Author and SingleDad contributor, James Studinger, talks about 401K retirement plan solutions.
De-Bunking the Myth that 401k Plans Have Failed (Part 1 of 6)
| Author: James Studinger | Posted: 10/20/09 | ||
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I did my first Triathlon this summer along with a couple of friends. Sprinting through on a borrowed bike, I was immediately hooked on the sport. I signed up for another race working many of the kinks out and moved up in ranking. We convinced ourselves to squeeze a third race into the year.
In the meantime that borrowed bike went from two weeks to two months and I began searching for one of my own. The consummate deal seeker, I struck a bargain on eBay just days before the final race. To my delight, the Elite bike was a perfect fit and in great shape, with all the right “speed” components. Showing it off to my 6 year old son, I explained what makes it so fast - lightweight aluminum and carbon frame, Dura-Ace gear, carbon aero bars, racing rims, even the tilt in the seat. And then he corrects me, “Dad, what makes a bike fast is how hard you pedal the wheels.” He gives me a look as if to say, “you just don’t get it”, and walks off.
Yesterday I received a call from a client who said his brother, after reading an article in the paper, finally decided to ask for my advice. Sure enough he called later that day and we discovered ways he can better take charge of his future.
I had to read such a thought provoking article that would move someone to immediate action, and found it in the Detroit News by Brian O’Connor, Workers discover 401k plans are failing them in retirement.
I authored the book Wealth Is a Choice. As the title implies, I believe the tools are there to create wealth; it is individual choice that determines the outcome. So right from the title, 401k plans are failing them, I was sensing a victim mentality here.
So how are these plans failing?
He goes on to tell the story of one 401k participant who in her words “raided my account” to meet other obligations. There is no shortage of people in hardship these days, especially here in Michigan where unemployment is in the double digits. When times are tough we look at our resources for relief, putting once sacred retirement dollars on the table.
But accessing that money is our choice, made available due to the shift in retirement plans. Other generations didn’t have as many options. Knowing their financial limits may have led them to living more conservatively (I still remember seeing the crusty ketchup bottle upside down in my grandmother’s fridge working that last drop), or maybe they sacrificed beyond what many people do today when things were tough. Either way, there was no 401k to “raid”. Their retirement consisted of money locked tight in a pension or social security. Theoretically they had balances with the pension and social security accounts that were “theirs”, but only in promised income at a later date. The money allocated to them was a mystery, and not something offered as a solution for short term problems.
However they made it through the tough times. Upon reaching their 60’s the retirement plans were still there, and began paying them an income.
We consumers are price driven (I’m not the only deal seeker out there). We don’t want to pay for a worker’s lifetime retirement income baked into the price of a product. We want the company to let that person retire on their own accord, so we can buy something for a few bucks less. And in this global economy, if companies don’t follow our demands, we simply shop elsewhere where labor and legacy costs are less intrusive. This has led to a major shift in retirement responsibilities.
As also evidenced by social security shortfalls, funding retirement for a large population isn’t easy and can become very inefficient. Therefore, the responsibility has been passed to the individuals to let them dictate their own future.
While this shift was in motion, most failed to comprehended what the financial obligation really was. Some began saving into the newly offered retirement plans as if it was money for a rainy day. Very few fully embraced the opportunity by loading it to the max. As Brian O’Connor’s article notes, this lackluster savings rate results in half the workers over the age of 55 having less than $40,000 in their account. Compare that to the hundreds of thousands of dollars they might actually need in order to sustain a retirement income.
So how did this plan fail us, or has it? The government encourages participation through up-front tax breaks. The investment choices range from ultra conservative to very aggressive, thereby allowing for personal portfolio selection. Guess what, it’s not the components that are failing. It’s the individuals’ choice. You’ll find employees who fully utilize what the plan offers, and you’ll find those who want nothing to do with it. And when the latter realize an empty retirement, they’ll say that the darn thing didn’t work.
The retirement plan solution has gone from having very few options to having many. The obligation to fulfill lifetime income has shifted from the company to the individual. That responsibility isn’t going back to the way it was, product pricing and global competition won’t allow it. So unless we learn to master the flexibility and opportunity we have in today’s individual retirement plans, don’t be surprised if the future legislation takes that flexibility away under the guise that we aren’t capable of making good decisions. And yet the obligation to fund will remain firmly on the shoulders of the individual.
By the way, during that third race chugging up the hills on the new bike, I realized my son was absolutely correct; my forward momentum was all up to me. Gasping for air with muscles burning, I imagined him on the top of the hill encouraging me to pedal harder. I passed quite a few bikes that cost a lot more money than mine, and managed to have the third fastest time on the bike course. I guess that’s a lot like these 401k plans. The tools are there, it’s up to us to get the most out of them.
Stay tuned for Part Two of “Debunking the Myth” where I give you tips on how to get the most out of your plan.
James P. Studinger believes that every important journey must begin by plotting one’s course—and that an informed client is the best client. He is author of Wealth Is a Choice, his first book, and owner of the JPStudinger Group, a wealth-management company.
For personal consulting services, you can call the office directly at 248-643-6550 and ask to speak to “James.” He would be happy to answer your questions and/or set up a meeting upon request. You can also call the office to book him for a speaking engagement.
Securities and Investment Advisory Services offered through NFP Securities, Inc., a Broker/Dealer and Member FINRA/SIPC and a Federally Registered Investment Advisor NFP Securities, Inc., is not affiliated with JPStudinger Group
