Most of us were brought up on the myths of our parents’ generation—that one day, we would retire from work, maybe in our 50s or 60s, and we would live out our golden years behind a white picket fence with all the comforts we had worked to build of our working lives.
The truth however is quite stark. The Economic Policy Institute reports that the majority of families in America have little or no retirement savings.
Just how bad is the situation? Almost half of all American families have literally zero retirement account savings (this does not count money in the form of basic savings or other assets). Families in their mid-30s had just $480 saved on average, and families approaching retirement had only $17,000 on average.
This means that we are on the verge of a looming retirement crisis. Even though we do not hear about this very often on a day-to-day basis, the threat is very real, and will impact multiple generations. Many Americans will never have a chance to retire. They will work until the end of their lives, or will end up relying on public assistance or charity to survive.
While a number of factors have played into this crisis, one of the main ones involves 401(k) plans. Several decades ago, nearly half of employees were on traditional employer-sponsored pension plans. Companies assumed the risks associated with these plans. All employees had to do was focus on their jobs, and their retirement savings were taken care of.
But then a change took place. The shift was subtle at first, quiet. The average American lifespan was extending as a result of medical advancement. Companies realized that pension plans were becoming expensive to finance. So they began to withdraw the plans, pointing people in the direction of alternative investments like 401(k) plans and mutual funds.
In some respects, this move did open doors. Not everyone could qualify for a pension plan, even back in the 70s, and now those people had options for retirement savings. 401(k) plans also are more customizable than traditional pensions.
There were however problems with the new system—problems which continue to plague investors struggling to save for retirement to this day:
- Both 401(k) plans and mutual funds may have excessive fees. Those fees can really stack up over the years. It is not uncommon to pay tens of thousands of dollars worth of fees. Think how many years of work that could add up to, all down a drain.
- The cost of a plan may compound as the amount of money in the account grows.
- 401(k) plans require an employee contribution. A lot of employees simply opt out of this. This is understandable, considering a lot of people literally cannot afford to set aside any money each month, much less risk it on an investment.
- The market crash in 2007 also crashed a lot of retirement accounts. Many people were wiped out completely.
Two more aspects of this situation are noteworthy. The first is that 401(k) plans are referred to by the Economic Policy Institute as an “accident of history.” Basically, a benefit consultant back in 1980 who was in charge of improving a cash bonus plan offered by a bank came up with the concept of employee contributions with employer matches. Two years prior, a new tax code provision had passed concerning deferred compensation.
401(k) plans were an immediate (seeming) success. The thing is, they were never intended by the government to replace pension plans. Nonetheless, that is exactly what has happened. They have taken the place of pension plans—but have never delivered the same benefits.
The second thing to note is that a lot of working families do not understand the risks and fees associated with retirement accounts—and many unsavory institutions have capitalized on that ignorance. By making the fees and fine print nearly impossible to understand, they have managed to swindle Americans out of vast sums of money—and the security that money was supposed to provide in old age.
So what can hard-working Americans do to try and prepare for retirement without the safety net of traditional pension plans? For starters, those who are opening retirement accounts need to be extra selective in choosing the best 401(k) plans. They also need to plan ahead and do the math to figure out how much to put away each month (a 401(k) calculator can help with this).
Also important is to seek alternative avenues of investment, like stock or currency trading (entry barriers for retail trading have dropped significantly over the past few years). It also does not hurt to maintain some basic savings. Americans also should keep in mind that government policy will play an essential role in resolving (or worsening) the retirement crisis, and it is up to the American populace to vote and petition as needed to push policy in the direction of broadening and creating new safety nets.