their education and skill acquisition/improvement

    -Some people started to believe early on that the world markets are screwed anyway

    -Some people believe they’re never going to retire

  116. scott

    I think 401K should be Opt-Out and automatically set at 5% to start with from moment of hire/earnings.

    All 401k plans should have a very simple mix of index funds with low expense ratios to avoid volatility as well.

    If someone needs money for a project, that is what emergency funds or savings (planned in advance!) are for.

  117. LaViva

    Failed experiment or not, 401Ks or 403Bs do not hold the promise they once seemed to hold for folks in my earnings bracket: $40 – 50K per year.

    My friends and family members are thinking about how to use real estate investments to fund retirement. Right now — for each of us — our homes are our greatest assets.

  118. Kristal

    I don’t think it’s the 401k in an of itself that’s the failure….it’s the market in general that follows the whims and profit desires of the largest hedge funds and banks in hand with lack of government oversite on top of the “set-it-and-forget-it” attitude of the lazy majority of people wanting 10-15% return by default with little knowledge or attention given to their retirement or financial planning in general. The author of the article mentioned clearly wants to blame someone else for his lack of self-control and poor financial planning, just like so many people that really need to be reading Ramit’s blog but probably aren’t.

    We’ve been sold by the people that created the 401k (and receive the lucrative managemenet fees of the mutual funds that are in them) that “diversification” in retirment is having some bond funds, some large cap funds, some small cap growth funds, etc in the 401k.

    That’s not diversification at all. Real diversification is having no consumer debt, having your house paid for, owning some rental real estate, having 401k money, roth IRA, cash savings, CD’s, bonds, all things which are actively managed as needed. Having some of these takes more work than just having money withdrawn from your paycheck autmotically, but you get what you pay (and work) for.

    • Mark

      The top comment on the NY Times site describes an un-workable socialist scenario, which doesn’t work precisely because taxes-high-enough-to-support-all-retirees reduces the “greed” incentive of “the rich” –thereby reducing tax revenues further, in a downward spiral that rhymes with “Greece.”

      BTW, one of the big lies of Social Security is that it does claim to support retirees at a reasonable “living income” –yet with no realistic provision for inflation other than a hope and a prayer.

  119. JK

    I don’t think 401(k)s are a failed experiment. With even a cursory understanding of what they can do for you, they can play a significant pillar of income in retirement years.

    As for what I would change however: We absolutely must educate the employers who put these plans in place for their employees.

    This is not at all to say an employee gets a free pass (the author shot himself in the foot several times), but almost all of the specific things from comments above (opt-out, the percentage at which to auto-enroll new employees, fund selection available, whether or not an employee can take a loan from their account, hardship withdrawals, having a qualified model portfolio as a default investment) are all “features” of the plan that the employer chooses.

    Most employers set it and forget it, and all too often didn’t do that great of a job in the first place (401k plan from an insurance company? really?)

    Here’s to hoping next month’s new fee disclosure rules wake some people up — 401(k)s might not have failed, but most of you should be downright angry at what your employers are giving you to work with…

    \intimately familiar w 401k plans
    \\yes, professionally.

  120. Lucy Ra

    Automation would probably work best for most people. But it may have to come from other source then self if self is not working out so well.

    A few years ago the company I work for auto enrolled all employees in 401K plan with something like %4 contribution. Every year they raise the contribution by %1 automatically. Employees can always log in and lower/cancel if they want. Chances are majority will leave it alone. A small change, but with full profit sharing this is better than nothing.

  121. Jac

    Sure lots of people don’t even get on the bus. If you don’t invest in a 401K, I don’t think that makes it a failed experiment. It probably should not be something you could cash in; it should have the same limits as SS – you get it for disability or death. I am stunned by the number of people I know who cash theirs in for a mortgage or credit card debt, and THEN give nearly half away in fees.

    I’m a science nerd and understanding economics and investments is not natural to me. Given that, I have been thinking lately that the 401K is a total let down. I’m 30+ years from retirement. I’ve been saving approximately $15k/year (depending on the max allowed) for 12 years. The markets have gone up. Gone down. Rolled around. I have $180,000. I didn’t panic and sell when the market turned. I didn’t scramble to buy. I merely continued saving.

    Auto enroll is great, but the fact has now become clear to me that the 401K needs care. It needs attention and feeding and watering like a plant. Most of my earnings I think disappeared in fees. I have finally accepted that I simply don’t know enough to be hugely successful at investing my 401K, and if I’m not going to learn more to be a huge success, then my result will be like putting it under my mattress.

    And now I’m torn because frankly, I don’t have any interest in understanding the markets and learning about fees and funds. I don’t want a part time job of misery keeping up with my investments. I’ve tried paying a person to do that. That was a stupid waste of money.

    Some people don’t even know enough to save, and the vast majority of the rest don’t know what to do with their savings.

  122. swamy

    For those who want to invest wisely, please read the book “Payback Time” by Phil Town. He oppose strongly putting money in 401k. Instead he suggest to open
    a self directed IRA and roll over the money on timely basis. That way you get
    the tax advantage of 401k and flexibility of what you want to invest.

  123. Zev Morgenstern

    I would not say it is a a failed experiment completely, with a few changes it may serve it’s objective to secure retired Americans future.
    I would not allow to withdraw 401k funds under any circumstances, not even vested funds, before retirement age.
    I would determine limitation and supervise the type and mix of the 401k funds’ investment. I will not allow 100% of the fund to be invested in stocks or other high risk vehicles.
    Just like anything else, our discretion may be wrong and we need professionals to guide and coach us on how to manage our money properly.

  124. Jason

    401Ks…Roth IRAs…IRAs…mutual funds. The problem with most of these investment vehicles is the inability to really trade the market. The entire system is set up so most working class people can do only one thing…buy stocks…buy ETFs…buy…buy…buy…dollar cost average and just keep buying. Why is we are not taught in high school how to short the market so we can make money in the event the market turns negative? Institutional investors get to play the full game with all the tools and products out there for mass opportunity to profit. Why don’t all American’s get to participate? I see the tax advantages of 401Ks and Roth IRAs but it almost ranks up there with holding onto a mortgage just for the tax breaks even though you can pay a house off completely with cash. When politicians set up a program with the help of Wall Street salesmen, the products pushed usually benefits only a certain few. Most of the products out there right now bringing in one thing for certain…commissions for the sales folks! It sure would be nice if the playing field were really level…but then again, most people can’t balance a check book let alone know how to buy/short stocks, use options or even break away from reality TV long enough to care about their money. So in that regard, 401Ks and Roth IRAs and other mass investment products are probably a good thing…for the sheep that follow the herd and never question what other opportunities are out there for real wealth creation.

  125. Xenocles

    You’re not free unless you’re free to be wrong. Ultimately it’s your money, and you have to make the best decision for yourself about how to allocate it. For most of us that means handing it to a target year fund. For some of us it means spending it now on some asset. A lot of us think we’re in the latter category when we’re not. Automation probably provides the most consistent positive results, but if we aren’t choosing it freely for ourselves I think we sacrifice something more important than the money we can expect to gain.

  126. Jason

    I’m surprised the average retiree even has $100,000 saved. I think the plans are improving for those who lack the time/desire/skills to be good investors. Index funds or ETFs are just fine for most workers, and most retirement plans offer that automatic diversification based on your risk tolerance and expected year of retirement. Following this type of plan while consistently investing 5-10% of your gross income every year is the best way for most workers who want a “hands-off” approach to earn good returns from their retirement savings.

    If there is a failure to 401(k)s, it is the reliance on workers to actually use them. In an attempt to resolve that problem, some blend of the automatic nature of Social Security and the investment component of a 401(k) would probably be ideal. Still, the only thing each of us can directly control is our own plan and actions.

  127. Greg Miliates

    I’ve got a strongbox of gold ingots, Krugerrands, and plenty of firepower in my basement bunker. When the apocalypse comes, I’ll be ready.

    And if I get to retirement age before then, I won’t worry about government handouts, slushy stock funds, and so-called high-yield savings accounts. I’ll be ready to barter for essentials using my hide-tanning, log-splitting, and home brewing skills. As for electricity and other utilities, I can live indefinitely on the energy produced from my composting toilet and the high-fiber diet I get from eating the first cutting of alfalfa.

    Laugh now, but I’ll be sitting pretty while the rest of you 401(k)ers are banging down my door like that Twilight Zone where the neighbors want in on the bomb shelter.

    And if you’re thinking of alternatives to your 401(k)–which only makes you dependent on an employer–take action to increase your cash flow. Start a side business so you can build your own cache of gold. If you can generate more cash flow and start automating it, you won’t worry so much about the stock market, 401(k)s, social security, or a pension.

  128. Moose

    The problem is that 401 k’s architects didn’t account for human nature which can be simply rectified.

    —90 percent of people never change the factory settings on their computers, therefore why would employees take the time to opt in.The solution is to have an automatic enrollment.

    —401 k should have no more then 5 choices and the default setting should be set to index funds.

    —Companies should be encouraged to advertise wages “after the automatic contributions” in order to encourage savings, because currently employees feel that they are loosing a part of “their” paycheck by putting money away for latter.

    Human beings by nature are lazy and get overwhelmed by too many choices, thats why cars have so many different features, and mortgages are packaged with many different layers.
    401 k should be KISS.

  129. Cherleen @ Barbara Friedberg Personal Finance

    401k was not made to be spent for down payment of your home loan or house renovation or business capital. In other words, we need to have a separate savings for these kind of expenses. Do not use your 401k, especially if you rely your future retirement on it. It is simply not a wise decision.

  130. Mike

    Average people who are not self investors should use 401K. The reason it seems failed is because like any other investment instrument it’s worth is only what it is at the time of “Withdrawal”. And since your exit time is planned for you age wise you do not have much control over the withdrawal process without taking penalty. And if your exit time starts during a market bust, it will dramatically change your life situations at a time where you may not have much choices. Depending on the company your working for, the 401k plan may not be as flexible, or the stock matching by the company may not necessarily be great if the company stock is well best way put crappy. And the management fees that some investors get stuck with without knowing which can go up to 3%, that means if you are in later part of your 401k worth up to 400k or more, you will be paying fees just the same amount you are able to contribute.

  131. T

    My 401(k) is working very well for me because of how well it’s been automated by all my employers. I always had an easy time setting up automatic deposits that are deducted before my paycheck goes to my other accounts. This is in contrast to my IRA, where I have to physically go to my credit union (in another state) to make a transfer every year.

    Thanks to the automation (and working in a lucrative field, of course), I’m 28 and have $70,000 in my 401(k). I hope to be able to stop saving for retirement entirely later in life, when it has less benefit anyway.

  132. Eric Wentworth

    The 401k was never intended to be the primary retirement “investment” vehicle for the American people. If you aren’t getting a 100% employer match, a 401k is almost always a mediocre investment at best. Also, most 401k plans are heavily laden with fees and other charges. A Roth IRA and a low-fee index stock fund makes more sense.

  133. Mark

    I’ve seen a few people mention this, but haven’t seen a lot of discussion on the fact that the 401(k) was created to benefit the employer as a lower cost alternative to a pension plan.

    Also, I’ve noticed most of the commenters are around my age (29) and are advocating opt out plans to mandate the good habits we already practice. First off, it’s great that so many have started out so well, so early in a down economy, and I think that the opt out plan will improve things for most of the people most of the time. However, there are many common scenarios in which the 401(k) is not the most beneficial. In my case, my employer no longer matches my contributions, and I’d rather max out my Roth and pay off my loans more aggressively. Also, I’d rather pay taxes in my current bracket than whatever it will be 25 – 30 years from now.

    Second, I’m curious as to how others are planning to avoid the life altering events that can wreak havoc on a retirement plan. One of the biggest hits to the author’s 401(k) was related to a divorce, which is problematic at best for someone’s finances. Yes, he made mistakes, some only visible in hindsight, as investing in tech stocks then his home seemed reasonable at the time, but I’d consider him a C+/B- investor. Take note, he started using his 401(k) as soon as it was available and contributed regularly for 20+ years, and he wouldn’t be writing an article like this if he hadn’t saved enough money to lose a fortune.

    • Mark

      Also, has anyone read Killing Sacred Cows by Garrett Gunderson? The biggest sacred cow he is hoping to kill is the 401(k). I don’t agree with many of the approaches he suggests, but he does raise valid questions about many of the investment strategies we take for granted. Also, to partially answer one of my questions, he advocates supplemental insurance for as much as possible. While it wouldn’t have helped the author, it could help with other unexpected life events.

  134. chris

    Everyone is entitled to their” fair” share. Government handouts, bailouts, welfare – indeed we have the freedom to choose however most are opting for doling on the taxpayer dollar. Is the “writing on the wall”? A literally bloated lazy and blaming society that really have been dependent on government paying our “fair” share. Im positive that we’ll turn around and start saving again in our 401ks however there are some serious entitlement issues our society/country needs to deal with

  135. Schwamie

    I don’t believe that it is a failed “experiment”. I believe that people make don’t make informed decisions. Look at it as buying a car. Do you want the hot rod or the reliable station wagon? That aside, there are some changes that are necessary to make this better. First, the cap needs to be eliminated. If the market takes a dive and your portfolio suffers, than you should be able to “double down” on your losses. This at least would give you the opportunity to make some of that up, especially if you are nearing the end of your working years. Second, the divorce rules need to change regarding the distribution of 401(k) and any other retirement account. The money earned and deposited would not be used until retirement and that is when the spouse should receive any portion of distributions. If not, there should be some other offset that should be given rather than being forced to liquidate a portion of the retirement account. (I’d add more, but that would be an entirely different post.) Third, there is a huge difference between a 401(k) and an Individual IRA. The rediculous low cap on an IRA doesn’t help offset what a person who is not working, but has savings or other funds available to put into a retirement account, but no access to a 401(k). To better explain, if I inherit funds distributed from a life insurance policy, I cannot open a 401(k) and deposit funds. Thus I do not have anything other than an IRA with a paltry $5k annual limit that I can deposit. How does this help me for “retirement”? A 401(k) is only good if I’m working AND the company I work for has a 401(k). Again, we are subject to a maximum annual contribution of $17k (more if you are old enough to have “catch up” contributions). Finally, distributions should not be allowed for any reason prior to the current 59 1/2 year mark. This is meant to a RETIREMENT account, not a fix up your house, go on a vacation, buy a car, or any other type of account. For the above reasons, we are in dire need of an overhaul of what is currently available for retirement accounts, but I still don’t believe that what was done has failed, rather is it has been a good start.

  136. Judith

    What’s wrong with pensions? Seriously? I’m not living in the US, and my retirement planning is 100% pension-based, so I don’t really understand the issue…please explain?

  137. Lapointe Russell

    If there is a failure to 401(k)s, it is the reliance on workers to actually use them. In an attempt to resolve that problem, some blend of the automatic nature of Social Security and the investment component of a 401(k) would probably be ideal. Still, the only thing each of us can directly control is our own plan and actions.

  138. Is the 401(k) a failed experiment? | How Do I Plan For Retirement

    […] My siblings and I all started retirement savings very early on. … Read the rest here: Is the 401(k) a failed experiment? ← Retirement Income […]

  139. Karen

    A couple quick thoughts:

    I love the portability of 401Ks. Most of us will not work at one organization long enough to accrue a meaty pension (if such things exist anymore)

    Top performers can pick choice employers and lobby existing ones for better options. My current employer matches 8% and vests in thirds. So fully vested in 3 years. Sweet!

    I am currently researching options for rolling over my 401K into an IRA so I will have more control over my account when I move on (ETA 6 – 9 months)

    All that being said, I have lots of compassion for folks who are struggling because this stuff is not easy. Life does happen. We all make mistakes.

    I am particularly concerned about early comments about the divorce and how the male wage earner should not have to split his account with his ex. This does not bode well for women in couples that decide they want to have a SAHM raise their children and take care of the household.

  140. Robyn

    Maybe I’m kidding myself, but in the spirit of automation, I put my 401(k) money into a mutual fund targeted to my retirement date. With my employer matching my contributions and a portfolio rebalanced as I get closer to retirement, I think it’s the best I can do.

  141. Ray

    After reading the article, its plain to see where the problem is. Investment -wise, the 401K is a little like our RRSPs in Canada, and its a great investment tool regardless of what anyone will try and tell you. Its just how you use it. The guy in the article invested in tech stocks while admitting he was also being boosted by the bull market results prior to 2000. Clearly he didnt really know what he was investing in, and was just following the crowd. Therein lies the problem that many poeple make. So the problem isnt the 401K, its the lack of information about your invetsment options. It’s like filling your closet with clothes that you see in fashion mags and then asking why does this make me look fat and why am I not getting the hot dates (desired result). OK but I think the real question asked in Ramit’s e-mail was: “considering the “average savings for someone near retirement in America right now is $100,000,” something isn’t working. What would you change?” So the factor that needs to be changed is really our approach to investing. Savings tools the world over are presented to us as something we are supposed to BUY—it’s selling to our pre-conditioned consumer mentality. If it was presented as us in a more “classroom” method ie: here’s the info, now research it and defend your argument, a lot more people would be better informed, better invested, and better prepared for retirement. (the reason I said defend your argument, is becaese if you can no longer defend (or reason) why the investment tool is right for you, then you need to sell it).

  142. Finding My Way

    While I am not American – so I do not have a 401(K), I can recognize that there are a few issues with it. The first, and largest issue, is that people are unable to grasp that they need to put money away for the period of their life called retirement. It is a difficult concept for many people to grasp, and I don’t know why.

    Laziness seems to be single most hindering aspect of the program. Laziness coupled with a desire to be immediately self-serving with our money. We don’t want to wait until later to use our money. We want it to use now. This is directly paralleled with the debt crisis around the world.

    So, to change the 401(K) program, you first have to change the attitude of each person not currently using the program. Once you get that portion under control, looking at things like fund choice, group rate plans, and market fluctuations could be the next step. Here’s the thing. The markets fluctuate. That’s what happens. They fluctuate for a variety of reasons. Looking at funds that have good performance records over the long term are going to aid your money growth. There are many things to invest in.

    Many of us lack knowledge in this area. Many more of us lack the drive to learn, track, explore and become involved in this. We are more worried about playing with our iPods, or iBooks, or what have you.

    Paying attention to ourselves and our futures are not things we’ve been told are cool, or things the “in” kids do. Personal Finance has become more of a movement, than a part of daily life. Currently it’s “fashionable” to be on top of your finances, for some of us. But too many find it “unfashionable”, to “hard”, to much work and to time-consuming.

    This is where we need to begin to “fix” the 401(k) program.

  143. joey

    I’m not sure I understand the article and how he reached the conclusion of the 401k being the culprit. He might as well blame his ills on the weather, or his favorite sports team. His problems are that he got divorced, stopped contributing to his 401k at precisely the wrong time, and he also made the curious decision to cash out at a loss and plow that money into remodeling???

    Of course, the comments section is critical, although just as many people patted him on the back as if he had solved some great mystery of life.

    There is no one solution to save for retirement. However, if you establish good savings habits early on in life and always save 10, 15 or 20% of your earnings year in an year out, I find it hard to believe that you won’t be prepared somewhat for retirement.

    Blaming others – it’s what’s for dinner. Try personal responsibility next time.

  144. ArtO7

    The 401k was not an experiment and was not meant to be the primary source of retirement income. Congress saw that pension plans were falling short of providing most people enough money to retire on. The 401k was supposed to provide a means to supplement pension income. Instead, employers took the opportunity to dump defined benefit pensions in favor of 401k plans. Overall making retirement for the majority of workers less secure. For that matter, even such as it is it is probably problematic. A bunch of retiring baby boomers selling off their 401ks would seem to be something that will place downward pressure on the value of stocks in general. Who knows, maybe todays 20 somethings can cash out by buying into these plans at depressed prices. Gen X is probably screwed though.

  145. Jeremy

    Lots of good comments here Ramit!

    What’s funny is that the people calling for defined benefit plans now were probably the same people calling for defined contribution plans in the 80’s. Either way, it depends on the person to stick to their plan, which obviously this shmuck did not. Which, as I can tell, is probably your point here Ramit.

    There are many things wrong with the 401(k) experiment, whether it be broker fees, fund account fees, poor allocation or poor performance. However, one still cannot beat an employer matched 401(k) plan (FREE MONEY!) where you are guaranteed a 100% return from day one – you know as long as you don’t screw it up from there. From there, someone who takes the time to educate themselves on their company plan should be able to find some low cost funds.

    I contend that perhaps the problem is that of putting too many eggs in one basket. Now I am biased, but I contend that an index universal life policy is the single most underused and under-appreciated retirement tool. Where else can you enjoy market-linked gains that are tax deferred, no downside risk to your principal, and, if designed properly, tax advantaged retirement income. Not to mention a legacy to leave to your next of kin. FULL DISCLOSURE – I sell the stuff so of course I am biased, but I am a buyer of it as well.

    If you like ETF’s and the like, you are really missing out if you are uneducated about these types of SAVINGS products. Note that these are not investments. Ramit, I don’t mean to use your forum to plug my own agenda but I believe this something that our generation is not looking at and I have not seen mentioned in any of your writings, so I eagerly await your thoughts and the thoughts of your loyal readers.



  146. Mark

    P.S. The 401(k) system was designed by the Mutual Fund companies as a way to collect obscene fees while totally being unaccountable for results. Does anyone see the moral hazard here? Contrast with the pension manager at your company that has to face his co-workers in the lunchroom every day…

  147. Patrick Millerd

    I would try and get rid of the expectation that any scheme that is proposed by the government or their allies (major financial institutions) is working in your interest.

    The fees earned and costs that are incurred are often (most?) way in excess of the returns earned by you. You may find that you are lucky to make 25% of the return while 75% is sucked up by the scheme (legal ponzi?).

    Start learning about how you can invest outside these flaky schemes

  148. Kismet

    I say yes that the 401k is a failure for workers. What better way to infuse the stock market every payday with new money supplied by the American workers for Wall Street Banksters to gamble with.

  149. Michael Neumann

    Teaching financial literacy from kindergarten on. As adults we spend, earn, save, invest and donate money every day of our lives. Yet, we are never taught. (at least formally) Is it more important to know all the generals from the civil war or knowing that purchasing a $3000 bedroom group from a rent-to-own center at 35% interest is a bad idea?
    Turn off the tv, stop comparing yourself and your belongings to a movie or tv show prop stage. Having money and some financial security is far more important than stuff. I max out my 401K and IRA, I like the tax deferrment now, and overall through the years they have done fine.

  150. Renee

    The 401(k) didn’t fail you; your poor choices did. 401(k) are not meant to “dip into” early. Hence the large taxes and penalties when you do. You should be contributing more and spending less if you don’t think there will be enough money for your retirement. It’s not rocket science, but it sounds like a good financial advisor might be a good option for you so you can come up with a PLAN instead of just “winging it”.

  151. collegeloanstress

    I hope the 401K isn’t going to be a failure. If I ever get rid of my student loan debt (near six figures) on a teacher salary I would like to contribute to a 401K. The problem for me is that I do not have enough room in my budget to contribute since I have already minimized all of my expenses and I am still barely getting by. So no 401K, no Social Security and maybe a teacher pension. I should probably just live it up know because the golden years aren’t looking too golden. I am just happy I have a job and I am managing to survive.

  152. John

    Yes, the 401k needs to be retired and here’s why…

    1. No guarantees the money will be there when you need it (see Joe in the story above and millions of others)
    2. No liquidity (can’t touch the money until 59 1/2 without serious restrictions)
    3. Actual returns on mutual funds are nowhere near as advertised (see the annual Dalbar study)
    4. Expenses are outrageous (2% per year in many plans)
    5. Doesn’t really take into account human nature problems (risk aversion, herd mentality, etc. – see Kahneman’s work)
    6. Tax bomb at retirement (Would you rather be taxed on the seed or the harvest? The seed of course.)

  153. Chad

    Take the 15.3% that Americans are forced to pay into Social Security, and let them put it into their 401k, *in addition to* whatever they and their employer are contributing now.

  154. Martha

    Major issue is folks who don’t take responsbility for themselves, their decisions, but instead choose to blame others, products, or “the system.” We choose whether or not to save. Me? I’d rather have the option of saving pre-tax or not. My issue has been, as a self-employed and freelancing individual, the 401K (in the past, I haven’t checked lately) has had more generous contribution levels. I’d like to see those of us who choose self-employment, freelancing or consulting, have the same opportunities as those who choose to be employed. So, he may not like the 401K, but that’s no reason to take this option from others. He made poor investing choices, but I read that the majority don’t know how to make decent decisions, so how about a system that helps folks with this. (No, education is not the answer.) As for his decision to take $$ out for house expenses (and pay taxes and penalties), he has only himself to blame for this poor decision.

  155. Orian

    Ramit, I’m really enjoying reading through your stuff. I just started yesterday. I’ve learned so much and look forward to learning more. That said, there is no need to bring up irrelevant politics (e.g. your Ron Paul comment) and insult your readers who identify with him! (Of course, there are kooks in every community).