Wednesday, April 16, 2008

The 401(k) Crock

I was recently propositioned at work to buy into the company 401(k) plan. I listened to the disquisition offered and thought the whole time, "what a crock." I guess maybe I've had too much training in the field of financial services (at one point I wanted to be a financial advisor), or maybe I just don't get it. Why would I want to put all this money away for later when I can't afford the now? Here are some of the reasons why I think retirement plans are a crock.

1. How much money do you need to save for retirement? There has been a rather clever commercial lately for one of the investment banks asking essentially if you are carrying around how much you need to save for retirement. The point of the commercial is that you don't have to worry about it, if you let us manage your retirement for you. This is ridiculous. I'm not opposed to people wanting to save for retirement, but to think that letting others manage your money will ensure a good retirement is bogus. You can put money into retirement, but don't expect it to take care of itself. ALWAYS, keep an eye on it.

2. Plan for next year, before you plan for retirement. Don't worry about retirement, if you can't afford to fix your car if it breaks down next month. If that money was in a regular savings account, it would be much more accessible than a 401 (k). The presentation was for a 401(k), not for a strong financial base to then plan on retirement.

3. I loved the aspect of the 401(k) presentation that talked about the fees assessed to your retirement account quarterly. I quickly flipped through the list of possible funds and found that the smallest fee was about 1% of the account balance. They take this out wether you gain money or lose money. So if you lose money, they still get paid. Sounds like someone I should trust with my nest egg. There do exist no fee funds, but not through my 401(k) plan.

4. Beware of the matching daemon. The one benefit 401(k) plans often tout is that employers can match some of your contributions as their way of helping with your retirement. Matching can be great if it covers the "fees" from the provider, and it can be an excellent way for you to "double your money," but don't get fooled. Matching has its problems, mainly (a) the employers then shed most of the responsibility for your retirement and get tax incentives for it, and (b) the amount they put into your retirement is only proportionate to how much you put in.
a) In days gone by, nearly every good job contained a pension. It was a standard amount dependent upon how long you have been with the company. There are companies that still do this (the US government being one of the most notable) but they are few and far between. On top of this, the US government strongly supports 401(k) plans with tax incentives to both the employer and the employee.
b) Many people are struggling these days to meet their monthly obligations. Wether this is caused by their own mistakes or society is an issue for another time. The problem is that many people do not put anything into a 401(k) plan, even if there is a good matching program. This results in many people not ready for retirement, and the company giving you a pat on the back and a "thanks for the 30 years of slave labor."
These are matching problems that could come if your company even offers matching. One of my coworkers asked about our company's matching program. The person giving the presentation said that our company didn't match anything. Wonderful!

I'm not saying don't save for retirement. I have a retirement account through the military. I'm just saying be smart about it. I would rather enjoy my early years while my family is young than to strap myself for cash now and have a rich retirement. If you are smart about it, you can probably have both.