401(k)s are a sham?

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Ddrak
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401(k)s are a sham?

Post by Ddrak » Sat Apr 05, 2014 9:02 am

Interesting, and somewhat worrying reading:

http://www.salon.com/2013/08/06/big_fin ... s_partner/
According to a recent report issued by the National Institute on Retirement Security, the median amount a family nearing retirement has saved for their post-work lives is $12,000. As for the magical 401(k)? If a household where the earners are between the ages of 55 and 64 does have a retirement account, they barely hit the six-figure mark at $100,000—a far cry from $1 million we’re told we need.
That's going to hurt, and in all sorts of flow-on effect ways.

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Re: 401(k)s are a sham?

Post by Minute » Sat Apr 05, 2014 12:19 pm

This is why I fully intend on dying early.
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Re: 401(k)s are a sham?

Post by Arathena » Sun Apr 06, 2014 9:38 am

The basic purpose of defined contribution plans, of all stripes, was, is, and always will be to reduce the burden of employment on employers. Whenever a private cost is reduced without socialization, you can essentially guarantee that the beneficiaries of that cost are getting fucked.
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Re: 401(k)s are a sham?

Post by Partha » Mon Apr 07, 2014 1:09 am

Well, it’s the Super-Monroe Doctrine: “Get off our oil, people who dress funny!” - M. Bouffant

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Re: 401(k)s are a sham?

Post by Embar Angylwrath » Wed Apr 09, 2014 10:29 am

@ Ara -

401(k) plans can be incredibly beneficial for the employee, I wouldn't paint them with so wide a brush. The benefit to the employee really depends on how the plan is administered, and the matching contribution level of the company. I'll use mine as an example: Our 401(k) plan is an "opt-out" plan. Upon employment, employees are automatically enrolled in the plan, and an investment selection is made for them. They have to fill out paperwork to stop participating in the plan. We have found we get a much larger percentage of employee participation (currently 100%) in the plan if employees actually have to make an effort to get out of it.

My company also matches 100% of every dollar for the first three percent of wages, and 50% of each dollar for the next two percent. So in practical effect, if an employee contributes 5% of their compensation, we match 4% of compensation, for a total of 9% contributed to the 401(k). In other words, they make an instant 80% increase on their invested dollar if they put in 5% of their income.

Finally, we have zero-time vesting on the company match portion. Once we make the match (and we do it every pay period, not at the end of the year when a lot of companies do), the employee is entitled to 100% of the match no matter the length of employment. Many companies have a vesting schedule that gives employees an annual 20% vesting of the company match so in order to get the full match, an employee would need to stay with the company for 5 years.

We also have the mix of investment funds reviewed and adjusted every year by a fee-for-service investment adviser.

That said, even with all of that, an employee should really be stashing as much money as they can into the 401(k), not just the 5% they need to contribute in order to get the maximum match from the company. I understand there are few employees who can put away the kind of cash allowed under the 2014 max of $55K combined contribution and company match limit. However, in our particular situation, a 15% contribution by an employee would net them 19% of compensation (almost a 27% return on their investment). That is before an average 8% return on the actual funds kicks in. In this case, a person making $60K a year who contributes $9K (15%) would see, on average, a balance of $12,120 at the end of the year. And then the lovely magic of compounding kicks in.

Under the above scenario, an employee, 30 years of age, contributing 15% of income with a rate of return of 8%, and a mere 3% COLA adjustment every year to salary, will retire at the age of 65 with $2.8 million. A 10% contribution will net them just a little over $2 million, and just the 5% contribution to get the max match will get them $1.3 million.

So really, it does depend on the administration of the plan, and the participation of the employee. Not everybody is a victim...
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Re: 401(k)s are a sham?

Post by Arathena » Wed Apr 09, 2014 1:47 pm

A pension has always been a savings account, funded by the employer, out of the employee's total compensation package. Eliminating that account without providing additional, unmatched compensation is absolutely a pay cut. Nickel and diming the back end is no different from nickel and diming the front end.

The fundamental problem with the 401(k) is the same fundamental problem that America has with all levels of discretionary savings accounts. Embar, You started your calculation at $60k - This is a higher salary than 81% of America makes as individuals. 55% of entire households make less than that. There's nothing to invest. Some portion of this is because of the loss of pensions. Take home pay was normalized with the assumption that a portion of total compensation would be going into a pension, and now we're expected to retire out of take home pay - our salaries have not gone up to match the loss off the back end. On top of that, we're now dearly exposed to the market on funds picked by our employers - Yes, you get to a million bucks if you can get 8% interest - Now start over at 10% of the median 30k salary getting, let's see, I've personally managed to staunch the bleeding to a 1.5% loss last quarter on mine, the primary Fidelity fund took a hit, off set by my spread.

It's good policy - if you're wealthy enough to afford it in the first place. If you're not...
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Re: 401(k)s are a sham?

Post by Ddrak » Wed Apr 09, 2014 3:02 pm

Australia has a similar problem looming, and over here employers must put 9% on top of the nominated salary into an employee nominated account before the employee even gives a cent. The problem is simply that it's not enough for most people to retire on and like it or not, those people will become a burden on society (either through socialised support, direct family support or they die starving in the streets).

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