Bashing 401(k)s on CNBC

I bet they would also propose a government backstop to these "new" pensions creating a whole additional nightmare of pensions being run into the ground and the taxpayers having to pony up for the rescue.... no thanks.

If we combine what Social Security takes from the individual and the employer, and then mandate an equal matching contribution from the individual and the employer again, we could mandate a 25% of income retirement savings be put into PRIVATE, low risk portfolios. If you assume 3.1% inflation, a 7% pre-retirement return, a post-retirement return of 4%, and expected salary increases of 3%, a person making $30,000 at age 22 would have $2.5 million dollars at retirement and die at 90 years of age with $600,000 in the bank for their kids and grand kids.

Problem solved.

Justin, you have to acknowledge this cover story is pretty slanted; I can point to at least half a dozen items where either the entire story is not being told, or it deals with individual circumstances that likely would not have turned out different in any case. Probably the biggest story not being told - I don't know of anyone today who has worked for a company for 20 years or more; in fact, the lifespan of most companies, at least in my industry, is less than that.

That said, perhaps after all of the slant we've had from the financial services industries over the last couple of decades, some slant in the opposite direction is warranted. But I didn't expect to find it as a Time cover story.

The biggest flaw in this article is the plainly implied assumption that your 401K stops accumulating when you retire. It makes an incredibly big deal of the fact that it matters in what year you retire, when in fact that's merely the last year you are contributing, not the last year you are accumulating.

I have no involvement in financial services, and I have also begun to think that a 401K won't necessarily bring me to financial nirvana. But I'm afraid that I have to disagree with you here, Justin. This article is just patently absurd, and does nothing to help reasonable people seek solutions to funding retirement.

I am sorry but this was pretty horrible financial journalism.
I wrote a letter to the editors outlining my issues.

Steve Gandel's article on the "Why it's time to retire the 401K", omits and distorts a lot of information about 401K alternatives. While 401K are far from perfect they are just a better retirement vehicle than anything else we have.

First Mr Gandel talks about the a time "when pensions were the norm", this is a mythical time. The chart on page 33 show the dramatic decrease in percentage of companies offering defined benefits plans, but it omits an important point; this chart is only for companies that offered a retirement plan. Prior to the widespread adoption of 401K the majority of American had NO retirement plans. The majority of Americans work for companies with less than 500 employees. Pension plans are expensive to set up, and administer much less to fund and hence cost prohibitive for small and medium firms. I believe that at no time were more that 1/3 of private sector employees ever covered by a pension plan and when you add in the arduous vesting requirement the actual coverage was even lower. The choice for most American isn't between a 401K and a pension plan it is between a 401K and no retirement plan.

Next the article compares the fates of Oxy Petroleum employees with 401K versus their expected pension benefits. Not surprisingly it shows the employees would be better off with a pension. The underlying assumption is that Oxy will be around to pay the pensions. Imagine if a breakthrough occurs in alternative energy and oil demand collapses, how will Oxy pay the retiree's pensions?. The answer is they'll do the same as many airline, steel, manufacturers, declare bankruptcy leaving retirees with dramatically reduced pensions paid by Pension Benefit Guaranty Corporation and/or taxpayers. A lifetime pension plan guarantee only last as long as the companies life, a look at Dow companies circa 1979 show only handful still in the index. Nor are public pensions the only ones in trouble. The Oct 11. edition of the Washington Post had a terrific article describing the horrendous shape of almost all state and local pension funds, with many expecting to have only 1/2 money the need to pay the pension of teachers, cops, city workers etc.

Finally, Mr. Gandel discuss alternatives to the 401K. These include plans like Guaranteed retirement accounts, and retirement insurance, but he omits a critical fact none of the alternatives would have fared much better in 2008. Pooling retirement money to reduce risk sounds like a sensible idea. However, there is very little difference between having one million people with $100,000 in their 401K and a single giant pension fund with $100 billion in assets. If values of the assets drop 30% like in 2008, either way there is only $70 billion to fund the retirement of a million people and that isn't enough money. As American taxpayers have painfully learned, insurance companies, even the biggest, can and do go broke. Trusting our future retirement to the next AIG seems especially foolish.

Guaranteed retirement income and eliminating market risks for retirees sound like worthwhile goals. Unfortunately they are pipe dreams. There is no magic bullet for funding retirement; Americans need to save more, and/or work longer. Like or not our collective retirement is linked to the country's economic prosperity and specifically to corporations generating enough profit to pay interest on their bonds, and dividends to their stockholders (which due to 401Ks includes the vast majority of Americans). Hopefully the events of 2008 served as a wake up call to these simple facts. One of the major of benefits of 401K is there transparency, you know how much money you have. Even more importantly your 401K money can't be easily stolen or distributed to others. The real problem with most pension plans all to often they unintentionally end up like Ponzi schemes, where current retirees receive too generous payments at the expensive of future generations. GM is but one example of this. Blaming the 401K for the poor shape many Americans are in for retirement is clear case of shooting the messenger.

Calling this story excellent is more frustrating than the article itself.

Please consider that Mr. Gandel had the exact OPPPOSITE advice three years ago, suggesting that the best thing an individual could do after paying off all their debt would be to contribute to a 401(k) plan. Need proof?

http://www.first30days.com/smart-investing/articles/stephen-gandel-on-smart-investing.html

The guy has no sense of reality, no macroeconomic sense and apparently feels no need to leave Buffalo, NY for a second, third or fourth opinion.

I expect more from Time. I expect them to hire writers (opinionated are fine, so long as their opinion is substantiated with facts rather than a story about one company in one town.)

Oh yeah, perhaps elaborating on that little "Monte Carlo Simulation" thing would be nice. What WERE the results? Telling us that T. Rowe Price discovered that no portolio is 100% safe from disaster is the equivalent of saying "the sky is up all the of the time."

Waste of time, energy, effort and money on Time's part.