Tuesday, January 31, 2017

Why Defined Contribution Retirement Plans Don't Work

This article discusses in detail the failure of so called 410(k) plans to ensure a comfortable retirement for their participants.  As it turns out, even the creator of them is unable to retire on his 401(k).  Bravo for life's little ironies (thank you, Garry Trudeau).

Defined contribution plans, like 401(k) plans, derive their name from the ability of participants to put in to the plan a specified dollar amount, tax-free, and then invest the money in the markets, which means that the ultimate amount of the plan balance at retirement depends strictly on market performance.  If the markets do well, you do well; if not, you may find retirement to be a long way off, if ever.

The only real solution?  Either increase Social Security benefits, or make it easier somehow for businesses to create defined benefit plans, which require the plan sponsor to invest enough money to fund specified benefits.  That was what retirement was like in the pre-Reagan era.  If only we could go back to that world!

No comments: