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Central Pension Fund Only 8% Believe Their 401(k) Plans Will Be Adequate A study released in July of this year confirms that the fears of pension experts that 401(k) plans are unable to provide adequate retirement income may well be true. The results of the study, which was sponsored by Fidelity Investments, were reviewed in the July 26, 1999 edition of the pension industry newsletter Pensions & Investments. Because 401(k) plans were not established in any significant numbers until the late 1980s, no workers have yet retired based on a career of participation in only a 401(k) plan. 401(k) plans, unlike traditional pension plans like the Central Pension Fund and IUOE Local Union plans, are funded from workers’ wages not employer contributions and do not pay a monthly benefit for life, but rather pay a single lump sum that the retiree must make last through his or her retirement years. Also, 401(k) plans permit workers to completely squander their account balances long before retirement by taking cashouts when they change jobs, taking hardship withdrawals for needs such as medical bills, home purchases and college tuition, or taking loans from their account balances for any reason whatsoever. While all of these opportunities to dip into 401(k) accounts appear to offer enhanced flexibility over traditional pension plans, pension experts have long feared that the utilization of these opportunities will leave participants with little if any retirement security. The Fidelity Investments study seems to confirm these fears. The Fidelity survey found that only 8% of the 401(k) participants polled felt confident that they would have enough money to retire. A spokesperson for Fidelity Investments expressed surprise and disappointment with this finding, telling Pensions & Investments “One would have thought that after 10 years, more people would be comfortable with their 401(k) savings.” Pension experts, however are not surprised by this finding. 401(k) plans require regular, consistent and disciplined savings from wages throughout a working career, combined with knowledgeable, and often lucky, decisions on how to invest the savings throughout that career. Then, at retirement, the participant must make a pure guess as to how many years he or she will live in retirement. Finally, the participant has to figure out how to make the 401(k) account balance last through those expected retirement years. Given these harsh realities, it should not be surprising that so few feel confident that their 401(k) plans will provide adequate income for retirement. Fidelity Investments expressed surprise at one other finding of their survey--fully 50% of those surveyed have taken loans from their account balances. The Fidelity spokesperson told Pensions & Investments “We assumed most investors were aware of the power of compounding and that they should not access that money in other than a strict emergency.” Again, pension experts do not view this finding as surprising. Other studies have found that the vast majority of 401(k) plans include loan features as a way to attract participants. Because 401(k) plans require workers to put their own money in, they will more readily do so if they know they can get it out through a loan. While loans might be viewed as protection against a “rainy day” when one needs money badly, unfortunately there are many “rainy days” in life and retirement is the last one that most people worry about. Accordingly, while it may make perfect economic sense to dip into retirement savings to deal with present emergencies, the final emergency will be a retirement without adequate income. This recent study is additional evidence that, while 401(k) plans are suitable as supplements to traditional defined benefit pension plans, they are entirely inadequate to assure retirement security on their own. Originally
published in the International Operating Engineer |