Contact Us
Firm Overview
Why Legend Is Different
Client Types
Professional Biographies
Frequently & Rarely Asked Questions
Risk Spectrum
Investment Strategies
Second Opinion
Global Investment Pulse
Event Calendar
Press Center
Legend News
Clients Only
Career Opportunities
Directions
Newsletter Sign-up
Site Search
Site Map
Home
Tell A Friend About This Website
 
 
 
Informational Booklets   
Phone: (412) 635-9210
  (888) 236-5960
Connect With Legend:
Subscribe to me on YouTube

Is Your 401(k) Plan A Failure?

The decline of the stock market over the last 2½ years, and the devastating bankruptcies of such companies as Enron and WorldCom, have prompted critics to call 401(k) plans a failure. Some have even called the two-decade old concept a scam and say employers need to return to the traditional pension plan to ensure that workers will have enough funds for retirement. 401(k) supporters counter that the problem is not with the plans themselves so much as the way participants use them.

Whatever the pros and cons of the debate, 401(k) plans are here to stay, and plan participants can do more to make their 401(k) an effective way to build a comfortable nest egg. The following are some of the criticisms of 401(k)s and what participants can do to minimize potential drawbacks.

Participation. Critics contend that all eligible workers benefit from a traditional pension plan, whereas 401(k) participation is voluntary. According to the Profit-Sharing/401(k) Council of America, roughly 75 to 80 percent of eligible workers participate in 401(k) plans, with participation rates even lower among younger workers and low-income workers.

Proponents note that more companies are providing automatic enrollments in 401(k) plans, which requires workers to opt out of participation. In these plans, participation rates are around 95 percent, according to the benefits consulting firm of Hewitt Associates.

Proponents also point out that if it weren’t for 401(k) plans, many workers wouldn’t have any type of retirement plan because 90 percent of 401(k) plans are offered by small companies who typically wouldn’t offer a traditional defined-benefit plan.

Failure to contribute as much as possible. The average 401(k) participant contributes less than seven percent of pre-tax salary, according to the Employee Benefit Research Institute. Financial advisors encourage workers to contribute at least ten percent or more of pre-tax salary.

Poor investment decisions. In a traditional pension plan, the company makes the investment decisions. In a 401(k) plan, all workers must be their own investment manager—a task many are not up to. Workers typically don’t diversify well, either loading up on company stock or investing too much in lower-returning fixed-income options. Proponents concede that the average 401(k) plan offers too few investment options for workers, but workers compound the limited choice by choosing only two to three funds, and often similar or overlapping funds at that. Fortunately, workers can seek professional independent investment advice to help them make smart investment choices.

Vulnerability to market fluctuations. A traditional defined-benefit pension plan promises that you will receive your pension payments at retirement, typically based on your highest salary and years of service, regardless of the ups and downs of the market and the economy. If the company’s plan can’t meet its obligations, the federal government will step in, though higher-paid workers may not receive all the benefits they are entitled to. 401(k) plans don’t have any guaranteed payments.

Proponents argue that workers can protect themselves better against market volatility through greater savings and long-term diversification, instead of trying to hit a home run as many workers attempted in the 1990s.

Proponents also point out that pension payouts during retirement typically are not adjusted for inflation—your pension will lose purchasing power over time. A well-invested 401(k) can keep up with inflation so you don’t lose ground.

Cashing out 401(k) plans. Another criticism of 401(k) plans is that when workers change jobs—which they do every four to five years on average—many cash out what they’ve saved and spend it. This is particularly true among younger workers. The money not only can no longer grow tax deferred, but the withdrawal faces income taxes and usually a ten-percent early withdrawal penalty.

Proponents agree that workers need to roll over their accounts into an individual retirement account or another employer’s retirement plan. But they also point out that this portability of 401(k) plans is one of the pluses. The payout from a pension plan can be excellent if you stay at the same company for 30 years, but who does that anymore? If you change jobs every four to five years, you may not even qualify for the pension, or payments will remain small because you don’t have the years of service.

Traditional pension plans and 401(k)s each will continue to have their pros and cons. The important point is that workers must better educate themselves about their plan options so they can make smart choices, whichever type of plan they use.

For Further information on 401(k) plans contact Louis P. Stanasolovich, CFP™, CEO and President at (412) 635-9210 Extension 21.



INDEX
  • ETFs Can Provide Some Other-Worldly Benefits To Investors
  • Trust As IRA Beneficiary: Not Crazy
  • Should You Fly Solo In Your Own 401(k) Plan?
  • Swap Munis To Your Tax Advantage
  • Sowing Tax Seeds For Capital Gains
  • With Fed's Mission Accomplished, Expect Rate Hikes And Low Bond Returns
  • Five Tax-Smart Ways To Transfer Your Wealth
  • Easier Rules On IRA Rollover Waivers
  • 4 Year-End Strategies For Investors
  • 6 Common Medicare Myths That Should Be Dispelled
  • 5 Key Documents In An Estate Plan
  • 10 Sensible Stock Market Strategies After A Fall
  • Be Aware Of Your Tax Surroundings
  • 4 Good Ways You Could Use An RMD
  • Take Early Withdrawals Penalty-Free
  • Life Insurance In Your Plan? Maybe
  • A New Direction For Your 401(k)?
  • Could Estate Tax Repeal Or Reform Become A Reality?
  • Taking Aim At Target Date Funds
  • Here's What You Can't Do In An IRA
  • 6 Common Estate Planning Myths: Here's The Reality
  • A Plunge, Snap Back, And A Goldilocks Economy
  • How To Avoid Emotional Portfolio Withdrawals
  • When To Harvest Gains, When To Harvest Losses
  • Are You Flying Below The Tax Radar?
  • Slice Through 7 Layers Of Taxes For Investors
  • Stay Focused On The Need For Tax-Aware Investing
  • 14 Sure-Fire Midyear Tax Planning Moves In '14
  • Beware The NII Surtax On Trusts
  • Do You Know The Basics Of 401(k) Retirement Plans?
  • 2014 Global Forecast Offers Hope Bull Market Can Spread
  • For Charitable Trusts, The Tax Icing On The Cake
  • 6 Bad Money Habits For You To Avoid
  • Want To Shift Income? Give It Away
  • Avoid Squabbling Over Your Estate
  • Wall Street Gurus Miss Again On Sector Predictions
  • Dust Off Life Insurance Policies
  • New Law Poses Tax Risks For High-Income Investors
  • How To Choose Trustees For Your Trust
  • Pros and Cons Of Section 529 Plans
  • 7 Major Tax Changes In The Fiscal Cliff Law
  • ''Ghost Story'' Can Haunt Your IRA
  • Who's Going To Pay The 3.8% Medicare Surtax?
  • New 3.8% Medicare Surtax Spurs Year-End Action
  • Selling Short And ''Short Sales Against The Box''
  • The Real Impact On US Markets Of A Greek Default
  • How Important Is The Debt Level To Future U.S. Economic Health?
  • New Study Shows Future Impact Of Great Recession
  • Commercial Real Estate May Boost Your Portfolio
  • If You Must Tap Your IRA Early, Know SEPP Rules
  • Get Up To Speed On Estate Planning
  • What Is A Will, And Do You Really Need One?
  • When Are Two Trustees Better Than One?
  • Money Market Funds Should Shrug Off U.S. Downgrade
  • What The Tax Act Means To Investors
  • Children In College Need A Health Proxy
  • The Tax Fallout From The Healthcare Reform Law
  • How A Solo 401(k) Plan Provides You With An Edge
  • Roth IRA Fall-Back: Re-Characterizing
  • Being An Informed Donor: The Realities Of Charity
  • Donor-Advised Funds Gain In Recession
  • Don't Miss Out On The Zero Capital Gains Rate
  • Finding Hidden Treasures In The New Pension Law
  • Ease Pressure On Loved Ones With Tax-Free Gifts
  • Seven Tax-Saving Moves To Make Right Now
  • Roth IRA Conversion Rule Changes Offer Opportunity
  • Nine Estate Planning Mistakes To Avoid
  • One Way To Reduce The Tax On Real Estate Gains
  • Working Longer To Fix The Retirement Mess
  • Tough Times May Turn 401(k)s Discriminatory
  • You Should Find A New Home For An Orphan 401(k)
  • Low Rates Give Estate Planning A Boost
  • Marriage Doesn't Mean Owning All Your Assets Jointly
  • Do The Math Before Refinancing Your Home
  • As Nursing Home Care Claims Drop, Home-Care Claims Rise
  • Making The Best Of A Bad Time For The Economy
  • Regulatory Guidelines Update
  • Beware Of Social Security Identity Theft
  • Free Credit Reports Available Online
  • Don't Forget About Roth 401(k)
  • Understanding the Importance of a Fiduciary Standard
  • Energy Systems Scale and Timeline
  • The Oil Patch Profit Squeeze
  • Timber As A Liquid Investment
  • Emerging Market Food Consumption Growth Equals Rising Prices
  • Timber Facts
  • Ethanol: Salvation or Panacea?
  • Emerging Market Food Consumption Growth Equals Rising Prices
  • Bank Loan Funds - A Primer
  • A Primer On Managed Futures
  • REITS: A Very Good Portfolio Diversifier, But Should You Invest In Them?
  • Does Investing Internationally Still Diversify Your Portfolio?
  • Another Way To View The Current Valuation Of REIT Sector
  • Understanding Risk-Preparing For The Unseen
  • How Volatile Can The Stock Market Be?
  • What Is Shorting Expense?
  • How Dangerous Is A Dollar Crash?
  • The Case For Industrial Metals
  • GMO 7-Year Asset Class Return Forecast Is Bleak
  • Too Many ''Phish'' In The Sea
  • Identity Theft In The New Year
  • Ways To Improve The Score
  • Know The Score
  • Total Credit Market Debt (All Sectors) As % Of U.S. GDP
  • To Reinvest Or Not To Reinvest
  • Why Not Alternative Fixed Income Investments?
  • Just How Expensive Is The Market?
  • Beware of Brokerage Firms' Misconduct
  • Identity Theft : Correct Those Credit Reporting Errors
  • Risk-Controlled Investing
  • Q & A With Robert Arnott
  • Identity Theft : Applying For Credit? Better Check Your Credit Report First
  • Identity Theft: Everyday Prevention
  • Identity Theft: Help Is On Its Way
  • Identity Theft: Tips to Protect Yourself
  • Identity Theft: What Documents Should You Shred Or Store?
  • Identity Theft : Don't Fall For That E-Mail!
  • Identity Theft : One More Reason To Protect Your Credit
  • Identity Theft: A Note About Social Security Numbers
  • What Do Rising Interest Rates Mean For Money Market Yields?
  • Section 529 Plans Are Popular But Not The Only Way To Go
  • The Importance Of Commodities In A Portfolio
  • A Tale Of Two Hedges
  • Bank Loan Funds: A Great Fixed Income Investment As Interest Rates Rise
  • REITs: A Great Diversification Investment
  • What Is Risk?
  • How To Find A Great Financial Advisor?
  • Is It Time To Find A New Financial Advisor?
  • Year-End Tax Planning Can Help Generate High Return On Investment
  • 4 Steps To A More Secure Investment Portfolio For Your Retirement
  • Medical Practice Succession Planning: Developing A Plan
  • Traditional Investing May Decrease Your Retirement Lifestyle
  • Understanding Deflation
  • Medical Practices Receive Temporary Depreciation Bonus
  • Is Your 401(k) Plan A Failure?
  • Tax Issues To Consider When Buying A Long-Term-Care Policy
  • The ERISA Retirement Plan Law Spells Out Fiduciary Issues
  • Evaluating The Quality Of A Company's Earnings
  • Investing In Times Of Uncertainty And Risk: The Importance Of Diversification
  • Yesterday's Great Companies
  • 2001 Tax Relief Act Changes Education Planning
  • A Retirement Plan Primer After The 2001 Tax Act
  • Beware Of Common Home Repair Scams
  • Custodial Accounts: One Way To Make Gifts To Children
  • Estate Taxes To Be Reduced Then Repealed In 2010
  • Faulty IRA Conversions Can Lead To Tax Penalties
  • Many Individuals Pay Private Mortgage Insurance Beyond When It Is Necessary
  • Rethinking Estate Planning
  • Retirement Plan Contribution Limit Changes
  • Shopping For A Bank Account That Pays The Highest Possible Rate Of Interest
  • Your Medical File Report May Need A Check-Up
  • Do It Yourself Tax Preparers Watch Out: Tax Answers From IRS Centers Oftentimes Are Incorrect And/Or Insufficient
  • Five Tips For Preventing Thefts From Your Checking Account
  • Home Office Deductions: Hoops To Jump Through
  • Income Tax Effect On Single And Married Taxpayers
  • Income Tax Planning For Investments
  • Property Tax Challenges Should Not Be Overlooked
  • The IRS Will Follow Your Wealth To The Ends Of The Earth
  • When Do You Need Life Insurance
  • Year-End Tax Defferal Planning



  • ©2017 Legend Financial Advisors, Inc.®. All rights reserved.