Passing the Blame: Some Thoughts on the 401(k) Crisis

A couple days ago at the doctor’s office, I picked up the newest issue of Time, which featured a cover story entitled “Why It’s Time to Retire the 401(k)” (and you can read the article online).

The article was filled with lots of stories about individuals close to retirement age who lost a large portion of their retirement savings in the stock market market downturn of 2008, including some who were forced to return to work. The article concluded that the 401(k) system is thus broken, since it’s letting down the people who rely on it.

Here’s the problem, though: 401(k)’s aren’t at fault. Personal responsibility (or a lack thereof) is.

A 401(k) plan is basically just an investment opportunity where employees can put in their money before taxes, then pay income taxes when the money is withdrawn much later in life. While the money is inside the account, account holders have a wide array of investment options. Some of them are very stock heavy and, yes, include a lot of risk; others are more diverse and offer lower risk. The choice of options is left up to the individual investor.

In the end, the investors who suffered a disastrous, life-altering 2008 in their 401(k) accounts were either contributing too little and essentially gambling with it or they didn’t bother to learn or understand how investing works.

A stock fund with a 10% annual return is not a guarantee of a 10% return each year. Minimal reading and investigation into investing reveals this to be true. Thus, if you need that balance to be there for you, you shouldn’t have it in stocks.

Some of the people who are suffering right now were not aware of this fact. They either didn’t bother to investigate their investments further or they simply chose not to think about it at all.

In either case, they chose to invest their future into something that they didn’t fully understand. That’s an incredibly dangerous individual choice.

And, honestly, my sympathy for them is somewhat limited. To build up the large balances that they had in their 401(k)s requires years and years of regular, steady investment – a substantial portion of the financial output of their life’s work. Yet, in many cases, the investors never bothered to truly learn about their investments or make any effort to diversify, using other funds or balancing things out with a conservatively-invested Roth IRA.

There’s a lesson to be learned here. Know where your money is going. Know where your investments are placed. If you can’t afford to take a loss on that money, move the money to something safe, like bonds or treasury notes. If you’re young and have many years until retirement, carefully investigate your options and know that investments in stocks will go up rapidly and down rapidly over and over again with, over the long term, a general upwards trend that will usually beat more conservative choices.

Should special help be given to people who have to re-enter the workforce because their 401(k) didn’t hold up? No. They made the personal choice to expose their investment to a lot of risk when they most needed it. If you argue that they didn’t know, I say that they didn’t bother to educate themselves about the very investment that’s supporting their entire lifestyle – another personal choice.

401(k)s are not the magic answer to retirement problems. They’re a tool, one that requires careful reading of the instruction booklet to use properly. And this time, you need to read the instructions, because if you use this tool wrong, you can cut years of healthy, happy retirement living out of your life.