The Father of the Modern 401(k) Says It Fails Many Americans


“Thus began the era of make-your-own-retirement.”

The 401k wasn’t exactly an accident – it was intentionally put into the tax code.  But the blockbuster growth of it, and the way it’s supplanting the traditional pension more and more – that was not the original intention.

Scott Tang at American Public Media (NPR) discusses the 401(k) with Ted Benna, the “tax nerd” who was working as a pension consultant and who noticed the new provision and had an inspiration as to how it could work for employees and employers.

And he says it’s failed many Americans.  The article doesn’t go much into how or why it has failed people, but the bottom line is that not enough money is being saved to pay for people’s retirements.

Unfortunately, in passing, the article says that “companies started ditching pension plans, which were very expensive”.  As if pensions have always been around, and as if pensions have always worked.  However, the history of pensions in the private sector doesn’t match that idealized view.  Pensions suffer from *exactly* the same problem as 401(k) plans – someone has to save the money now in order to provide for the money in the future.  True, pensions have traditionally put more of the burden on the employer rather than the employee, but the fact is that those who don’t save enough now run into disasters later.  When pensions are not adequately saved for, the sponsoring company still ends up having to make up the shortfall, and having not invested the money in advance, they may not have enough to pay when the time comes and you end up with both a bankrupt company *and* employees not getting the pensions they’d thought they were going to get (and often, the pension liabilities shifted to the federal Pension Benefit Guaranty Corporation (PBGC), with many of the retirees getting only a fraction of what was promised.  See, for example, any of several airlines which have gone through bankruptcy and shed their pension plans as a result.

Note, too, that the failure with pensions has generally been in the private sector.  That’s because, unlike the public sector, pension shortfalls cannot be made up by simply raising taxes.  And even in the public sector, that option is failing, too, as we’re seeing with several recent cities filing for bankruptcy, too.

The bottom line is that whether we’re talking about pensions or 401(k) plans (or IRAs or annuities), future spending is funded by current saving and we *all* need to concentrate on the current saving.

It would certainly help if more people had clear illustrations of the connection between “save now” and “spend later”.  As a financial planner, one of the most common questions my clients come to me with is “am I saving enough for retirement”.  And we can sit down and map out how much income they can expect in retirement based on their current savings, the rate at which they are continuing to add to that savings, and the growth rate of the investments into which we put their money.  And importantly, we discuss risks – most of the clients are willing to step up and save more if we come to the conclusion that they need to, but what we can’t control is the growth of the investments and for that reason, we always, always discuss what alternatives to keep in mind should “plan A” not work out.

Individuals can understand that for themselves.  I see it every day. Perhaps the institutions will learn, too, and we can get to the heart of the problem, which is not “individual responsibility for retirement versus corporate/institutional responsibility for it” but rather “save now so you don’t go broke later”.

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