You didnât have to think about it, it went in automatically.
With a pension the employer takes all the risk and responsibility of investments and guarantees a set monthly stipend to retirees for the rest of their lives. But pensions have gone out of favor with employers. Today fewer than one in five private sector workers have them. Most employers have switched to so-called 401(k) programs. Named after a subsection of U.S. tax code, they guarantee a defined contribution from the employer but make no guarantee on outcomes. The employerâs contribution along with the employeeâs is invested in a select group of mutual funds, real estate trusts and fixed income options. Itâs up to the employee to decide where exactly to put the money within the range of choices offered. Bob Scherryâs current employer has a 401(k) retirement plan. He says thatâs been a challenge, because heâs no investment whiz. "I donât have the smarts," Scherry says. "401(k)s you have to think about, or trust somebody to administer the plan for you." Scherry is not alone, according to J.B. Silvers, a finance expert at Case Western Reserve University.
A typical employer might offer 50 different funds for people to choose from, under the theory theyâre able to choose, and have the knowledge to do that. And overwhelmingly, they donât do a very good job.
Westlake-based retirement plan consultant Dave Kocsis blames widespread financial illiteracy. "People need to start learning in grade school and high school how to be financially self-reliant, and not just how to balance a checkbook, because thatâs really not even relevant anymore," says Kocsis. One of the most common missteps people make is not saving enough for retirement. Studies show only 1 % of people with 401(k) plans contribute the maximum allowed; 20% of workers eligible donât participate in a plan at all. And thereâs this from a Boston College think-tank: The Center for Retirement Research calculates that the typical household with two workers in the 55 to 64 age range has about $120,000 in retirement savings. That would provide a measly $7,000 a year. The typical household needs at least four times that much, plus Social Security to maintain their standard of living. Not only do we put too little in, we take it out too early. New data show a record number of workers raided their retirement funds during the recent recession to make ends meet. "Taking care of their families, just putting food on the table, putting kids through college --- whatever the case may be," Dave Kocsis says.
Now, theyâre trying to shovel in as much money as they possibly can into their retirement accounts.
J.B. Silvers of Case Western says the shovel isnât big enough and thatâs going to cause huge problems over the next twenty years, especially for those now hitting retirement age. "They probably wonât have enough time until retirement to make that up, and they may not even understand how much they have to save to be able to have a chance at retirement, either." Some financial experts say itâs time to overhaul or even scrap the 401(k) system; replace it with something that presents less risk for the average investor, mandates employee contributions and totally prohibits access till retirement age. Otherwise, critics say, many more people may be standing on the edge of poverty in their old age.