CNBC posted a story today that was less than enthusiastic about the impact of 401(k) plans. I have a much different take.
It is true that wage stagnation can make it a challenge to save. This is especially true of those with families. Sometimes it truly may be impossible to save without sacrificing essentials. I get that and my words are not directed toward them. But, for everyone else, the ugly truth about saving is that you have to make a firm commitment to do so. It doesn’t happen magically. Pretty basic. One has to put a wall around her or his 401(k) savings and contributions. Both should be completely off the table to tap into except for a true emergency.
With a 401(k) plan, savers are richly rewarded. Taxes deferred means less money paid in taxes. Your investments grow without a tax hit, thus grow much more quickly. And whatever portion of your contribution is matched by your employer is free money.
Granted, in contrast to a pension plan and its guaranteed retirement payments, 401(k) plans are not nearly as generous and offer no guarantees. But the reality is pensions are a thing of the past largely because there is no such entity as a guaranteed return. We are seeing this on steroids as so many pension plans are underfunded and can’t make up the ground even with the most bullish of markets. With a 401(k) plan, you can see every day the real worth of your savings and investments. And if you had truly walled off these savings and continued making your contributions through the years, you have seen an outstanding return on your money.
But now the 401(k) plan itself has been criticized because half the individuals eligible to participate haven’t. Likewise, the 401(k) is criticized because many of those who have participated have saved so little. It seems to me the problem isn’t with the plan but with ourselves. In the immortal words of the late Massachusetts Senator Paul Tsongas, there is no Santa Claus.