Why 401(k) Plans Finally Work
NEW YORK ( TheStreet) -- After years of frustrating trial and error, there is good news to report about 401(k)s. The savings system is beginning to work effectively.
Most employees are now tucking substantial amounts into their accounts and the portfolios are properly diversified. The improvements are too late to help many older workers who have inadequate savings to support their retirements. But recent changes should go a long way toward ensuring retirement security for people in their 20s and 30s.
The positive outlook represents a dramatic shift from the picture that appeared only a decade ago. At the time, the 401(k) system appeared badly flawed. All too many employees were investing in the wrong things -- or not saving at all.
Recognizing the problems, companies introduced a series of reforms, including automatic enrollment and balanced funds that made it easy to build diversified portfolios. In recent years, the reforms have begun producing dramatic gains.The roots of the 401(k) crisis can be traced to developments of the 1980s when many companies were eliminating their traditional defined benefit pension plans. To replace the old retirement plans, a growing number of employers introduced 401(k)s. But there were key differences between traditional pensions and 401(k)s.
The pensions promised fixed monthly payments to retirees. To fund the monthly checks, employers put aside cash and hired professional managers to oversee it. From the employees' point of view, the system worked automatically. Individual workers did not have to worry about whether their retirement plans were managed properly. If pensions faced a shortfall, employers had to make up the difference. Under the 401(k) system, employees had to decide whether or not to save at all. If they did elect to save, the plan participants had to select where to invest the money. Employers could supplement the savings. But if the retirement plans produced skimpy nest eggs, that was the employees' problem. In retrospect, the entire 401(k) strategy was shaky. The system assumed that janitors and clerks could make complicated investment decisions. However, it soon became apparent that even many employees with business degrees lacked the ability or motivation to save enough and invest it properly.
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV