You start a new job with benefits. One of those benefits is a 401K complete with a generous company match. You feel lucky, your new employer is interested in your future, interested in helping you build a secure retirement. But what if he isn’t? What if you 401K is just a way for your employer to cut expenses? Earlier this week, I ran across the CNN Money article: “Reality sinks in for 401K investors and providers” the article was pretty sobering. That people are finding that they will have to work longer than planned because of the market turmoil of the past decade is really no surprise. What I found surprising is the way employers view 401Ks, the coveted benefit that they offer employees. The CNN Money article quotes a study by Wells Fargo that looks at employer attitudes toward the 401K. The study found that:
1)Employers view retirement plans as a benefit rather than as the main way that employees will support themselves in retirement. Half of employers say that they offer competitive benefits to attract and retain employees.
2)Fewer than 1/3 of employers believe that employees participate in 401K plans in order to have a comfortable retirement. Many employers believe employees are only after the match.
3) Only 1/3 of employers stated that their 2010 goal was to educate plan participants about retirement needs and how much to save.
4) Only 20% of employers said that providing employees with the ability to retire was the greatest challenge their plan faced.
5) Only 10% said that they measured plan results against expected employee retirement needs.
In other words employers feel no obligation to assist employees in reaching retirement goals other than offering the 401K savings plan. Most plan providers do not provide financial literacy education or education about the implications of investing in the markets. When the markets were exploding during the heady 1990’s it seems that everyone became an investor, there was a millionaire born every minute, stock prices were destined to always rise and no one had to ask the important question: will the 401K really help people create the funds for a healthy retirement.
Some friends of mine would say that it was never or should never have been an employer’s responsibility to provide for an employee’s retirement. I am not sure I find the philosophical point relevant. Employee benefits are expensive and any employer will have to do something about those expenses if they hope to compete globally but the shift from defined benefit to defined contribution plans as the primary mode of retirement planning occurred gradually and quietly. Looking at where the DOW was in the 1980s before the proliferation of plans to where the DOW ended as 401K plans took hold, one cannot help but conclude that the proliferation of 401K plans created the market explosion of the 1990s by flooding the markets with new money, much the same way that creative financing and the securitization of those loans fueled the housing bubble. In short, the 401K plan fueled the very market boom that retirees were supposed to take advantage of. This is what we are left with: defined contribution plans are the primary vehicle of retirement planning, but the employer who provides the plan has no vested interest in making sure employees actually reach their retirement goals. This is America, we fundamentally believe in freedom of choice including the right of individuals to make unsound financial choices therefore it is unlikely that we will ever mandate financial literacy and education. I believe that the most that the American public can do is realize that Social Security is in trouble, that the 401K, maxing it out and getting a generous company match will not guaranty a comfortable retirement and that financial literacy is critical to building a sound retirement. Financial literacy is more than reading the jargon of the day, it means studying financial history, bubbles and true long term returns. Going forward a comfortable retirement will likely be due to a combination of Social Security, the 401K, savings outside of a defined plan, and entrepreneurial activity designed to generate reliable cashflow. One thing’s for sure the employee has never been more on his or her own to create a comfortable retirement.
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{ 3 comments… read them below or add one }
Ouida, I think you have a misimpression about a term. A 401(k) plan is not a defined contribution plan. With the adjective “defined” applied, there are two types of plans: defined benefit and defined contribution. Both of these are funded solely by the employer. Defined contribution plans specify the amount an employer must contribute for each qualified employee. They are best for small closely held corporations because they give owners the opportunity to fund very top-heavy plans.
A 401(k) plan requires no contribution from the employer and the employee actually owns his own account and is responsible for the amount he chooses to fund it, up to the maximums. 401(k) plans are most advantageous to employers not just because they save on contribution requirements, but because the more pre-tax benefits an employee participates in (cafeteria plans) the lower the taxable income will be upon which the employer must pay FICA and other taxes.
An employer increases his bottom line by offering employees options to participate in pre-tax benefit plans. That is the employers’ primary motivation, not whether employees are secure in retirement.
Hey, Jack thank you so much for your comment. Actually the description of the 401K plan as a defined contribution plan is correct as it appears in the mainstream press. From Wikipedia :”Examples of defined contribution plans in the USA include Individual Retirement Accounts (IRAs) and 401(k) plans. ” Even if the employer contribution is zero dollars it meets the definition of a defined contribution plan.
You are absolutely right, employers are concerned about their bottom lines and that was the point of the article was that employers have no concern at all about whether or not employees have a fully-funded retirement. The study authors, and remember the study was from Wells Fargo, believe that employers should care and provide financial literacy education.
I believe there should be mass financial literacy campaigns and I don’t care who runs them. Thanks for your comment, Jack.
Hey Ouida,
Great site, I hope to read more posts from you.
Regarding the nomenclature of “defined contribution” in the exchange above, a 401(k) is in fact correctly referred to as a defined contribution plan. See IRC 401(k)(2)(A)&(B). http://www.fourmilab.ch/uscode/26usc/www/t26-A-1-D-I-A-401.html#_k_
Furthermore, the employee is not really the owner either. Technically, the employer contributes funds per request of the employee into a trust held “for the benefit of” the contributing employee. So who owns the pot? The employee, the company, or the silent partner (the govies)? The answer is yes. Haha. Therein lies the conundrum. A couple of scenarios to provide crude examples of the “whose is it?” game.
I. The employer goes bankrupt prior to adequately funding the employee trust account even though the 5500 states an amount that “is” vested. Can the employee spend any of that phantom money? It was supposedly held in trust, so perhaps the employees can get in line along with the other creditors and salvage some loss. At any rate, was it ever really the employee’s money? If so, how much control could the employee have employed over those funds?
II. Hypothetically, the government recognizes that its own shortfalls have become paramount and decides to review some of the calculations regarding the taxation of its self-devised qualified plans. IRC section 401(k) makes it to the cutting room floor and is found to be a favorable means of “funding” some of the government’s shortfall. Who then owns the plan? In this scenario at any point did the employee have control of those funds or the opportunity to exert a different direction for the redirected funds?
My point is that you have certainly hit on a livewire regarding retirement and your insights on the main players and their effects on the markets and its participants are dead on. Thanks for a breath of fresh air.