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Uff Dah: Long Live the 401(k)

July 02, 2010
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In Norwegian, uff is an interjection used when something is scary, uncomfortable, hurtful, annoying, sad, or boring. Uff da or uff dah (pronounced “oof duh”) is most often used as a response when hearing something lamentable.

Did you see the story on 401(k) accounts in Time recently (10/19/09)?

If you didn’t, and you’re at all interested in retiring some day, you should look at it. The gist of the story is this: 401(k) plans have not been able to replace defined benefit plans and, because workers have not contributed enough to their plans or their plans are so new, 401(k)s have not done the job expected of them.

Uff dah

The story profiles several retired workers of varying income levels with retirement savings from $70,000 to $500,000. All of them talk about going back to work part-time because of finances.

Instead of getting guaranteed pension checks of more than $15,000 a year from a 36-year career as a chemical factory worker, for example, one person is taking $8,000 a year from his 401(k). Another executive with half a million in his 401(k) is living on $75,000 annually and doing day trading in the stock market because he’s afraid he’ll run out of money.

Author Stephen Gandel says the 401(k) was never invented to replace employer-guaranteed pension funds. It was meant to be one part of those three-legged stools financial planners all talk about:

* Personal savings including a 401(k);
* Pension; and
* Social Security.

The author writes, “The ugly truth though is that the 401(k) is a lousy idea, a financial flop, a rotten repository for our retirement reserves.”

Here’s Gandel’s argument: From the end of 2007 to the end of March 2009, the average 401(k) balance fell 31%. While accounts have bounced back in the past six months, those consumers who retired or were forced to retire during the recession will suffer long after this recession ends, as will those who did not stay the course.

Uff dah

What Gandel contends makes some sense. These accounts are “most dangerous for those closest to retirement. During the market downturn, the 401(k)s of 55- to 65-year-olds lost a quarter more than those of their 35- to 45-year-old colleagues. That’s because in your early years, your 401(k)’s growth is driven mostly by contributions. You control your own destiny. But the longer you hold a 401(k), the more market exposed it becomes.”

About 73 million Americans (50% of the working population) have 401(k)s. Yet the average 401(k) has a balance of $45,519, and 46% of all workers with 401(k)s have less than $10,000. (I know, I have been harping on this the past few columns.) The number of workers covered by pension plans has now fallen to less than 20%, and we all know that number will continue to fall further.

Gandel says that all the people who shared financials with him would have been better off with a pension. That may be, but we all know that companies can no longer afford to fund them, particularly with generally accepted accounting rules that make “mark to market” a real-time problem.

Hats ‘n horns vs. ‘lots of luck’

He also argues that when a person retires is critical. If the market is up, it’s hats and horns. If the market is down: lots of luck. This decade the market has been down four out of nine years, and many people were forced into retirement when their companies cut payroll.

And finally, the Time article pushed the idea of private- or government-run insurance programs that would guarantee workers one-quarter of their final paycheck throughout retirement. Don’t hold your breath on the government helping out. And as for a guaranteed salary for life, isn’t that what annuities purport to provide, albeit for not nearly as much as your pay?

Uff dah

Protect yourself

So where does that leave us? Here’s what we know to be true:

* Most workers do not contribute as much to their 401(k) as they should. Even among employees making more than $100,000 annually, only a third max out their contributions of $16,000 a year.

* Too many workers do not diversify their holdings, either putting too many of their eggs in bonds or stocks rather than splitting their portfolios. The Center for Retirement at Boston College says 14% of workers have their 401(k)s tied up in bonds, and more than 25% of investors are 100% in stocks.

* The savings rate is still too low—somewhere close to 5%, which is a great improvement over the negative numbers of 2008. But look what it has taken to get consumers to save: The Great Recession… fear of job loss… and fear of unemployment.

* That third leg—Social Security—is in need of some serious cash infusions if it is going to continue holding up its end of the retirement stool. (Why do highly compensated employees not have to pay beyond the $106,800 threshold, anyway?)

And here are some things you can do now:

* Increase your personal savings rate. If you get a raise, save it. All of it.

* Look for ways to cut costs and save the savings each month. Maybe you don’t need all those cable channels. After all, how much TV should you watch, really?

* Look at the benefits of credit union individual retirement accounts (IRA) and Roth IRAs. Ladder your share certificates of deposit. And make sure you have enough liquid savings to cover six to nine months worth expenses.

* Enroll in your company’s 401(k) program. Why that isn’t uniformly mandatory, I’ll never know. And contribute enough to qualify for your employer’s matching contribution.

* Make sure your 401(k) portfolio is not lopsided. With life expectancy so long these days, it’s probably impractical to get out of the market. But a diversified portfolio can help cushion a downfall.

* Use the catch-up provision if you are between the ages of 50 and 65, and stash an extra $5,500 in your 401(k) every year.

* Decide whether you need to work longer before retiring. The difference between retiring at 62 and 65 can mean 20% or more in annual retirement income, some analysts say.

And finally, recognize that sometimes all there is to say about stories like Time’s is: uff dah.

James Hanson is vice president of the Credit Union National Association’s business to consumer publishing department. Contact him at 608-231-4080.

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