The 401k

An article about the terribleness of the 401k.

Traditional pension plans force people to save and protect them against investment mistakes, market risks, and the possibility of outliving their savings, not to mention predatory financial institutions. 401(k)s don’t, and, lo and behold, most people don’t put enough in them, make serious investment errors, and fall prey to heavy fees that crush long-term returns. Worse, because 401(k)s can be tapped into (with a penalty) before retirement and are transferred to workers when they lose or change jobs, middle-class workers often use them as rainy-day fund when times are tough, further beggaring retirement security.  

Granted, 401(k)s work well for one group — the group who needs them least. For the affluent, 401(k)s are a lucrative way to manage retirement investments. They are also a great way to build up an estate and delay paying taxes. (Traditional defined-benefit plans didn’t become part of workers’ estates; like Social Security, they promised benefits for the remainder of a workers’ lives, pooling the “risk” of living longer — and potentially running out of money — across all those covered by the plan.)

I used to agree with this type of thinking. Here's why I changed:

1) My financial dealings with the state and federal government via paying nanny taxes, personal taxes, having a loan out corporation, dealing with EDD, etc. It's way more cumbersome and worse than you can imagine. Just try for instance - to call EDD to get an answer. For the record, this is an organization that my household PAYS between 1k-2k a month. And we can't get them on the phone.

2) Teaching and writing experience. Here's the thing: just because someone doesn't use a 401k right at the moment, doesn't mean they can't learn to use the 401k. People can learn. People can be taught. I think liberals in general make a huge mistake when focusing on RESULTS (which are by definition, looking at hindsight) versus focusing on IMPROVEMENT.

3) A general attitudinal shift from getting older and being a parent. People can learn when there is someone there to teach them. Rather than focusing on how stupid people are and how governments or computers or bureacrats or corporations would be so much better at making decisions for people than themselves -- how about we focus instead on teaching people to be more self reliant. Teach people thrift, savings, compound interest. I learned all this stuff when I was around 10-12 years old. Adults can figure it out. And if they can't, believe me, social security isn't going to save them.

4) Pension plans are good if managed well. But why should we assume they will be managed well? Most are underfunded, including Social Security. 401ks are good if managed well,  too.