Talk of a retirement crisis has flooded the media for the past several months and even years. There’s a growing concern that people who are reaching the age of 65 are not going to have enough money in the bank to retire comfortably. A lot of the fingers are being pointed at Social Security pensions, but perhaps not enough blame is going to 401Ks. How did we end up with 401Ks in the first place?
The 401K concept was introduced in the early 80s as a way for employees to avoid taxation in favor of a deferred payment. This, in theory, was great news for employees who were going to lose that money anyway and now had a way to put it towards retirement. It seemed like a win-win proposition for workers. So much so that in its infancy, the Reagan administration reportedly even tried to kill off this possibility for employees.
With the aforementioned issues within the Social Security system, which isn’t able to pay workers what they’re actually owed, and the concept of pensions mostly disappearing from all but syndicated jobs, more new retirees will rely on their 401Ks than ever before. One of the biggest issues that people who are getting close to 65 are having to face is still a COVID-related backlash. Simply put, if you picked the wrong fund to put your 401K money in throughout the pandemic at this point, you’re looking at much less money than you anticipated back in 2019. The scariest part for people in their early 60s is that they may not have enough time left in the workforce to make up the difference.
This situation is very similar to what happened to retirees who were getting close to the age of 65 during the 2008 financial crisis. Many of them saw their savings dwindle overnight and walked into retirement with a huge sense of uncertainty. Workers who had to endure both the 2008 crisis and the COVID-induced economic issues of recent years may have seen thousands of dollars in savings go down the drain.
One of the main issues that people who are going through this refer back to is that they would’ve liked to have a retirement plan option that didn’t depend as much on their own financial decisions. They would’ve wanted to have their retirement savings guaranteed, just like in the pension system, which, as mentioned, is going the way of the dodo. Another issue with the 401K system is that many times, employees have a very limited number of options to choose from when it comes to investing. Employers may push them to have their account in a specific fund.
This brings up another major issue with the system that people tend to have. That is the fact that a lot of the financial decisions that people made regarding their 401Ks were not in their best interest. The concept has been a massive success for banks and funds since the 80s. They’ve been able to have access to money that otherwise would’ve gone straight to the government. Plus, up until recently, workers in the financial sector didn’t have to contend with too many potential penalties if they advised their clients poorly on what to do with the funds in their 401K. This allowed sketchy bankers to move people’s money into funds that offered the best bonuses for them.
On the other end of the spectrum, some people have been able to leverage their 401Ks into a great retirement. Knowing all of this, the main issue may be that the 401K system is really not that beneficial to workers with low financial literacy. They’re being forced to make decisions that will impact their future based on metrics and ideas that they may not fully understand. Plus, a poor decision made 20 years ago could directly affect their future. While the 401K system provides workers with at least a fund to draw money from post-retirement, it certainly still has its issues.
