4 Major Problems With 401(k) Plans
Gone are the days when employees could work for the same company for years on end and have a pension to look forward to in retirement. These days, most major companies don’t offer pensions (last year, only 16% of Fortune 500 companies did), leaving employees with no choice but to turn to other savings options, such as the 401(k).
A 401(k) is an employer-sponsored plan that enables workers to save for retirement in a tax-advantaged fashion. With a traditional 401(k), your contributions go in tax-free, and withdrawals are taxed in retirement.
With a Roth 401(k), you don’t get a tax break on contributions, but your investments grow tax-free, and withdrawals aren’t taxed in retirement. Both types of 401(k) are extremely useful in helping workers amass funds for the future, but they aren’t perfect. Here are Four problems you should know about.
- Individuals bear investment risk
Employers who offer pensions must invest those funds to ensure that there’s enough money to pay employees their retirement benefits once they’re eligible to receive them. But when you save in a 401(k), it’s on you to choose investments that allow your money to grow. As such, you, as an individual who may not know much about investing, assume all of the risk involved so that if the funds you pick for your 401(k) perform poorly, you risk not having access to enough income in retirement.
2. High fees
Employer-sponsored 401(k) plans come with fees that can eat away at your savings’ growth. All plans come with administrative fees, which are typically passed on to you, the individual saver. In addition, you’ll pay fees for the specific investments you choose within your account.
3. Not everyone has access to them
An estimated 35% of private-sector employees don’t have access to a 401(k) through their companies, according to data by The Pew Charitable Trusts. And that lack of availability is higher among younger workers — 41% of millennials don’t have a 401(k) through their jobs.
- No Protection from Market Downturns
Let us take the example of the economic slump of 2007-2009 – one of the biggest crises to hit the world in recent times. The international markets saw a big decline and many people lost their jobs due to the recession. People on the verge of retirement decided to postpone it, some people hastily withdrew their money from the market, while some continued to invest. The outcomes were different for all these people, but the common fear of losing money lingered in everyone’s mind.
When you need market protection the 401k Offers very little for protection and why and IUL may be a better option if you qualify.
-Maurie Backman
