Last week, Thomas Friedman wrote a breathy column for the New York Times about how it’s a 401(k) world. The idea being that just as we have responsibility for our own retirement funds – which is good for some people – we have responsibility for more of our careers – which is also good for some people.
Felix Salmon responded with a piece pointing out the problems with 401(k) plans as a retirement vehicle, and there are many. They generate a lot of money for investment companies, don’t provide an adequate retirement income for most people, and are overall a more expensive way to cover a group of people than a pension plan.
I’ve often said that everyone should get an MBA because we are all being asked to manage more of our lives than every before. Is that good? Is that bad? I don’t know.
I do know this: investing isn’t as hard as people think, but it isn’t easy, either, in large part because we have to fight all sorts of psychological biases. It’s never easy to do what seems unnatural, and buying low and selling high are unnatural. (Doesn’t it seem more fun to buy things that are going up and sell things that are going down?)
401(k) and other portable retirement plans are great for some people – people who change jobs a lot, take time out of the workforce for family or personal reasons, or those who are savvy investors. Under old-timey pension plans, you often had to work at the same place at least 15 years to receive benefits.
But here’s another key consideration: the 401(k) was never meant to replace traditional pension plans. It was meant to be a supplement and a tax shelter for people with high incomes. I have a SEP-IRA as a self-employed person, and I can put away as much as $51,000 per year. That’s a lot of money.
The bottom line is that you have to know the limitations and work with them. Having a 401(k) account is not enough. You need to contribute to it – as much as you can afford – and you need to invest it reasonably well. And, you need to keep the money in there. A loan against your plan is a nifty idea if it is merely a supplement to a corporate pension. It’s a terrible idea if this is your primary source of retirement income.
There aren’t enough four-leaf clovers out there for all of us.
