First a quick history lesson: Congress’ changes to line 401(k) of the IRS code took effect January 1, 1980. On that day, 401(k) plans started on a path toward being the primary means for employers to provide retirement plans. As 401(k) plan popularity grew, individuals became more and more responsible for saving for their own retirement. The stock market saw a long-term bull run through the 1980s and 1990s, so people accepted and embraced 401(k) plans.
Fast forward to 2008: With the worst bear market since the Great Depression, investors around the country saw their balances lose 30%, 40%, even 50%. Lots of people hadn’t understood that 401(k) investment performance would dictate retirement income rather than the predictable set income that company pensions had provided.
A few talking heads in the media and some political extremists called for the death of the 401(k) plan, and those people began throwing out ideas for what should be done instead. Somewhere along the way there was an idea that the government should take over all existing and future 401(k) plans and turn them into annuities that would guarantee income during retirement – a new type of Social Security.
There was virtually no support for these ideas, and the discussions quickly quieted. But over the past couple months, a few fringe people have talked more about the government take-over idea.
I’ll admit I don’t know exactly when these discussions started or why. What I do know is when I hear people talk about stopping their own 401(k) contributions – the government’s going to bail me out; why bother saving??? – I advise them that they’re making a huge mistake.
With the backlash that arose as soon as the idea of a government takeover was suggested, it’s incredibly unlikely that any type of action would happen in the near future. And since it seems like every article I read talks about people not saving enough for retirement, stopping your retirement savings out of fear is clearly not the right idea.
So instead, let’s talk about two other ideas for government intervention that have been suggested and why they may actually be helpful.
The first idea is part of the Senate Bill 2832 – Lifetime Income Disclosure Act (Read it here). In this bill, the Senators propose that it be mandatory for all retirement plan participants to be informed of their projected monthly retirement benefit based on the savings they have accrued. This reporting would be required at least once per year, like Social Security. The goals of this initiative are to (1) get people thinking about their retirement plans, (2) get them to realize that they may not be saving enough for retirement and (3) motivate them to make changes to saving habits.
Another recent idea was for retirement plans to start making annuities available to participants as a 401(k) investment option. While I’m usually not the biggest fan of annuities, there would be some instances in which they could make sense as long as participation was voluntary and fees were low. The ability to turn a portion of your retirement savings into a guaranteed income stream could give individuals more confidence about their financial future. Hopefully that would inspire investors to start saving more for their bigger goals.
Regardless of what changes ever take place, one thing is clear: you will continue to be responsible for saving for your own retirement. So start figuring out exactly how much you’ll need each month to create the standard-of-living you desire. If you’re still years or decades away, use calculators (like these on the Smart401k website) to determine whether you’re on the right path. And if calculations show you’re not there yet, start thinking of ways to change your savings habits.
For help getting on the right path, call Smart401k and talk to our advisers. Not only do we help you figure out the right allocation for your investments, but we’re available to talk to you about saving and other questions or concerns that you have. You can talk to me, and the rest of the adviser team, by calling 877.627.8401 or sending an email to firstname.lastname@example.org.
Joe McCulloch, Senior Investment Adviser
Smart401k is a web-based investment adviser providing unbiased advice to help employees invest in their employer-sponsored retirement plans. Smart401k provides service to almost 11,000 clients who collectively have more than $1.5 billion in assets. Individuals receive personalized investment recommendations based on the funds in their plan and support of professional investment advisers available to answer all investment questions. Based in Overland Park, KS, Smart401k can be found at www.Smart401k.com.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.