Do 401(k)s Suck? | Teacher Finance

Last week while I was researching another article, I came across this piece on Slate. The title of the article, “It’s a 401(k) World, And It Sucks,” immediately caught my eye. I’ve long been skeptical of the 401(k), so I was intruiged to see what the author’s arguments against it were. (Note: if you’re unfamiliar with the 401(k), it’s basically a tax-deferred retirement savings account offered by many American employers to their workers. Sometimes employers match employees’ contributions, sometimes they don’t. You can also check out this article to compare the various types of retirement savings accounts that are out there.)

This quote from the beginning of the original of the article pretty much summarizes the author’s qualms with the 401(k) as America’s primary vehicle for saving for retirement:

— Poor people get absolutely nothing.

— Wealthy people who would have had large savings anyway get a nice tax cut that offers no meaningful incentive effect.

— For people in the middle, the quantity of subsidy you receive is linked to the marginal tax rate you pay—in other words, it’s inverse to need.

— A small minority of middle-class people manage to file the paperwork to save an adequate amount and then select a prudent low-fee, broadly diversified fund as their savings vehicle.

— Most middle-class savers end up either undersaving, overtrading, investing in excessively high-fee vehicles or some combination of the three.

— A small number of highly compensated folks now have lucrative careers offering bad investment products to a middle-class mass market based on their ability to swindle people.

I found this pretty interesting because the author took a socio-political stance against 401(k)s that I hadn’t considered, or at least, I hadn’t considered in these terms. He’s basically arguing that 401(k)s put too much control in the hands of the individual, as well as failing to provide for the retirement needs of poor Americans. I completely agree with all of the author’s points, but my argument against 401(k)s is more simplistic and micro-level. I dislike 401(k)s because:

You have to elect to join your company’s 401(k) – this, of course, means that a lot of people don’t
401(k)s, unlike Roth IRAs, have no option to retrieve funds before retirement age without incurring lots of taxes and penalties
Most investment options provided by employers are very limited
401(k)s don’t travel easily between jobs

Whether you look at a 401(k) from the perspective of the individual investor or the perspective of American society on the whole, it’s pretty clear that I think that 401(k)s suck. What about you?