401(k): An Umbrella with Holes

Personal Money Planning |



By Gary Silverman, CFP®

When we compare pensions and 401(k)s, a few issues came to mind: Compared to a pension, a 401(k) (or its cousin the 403(b)) puts the onus on the employee to do the investing. Most, if not all, of the contributions to the plan come from the employee, not the employer, and there is no guarantee as to what the account will be worth at retirement.

These are big problems.

Now, for many of our readers, 401(k) plans work just fine. You have income above your needs, so shifting some of it toward retirement is doable. You’ve learned how not to make investment mistakes, so the investing part is not an issue. And you’ve been reasonable about your financial planning in figuring just how much income your retirement savings can provide in retirement.

You’re in the minority there.

Many families just don’t have enough left over at the end of the month to save. We can argue whether this is their “fault” or if society puts them in that situation. Regardless, they are there.

Schools rarely teach anything about personal finance, economics, investing, retirement planning, or all those other rather useful bits of knowledge. And while there is ample material online, it can take a long time to get through, because you have to figure out what knowledge is true for you and not 1) misguided, 2) put there for the purpose of selling you something that you really don’t need, or 3) just plain wrong.

Those two facts: That many don’t have the means to save and many others don’t have the knowledge to do so—mean that you have a problem. That doesn’t make a 401(k) a bad thing, it’s just that it doesn’t work for a lot of people for the purpose it was created for: To allow them to save enough to retire in comfort.

Another teensy problem is that most small businesses do not have a 401(k) or similar plan, so that in itself makes it pretty hard for a lot of workers to use them.

Some economists say that the way out of the problem is to go back to the pension plan. That’s all well and good, but businesses have pretty much said, “No.” Okay, then maybe we’ll force businesses to have pension plans. That’s certainly possible, but since many small businesses are already on the ropes, adding another burden to them isn’t going to make things easier. But if you exempt them, then you could be exempting about half of workers from getting your forced pension idea.

Which is why it won’t work. At least not a workplace-based pension system. But what if the government created such a thing. Well, they did, kind of. It’s called Social Security. Most readers know a problem with this already: The government isn’t funding the existing Social Security system with enough money for it to work as promised—so how are they going to augment it or add a new system?

And that’s a problem for next week. See you then.


Gary Silverman, CFP® is the founder of Personal Money Planning, LLC, a Wichita Falls retirement planning and investment management firm and author of Real World Investing.