Monday, October 12, 2009

401K Pieces from Time & BusinessWeek

Interesting story on the concept of a 401K retirement plan in the latest Time Magazine.

In his piece "Why It's Time to Retire the 401(k)" Stephen Gandel examines the heavily trumpeted retirement plan... and looks at it's shortcomings and what to do about it.

The basic statement Gandel makes is that 401K programs were never designed to be a replacement for company pension programs, but rather a supplement to them. However, the present-day corporate climate has one company after another eliminating pensions and relying on 401K plans... leaving the retirement income solely up to (A) house equity, (B) 401K and other investment income and (C) Social Security.

401K plans in and of themselves are not a bad thing as they encourage employees to save money and often feature some form of company matching of funds (as a replacement for pension programs), but in current form they can fall victim to the vagaries of the stock market. For those who hoped to retire last year, this year or in the next 5-10 years, the plummeting of 401K values in many cases put those plans on hold. As to the idea of house equity as a source of retirement income... see aforementioned 401K value plunge.

The alternative in Gandel's piece is an idea that combines aspects of a pension program and 401K. There's a plan that still gets employee contributions, but rather than those contributions then going towards investments, they go towards a guaranteed monthly check from retirement until death... in short, a pension. Difference is that in this case it's funded not by the company (and to be fair to corporations, the US auto industry is an exhibit of how pension programs can cripple a business), but by the individual.

It remains to be seen how effective 401K programs are for many as they simply haven't been around long enough. Perhaps over another 20 years they'll prove wildly successful if the market continues on an upward path, but I get completely the idea of there being an alternative with less risk. Perhaps that alternative sacrifices the possibility of high returns in the market, but would do so while providing more of a guarantee for retirement... and reduce the number of people worried about their money running out before they die.


Within the same topic, but taking a different approach, BusinessWeek featured an article in it's July 13 issue titled "IBM Reinvents the 401(k)". The idea implemented there works on the idea of there being a 401K rather than pension program and then attempts to get the best 401K program possible. That involves a generous company match, but also access to both online financial planning tools and no-cost sessions with financial advisers.

I don't agree with the IBM consideration of using the 401K and other benefits on a tiered scale rewarding highly ranked employees more than others (as I feel that's what salary and bonuses are for), but do appreciate the concept of trying to set employees up as much as possible to succeed without actually having the expense of a traditional pension program.

Gotta have some sort of balance between the bottom line of the company on one hand and the long-term financial success of it's employees on the other.