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Can ≠ Will: Yesterday’s 401(k) ≠ Tomorrow’s 401(k) Part Three of a Three-Part Series

07/09/2018
By Jack Towarnicky

In part 1 of this three-part series, I reviewed a recent Wall Street Journal (WSJ) article that suggested Baby Boomers were less prepared than prior generations, that tens of millions of retirees will soon live in poverty, and that the 401(k) was a culprit in this decline.  In part 2 (link), I confirmed that defined benefit pension plans were in decline long before the advent of the 401(k) and that, since 1982, individual account retirement savings plans are more than adequate, when combined with Social Security, to enable a worker to successfully prepare for retirement. 

In this third and final part, we’ll confirm that there is no solution for workers who do not have retirement preparation as a priority.  There is no retirement preparation solution for those who suffer repeated employment, financial, medical or other setbacks throughout their working careers.  

Last, we will confirm that the 401(k)’s past is not its future and that most of the academic and media criticism of individual account retirement savings plans is based on what retirement professionals see in their rear view mirror.  

Siempre Listo, Toujours Prêt, Budi Pripravan, Sii Preparato, Wees Geréed
In any or every language, and especially when it comes to retirement, Robert Baden-Powell’s original intent for the Boy Scout motto survives – “be prepared.”  

“People have within their own hands the tools to fashion their own destiny.”1 For retirement preparation, that has certainly been true since 1982, over 36 years ago, once IRAs became available to all wage earners.  

“Can” is correct.  “Will” is another story.  As the WSJ article highlights, many stumble in their retirement preparations. That is not new.  The barriers are numerous: bad financial decisions, lack of prioritization, financial illiteracy, etc.  The article specifically notes:

  • Lower interest rates that reduced earnings on investments and triggered increases in universal/variable life insurance and long term care premiums, 
  • Gains in life expectancy which have increased the use of professional caregivers, 
  • Less employer-sponsored retiree medical coverage,  increased Medicare/Medicare Supplement premiums, 
  • Credit card debts, retirement plan cash outs, divorce, job loss, and debts from business failures, home purchases, out of pocket health costs and college.  
  • Market crashes in 2000 and 2008 – though it conveniently ignores stock market recoveries.  

While the article does mention public employees with defined benefit pensions, it erroneously suggests those workers and retirees receiving those benefits are worry free.  

Bottom line, if there is a “retirement crisis” in America today, it is not the 401(k).  Instead, it is much more likely to be the cost to taxpayers to fund entitlements, as well as public employee and quasi-governmental agency retirement commitments:

  • Underfunded entitlements like Social Security and Medicare,
  • Underfunded multiemployer pension plans insured by the Pension Benefit Guarantee Corporation,
  • Underfunded federal, state and local public employee pension plans, and
  • Unfunded public employee retiree medical commitments.  

Yesterday’s 401(k) ≠ Tomorrow’s 401(k) 
Finally, while the WSJ article notes the adoption of automatic features following passage of the Pension Protection Act of 2006 (PPA 2006), the authors write, “Those safeguards generally came too late for Americans now in their 60s.”   

But, PPA 2006 didn’t contain many safeguards.  And, more importantly, a careful reading of the WSJ article confirms that almost all of the highlighted age 60+ Baby Boomers seemed to be aware of the need to prepare for retirement but either failed to take full advantage of savings opportunities or, where they did, cashed out:     

  • “… in his 20s … began saving in his 401(k)” (but cashed out twice)
  • “…she never earned enough to set up a … retirement plan” (but never contributed to an IRA)
  • “… consistently saved (over 35 years) … got hit hard in markets … withdrew $25,000 … down to about $20,000 …” (must be other transactions during those 35 years)
  • “… $5,000 saved until 2007 … now has about $30,000 in a 403(b) …” (12 years of savings = $30,000?)
  • “… took a lump sum … (no later job) offered a pension … ” (Did not contribute to an IRA)
  • “… hundreds of thousands in a profit sharing plan … spent much of the money.”

Yes, today’s 401(k) - with the advent of automatic enrollment and more sophisticated age-based and qualified default options, what I sometimes call Release 3.0 - is totally different than those early 401(k) plans back in 1982.  The trends are also noticeably different as documented in PSCA surveys.6  Options exist to update the 401(k) so that it anticipates middle class worker needs and offers features intentionally designed to anticipate the financial, employment and behavioral challenges workers will face in preparing for retirement.7 I call it 401(k) Release 4.0.  

If you have better ideas or proposals, send them on in to Jtowarnicky@usaretirement.org. 


1 Murray D. Lincoln, Vice President in Charge of Revolution, 1960. 
2 J. Towarnicky, DC Plans: Can Everyone Win?, 10/20/17, Accessed 6/25/18 at:  https://www.psca.org/blog_jack_2017_11  
3 H. Gillers, A. Tergesen, L. Scism, A Generation of Americans is Entering Old Age the Least Prepared in Decades, Low incomes, paltry savings, high debt burdens, failed insurance – the U.S. is upending decades of progress in securing life’s final chapter, Wall Street Journal, 6/22/18, Accessed 6/25/18 at:  https://www.wsj.com/articles/a-generation-of-americans-is-entering-old-age-the-least-prepared-in-decades-1529676033?mod=searchresults&page=1&pos=1 
4 The Dow Jones Industrial Average's highest closing record is 26,616.71 (1/26/18).  The S&P 500 Index highest closing record was 2,872.87 (1/26/18).  The NASDAQ Composite Index highest closing record is 7,781.51 (6/20/18).  
5 R. Greszler, How Big Is Your State’s Share of $6 Trillion in Unfunded Pension Liabilities? Heritage Foundation, 12/21/17, Accessed 6/25/18 at: https://www.heritage.org/budget-and-spending/commentary/how-big-your-states-share-6-trillion-unfunded-pension-liabilities 
J. Towarnicky, 401(k) Trends - Where We’ve Been and Where We May be Headed – Part 1 & Part 2, 04/18/18, 4/23/18, https://www.psca.org/blog_jack_2018_23,  https://www.psca.org/blog_jack_2018_24   
7 J. Towarnicky, The 401(k) as a Lifetime Financial Wellness Solution, May 2017, Accessed 6/25/18 at: https://www.soa.org/essays-monographs/2017-financial-wellness-essay-collection/   

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