401(k)s are a great way to save. Yes, today those that have been saving money have the disappointment of bad recent results. But that is a minor factor compared to the major problem: Americans not saving what they need to for retirement in 401(k)s, IRAs, even just emergency funds… Do not use the scary financial market performance recently as an excuse to avoid retirement savings (if you have actually been doing well).

The importance of saving enough for retirement is actually increased by the recent results. You might have to re-evaluate your expectations and see whether you have been saving enough. I am actually considering increasing my contributions, mainly to take advantage of lower prices. But another benefit of doing so would be to add more to retirement savings, given me more safety in case long term results are not what I was hoping for.

Now there can be some 401(k) plans that are less ideal. Limited investing options can make them less valuable. Those limited options could include the lack of good diverse choices, index funds, international, money market, real estate, short term bond funds… My real estate fund is down about 2% in the last year (unlike what some might think based on the media coverage of declining housing prices). And poor investing options could include diverse but not good options (options with high expenses… [ the article, see blow, mentions some with a 2% expense rate – that is horrible]).

But those poor implementations of 401(K)s are not equivalent to making 401(k)s un-viable for saving. It might reduce the value of 401(k)s to some people (those will less good 401(k) plans). Or it might even make it so for people with bad 401(k) options that they should not save using it (or that they limit the amount in their 401k). I don’t know of such poor options, but it is theoretically possible.

The tax deferral is a huge benefit. That benefit will only increase as tax rates rise (given the huge debt we have built up it is logical to believe taxes will go up to pay off spending today with the tax increases passed to the future to pay for our current spending).

And if you get matching of 410(k) contributions that can often more than make up for other less than ideal aspects of a particular 401(k) option.

Also once you leave a job you can roll the 401(k) assets into an IRA and invest in a huge variety of assets. So even if the 401k options are not great, it is normally wise to add to them and then just roll them into an IRA when you leave. If the plan is bad, also you can use an IRA for your first $5,000 in annual retirement savings and then add additional amounts in the 401k (if they are matching funds normally adding enough to get the matching is best).

401(k)s, 403(b), IRAs… are still great tools for saving. The performance of financial markets recently have been poor. Accepting periods of poor performance is hard psychologically. But retirement accounts are still a excellent tool for saving for retirement. Using them correctly is important: allocating resources correctly, moving into safer asset allocations as one approaches and reaches retirement…

The biggest problem by far though is failure to save enough for retirement. The recent decline in value is not close to the problem that failing to save has been. Failure to us proper asset allocation (especially huge amounts tied up in the stock of your employer) has been a problem but the rules have been changed to discourage such results.

When one fails to diversity and hold large amounts (say over 20% of a portfolio) in one stock risks are high. Individual stocks can decline 95, even 100%. Such declines for a significant portion of a portfolio are extremely difficult to recover from (especially the old one gets). While using asset allocation, even if you were very aggressive, likely funds were split in various classes: growth stocks, international stocks, real estate… And those different asset classes should be able to partially tamp effects of large declines in the other assets (though even diversification is not assurance that massive market panics will not result in significant portfolio declines).

Early in your career, huge declines in the stock market actually can benefit you (since you can buy more at lower prices). It is hard to accept this when you see your first 5 years of profits disappear, but it can still be true. And as you approach retirement (say 15 years from it) you should start moving to an increasingly defensive asset allocation. Those close to, or in, retirement, still can be hit hard by a very poor stock market but the asset allocation should manage that problem and reduce the downside.

Retirement Wreck: Are 401(k)s Still Viable for Saving?

If your 401(k) plan has 2% expense ratios you should talk to your company about not allowing such high expenses. Their are plenty of options without such onerous terms: Vanguard for example. And if you are a long term employee replacing poor 401(k) options with reasonable ones can easily amount to many tens of thousands of dollars in your final 401(k) balance.

Related: Nearly half of all workers have under $25,000 in retirement savings – Spending Guidelines in Retirement – How Much Retirement Income?

Comments