We’re in the middle of National Save for Retirement Week. As we indicated in Monday’s blog post, this week is often used by Wall Street banks and other financial interests to promote participation in defined contribution 401(k) plans. One of the biggest changes in retirement planning in the past thirty years has been the move from defined benefit pensions to defined contribution 401(k) plans. However, there is now growing evidence that 401(k)s have failed to live up to their promise.
The 401(k) was created to allow well-paid corporate executives to contribute a portion of their high earnings to tax-deferred accounts. However, several years after its creation, the Reagan administration changed the legal interpretation of the 401(k) and allowed corporations to begin moving their rank and file employees from defined benefit pensions to the new defined contribution 401(k) plan. This opened the floodgates as corporations raced to abandon retirement security for their employees. Workers were sold on the idea that they would be able to save millions for retirement by investing their contributions in the stock market, which they were told would deliver consistently high returns.
Unfortunately, the reality of the 401(k) has been far from the story workers were told.
The past three decades have seen workers fall farther and farther behind in saving for retirement as their 401(k)s fail to live up to the hype. Market downturns like the Great Recession have wiped out the retirement savings of Americans on the verge of retirement. In general, defined contribution plans have benefited the very wealthy, who are able to contribute large sums to their accounts, but have done little to nothing for the average working family. The best retirement plan for workers continues to be a defined benefit pension, the safe and secure plan so recklessly abandoned by some in the private sector decades ago.