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As boomers near retirement age, more than one question arises about 401k plans and how well it worked out for the first generation to get it. Benefits at work go beyond compensation, but at the end of work life, there should be enough savings to fully retire.
Read this short article exploring the myths of 401k, investment alternatives, and comparable plans according to experts.
New York Times
In a controversial piece for the New York Times Magazine, Michael Steinberger asked, “Was the 401k a mistake?” The author explores the idea that a 401k plan is not a good move, as this system requires individuals to put aside some money for the future.
A 401k can be a good investment, but many benefits depend on the investing acumen of the individual putting money away. This means that when someone reaches retirement age, the market might be kind or cruel to their money, as many discovered during the 2008 recession. This differs from the fixed-pension plan that used to be normal, where the employer would invest their employees’ savings, and by the time they were ready to retire from the workforce, they would get a fixed pension.
Although 401ks are common, not every company offers one, and even if yours does, you must check out its perks and benefits to see a breakdown of the contributions it makes. This seems like a pretty sweet deal, but not for everyone.
According to financial services companies, 4.1 million Americans are turning 65 this year. This is the first generation retiring on this plan, as before, people had pensions—these still exist, but only on certain plans, such as unions. The AARP has called this the silver tsunami.
Experts are not confident that the baby boomer generation is as prepared to retire as some may want; according to 2017 data from the US Census Bureau, 49% of Americans ages 55 to 66 had “no personal retirement savings.”
“The concern is that [401(k)s] didn’t work as well for many others and that a lot of Americans are now reaching retirement age without having adequate money put aside for their retirements.”
Teresa Ghilarducci, an economist at the New School in New York, calls 401ks a “40-year experiment” that has failed. Larry Fink, chairman and chief executive of BlackRock, has backed this position in a letter stating that the US is facing a retirement crisis by shifting from financial certainty to uncertainty.
Forbes
Despite this overtly negative view of things, Forbes came out with an article that paints a completely different picture by Andrew Biggs, a resident scholar at the American Enterprise Institute.
Biggs argues that the NYT piece comes from a basic misunderstanding of statistics, as it cites some outdated US Census Bureau numbers. He argues that there are several 401k alternatives, including traditional pensions, investments, real estate, or small businesses.
“About half of near-retirees have no retirement account, according to Federal Reserve data. But 35% of 55-64-year-olds report they’re entitled to a traditional pension (think: pretty much anyone who worked in federal, state or local government).”
Investment alternatives are always a good way to manage money, as diversifying assets is a common strategy. It shouldn’t be a surprise that 401ks aren’t the only retirement plan, even though they’re the most common. According to the Federal Reserve, in 2019, 8 in 10 retirees had one or more private income sources.
This also puts a spotlight on the NYT’s claim that 10-20% of seniors are living in poverty is alarmist, as Biggs explains that in 2022, the official poverty rate amongst 65+ was 10.8%.
Investopedia
Considering Forbes’s article, what is the alternative to a 401k? IRAs, Roth IRAs, and different investment plans are the best options. Besides, not everyone has a 401k, with 76% of workers having one in 2023.
So, what are the best alternatives? The main thing that you must know is that there are two big retirement options, which are broken down into smaller plans. These are the 401k and the individual retirement accounts (IRA).
The 401k works only for employees of private or publicly traded companies, but there is a comparable alternative that only applies to certain tax-exempt organizations, like public schools: the 403b.
“Beginning in 2025, employers will be required to automatically enroll eligible employees in new 401(k) or 403(b) plans with a participation amount of at least 3% but no more than 10%.”
An IRA is a good replacement for a 401k if your employer doesn’t offer 401k, you’re self-employed, or a small business owner. You can also choose to combine an IRA and a 401k, but your income will determine if your contributions are tax deductible.
Three main types of IRAs exist: traditional, Roth, and SEP. The differences between these are the distributions, minimum distributions, and contribution limits. Other replacements can be cash-balance-defined plans or even investment accounts.
The takeaway
There is no one-size-fits-all answer to retirement. Even if 401k is the most used retirement plan, it is still not used by everyone, and even if your employer offers it, you can use it or mix it with other IRAs. Investment alternatives have always been offered by the market for people of all ages, so a widespread panic about 401k is unwarranted, according to the government’s numbers.
Finding the right plan or a replacement for 401k, in case your company doesn’t offer it, is essential for your career plans, as working for all your life isn’t a desirable goal.
