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How 401(k) Plans Put Retirement at Risk

Dave Bernard

In the old days, private sector employees could feel reasonably secure in their retirement future by counting on traditional pensions. You could expect the same check each month for the length of your retirement, and the money was managed behind the scenes by professionals. Today many companies have ditched their defined-benefit pensions and adopted a model where the employee is responsible for setting aside what they calculate to be the appropriate savings and then managing their own investments to fund retirement. It is not an easy assignment by any means.

To see how well this new retirement savings program is working you need look no further than some scary statistics: The median retirement account balance of all working-age households is a mere $3,000, with near-retirement households not faring much better at $12,000, according to a National Institute on Retirement Security analysis of Federal Reserve data. The gap between what savings should be there for retirement and where it actually is for households ages 25 to 64 ranges from $6.8 to $14 trillion, depending on the financial measure.

Here are some of the reasons counting solely on 401(k) plans can put your retirement at risk:

Lack of investment expertise. Few of us are experienced in how to best invest our money. The options are endless and the complexity is daunting. Yet, when it comes to 401(k) plans you are in charge of managing and growing your savings and investments. The burden falls on the individual to choose stocks, funds and other investment vehicles in optimal proportions, and also make adjustments as your age and risk tolerance changes. Few people outside the financial industry can hope to stay on top of the incredible variety of different investment options that exist and are frequently added. But with your 401(k) plan, you need to do just that.

Lack of discipline. In order to provide for retirement, it is recommended that most people save between 10 and 15 percent of their pay for 40 years. But for me that is a pretty tall order. Something inevitably comes along that is more important or critical than continuing that hefty contribution. Over my years on the job I have adjusted contributions (typically downward) when putting the kids through college, buying a new house and on more than one occasion when the bills piled up and credit cards were the only other option.

In addition to cutting my level of savings, I was guilty on more than one occasion of cashing out my 401(k) plan as I moved from job to job. The temptation to access a nice chunk of cash proved too much for my weak will. Unfortunately, because of my shortsightedness, the contributions were not allowed to mature over time, which is the real benefit of such plans.

Vulnerability to ups and downs of the market. Even if you are a diligent saver and make your contributions consistently, you still have no control over the financial markets. The recent debacle of 2008 decimated many 401(k) plans. The strength of 401(k) plans is in their ability to grow over long periods of time. However, if you are in your 50s or even closer to retirement age you no longer have the luxury of future decades of growth. Should you be hit hard by the vicissitudes of an unpredictable market, you may not have enough time to recover. It's up to you to come up with a plan to cope with the volatility of the market, and failing at this could destroy your chances of a comfortable retirement. For better or worse, when it comes to your 401(k) plan, you are the expert.

Dave Bernard is the author of "I Want To Retire! Essential Considerations for the Retiree to Be". Although not yet retired, he focuses on identifying and understanding the essential components of a fulfilling and meaningful retirement. He shares his discoveries and insights on his blog Retirement-Only The Beginning.

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