An Extensive Investigation Reveals 401(k)s Aren't Perfect


Barron's had an uncharacteristically bad article titled 401(k)s Aren't Helping Americans Save Enough For Retirement. Cited in the article as reasons were that they haven't been around that long, lack of access for employees, participants taking money out and fees.

The author made no attempt to convey why 401(k)s "youth" was a drawback and I can't really fathom what the researchers that the author cited had in mind. Without having looked at the data, I can believe that employers don't do a great job of offering them to employees and don't do a good job of making sure employees enroll once eligible. That's clearly bad but would seem to have nothing to do with the characteristics of the wrapper, the 401(k). Similarly, if someone takes money out for a loan or cashes out when they change employers, certainly not good but those are behavioral matters having nothing to do with the mechanics of 401(k)s. One dangerous nugget about 401(k) loans, if you have a loan outstanding and you leave your employer for any reason, the loan is due immediately otherwise you owe taxes and penalty (penalty pertains to under 59 1/2 years old).

The article is correct about fees being too high. You're starting point should be to assume the fees are high and then work from there in terms of trying to figure out how to mitigate the fees with your investment choices (may not be possible) or a brokerage account option; pursue a brokerage option if available to you.

If you ask any advisor, they will tell you they have plenty of clients who rolled over 401(k) balances that were more than adequate for retirement. Anyone starting early, contributing enough to at least max out the employer match has a very good chance of accumulating enough for their retirement regardless of the various life circumstances that could impair their colleagues' experience with their 401(k).

If there's no getting around the expensive fees (there may not be) there is still not going to be anything better than maxing out the employer match. One alternative is to put in enough to the 401(k) to get the full employer match and then fund other types of savings vehicles, if eligible, like Roth IRAs.

No doubt 401(k) have flaws but if that is the best vehicle available to you then you have to make the most of it. You have to learn the pros and cons and become one of the people who uses them successfully to amass a notable retirement fund. This leads to another relevant aspect which is that no one will care about your retirement more than you (that is a quote from Joe Moglia). You can either rationalize the flaws cited by Barron's to not save or you can prevent/solve your own problems by learning and then overcoming. Anyone using 401(k) flaws as a reason to not save is setting themselves up for a catastrophic retirement failure.