The Ugly Truth About 401(k)s

| Wed Oct. 14, 2009 3:39 PM EDT

Back in the spring, Mother Jones published an issue with cover line “Who Ran Away With Your 401(k)?” and a series of articles about America’s broken retirement system. This week Time magazine has a cover story by Stephen Gandel that’s worth reading, even though by now it’s stating the painfully obvious: It’s called “Why It’s Time to Retire the 401(k)”:

The ugly truth…is that the 401(k) is a lousy idea, a financial flop, a rotten repository for our retirement reserves. In the past two years, that has become all too clear. From the end of 2007 to the end of March 2009, the average 401(k) balance fell 31%, according to Fidelity. The accounts have rebounded, along with the rest of the market, but that’s little help for those who retired — or were forced to — during the recession. In a system in which one year’s gains build on the next, the disaster of 2008 will dent retirement savings long after the recession ends.

 In what must seem like a cruel joke to many, the accounts proved the most dangerous for those closest to retirement. During the market downturn, the 401(k)s of 55-to-65-year-olds lost a quarter more than those of their 35-to-45-year-old colleagues. That’s because in your early years, your 401(k)’s growth is driven mostly by contributions. You control your own destiny. But the longer you hold a 401(k), the more market-exposed it becomes. It’s a twist that breaks the most basic rule of financial planning.

And don’t think that the problem is solved by the stock market’s partial rebound, or pronouncements that the recession is over. As the Economic Policy Institute has pointed out, the retirement crisis preceded the recession, and will endure long after it’s over:

Only half of full-time workers have a retirement plan through their employer, and coverage is much lower for part-time workers. Participating in a plan doesn’t mean a worker is adequately preparing for retirement. The median 401(k) account balance was only $25,000 in 2006-$40,000 for workers approaching retirement age. In other words, half of those who had a 401(k) were nearing retirement with less than $40,000 in their account.

Even before the stock market slide, the average person with a 401(k) was on track to retire with only 20-40% of what they need to maintain their standard of living.

The Economic Policy Institute, Pension Rights Center, and others are part of a new initiative called Retirement USA, which “is working for a universal, secure, and adequate retirement system to supplement Social Security for those workers who are not in plans that provide equally secure and adequate benefits.” Based on the current effort to achieve universal health insurance, it’s clear whatever they come up with will arrive too late to help present-day geezers like myself. (Death panels, anyone?)

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