401Ks are a disaster: Column

[FreeJoe]

62. I have mixed feelings about 401Ks

In my early career, I had a pension. I hated it because it was very weighted towards longevity. Those that didn't stick around for 30 years didn't walk away with much. I knew that I wouldn't be in one job for very long at that point in my career, so I wanted something more portable. The 401K fit perfectly for me.

For me, 401Ks have worked great. I have a pension with my current company, but it will be dwarfed by my tax advantaged savings accounts (I lump my regular 401K, Roth 401K, IRAs, Roth IRAs, and even HSAs together). I have been fortunate to work for companies that do a 6% match for many years and have put in the federal max for decades. The plans at the companies I've worked have had good selections of funds and I've kept my money invested in very low cost index funds and have kept everything well balanced between US equities, International equities, and Bonds/TIPS. I've followed "best practices" on asset allocation based on my age and risk tolerance.

While 401Ks and other tax advantaged savings plans have worked well for me, I still recognize that they are a pretty sucky way to handle old-age pensions for society as a whole. They presume that people will be disciplined savers (few are) and that they will understand how to invest (few do). With company pensions, you don't have to be disciplined. That portion of your compensation is set aside for you regardless of how badly you may want/need to spend it today. With company pensions, the money is invested for you, with less risk that it will be eaten up by unscrupulous money managers. Even with that, I don't like company pensions.

I think we should have a dual sourced pension system. One portion should be something like social security. It should be a basic stipend to everyone over retirement age (I suggest 62), with means testing so that wealthy people don't receive it. This should be a base survival level of income so that no one lives without the basics in their old age.

The second source should be a national version of something like a company pension. These should be individual accounts. Every employer (and the self-employed), should be required to contribute something like 10% of pay to the account. The account owners should have limited ability to control how the funds are invested. The account owner should have some control over the asset allocation, but even that control should be constrained so that they have to progressively reduce the risk of their investments as they get closer to retirement. You don't want people 10 years from retirement being 100% in stocks.

So to summarize, everyone, regardless of whether they worked or how little they earned, should have a basic stipend that is enough to live on. Above that, everyone should have a pension account that is personally owned, restricted to appropriate funds (managed by a non-profit federal agency).