‘An utter failure’: This economist says 401(k)s tend to benefit the richest Americans. Here's how to make yours work for you — even if you're not in the top 1%
Putting money into your employer-sponsored 401(k) is a prudent investment for your future. However, one economist wonders how true that is for the majority of Americans.
Teresa Ghilarducci, an economist at the New School in New York, told the New York Times (NYT) that the “40-year experiment with do-it-yourself pensions” has been “an utter failure.”
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She argued that the move from defined-benefit plans (guaranteed returns on pensions) to defined-contribution plans (self-directed 401[k]s with no guarantees) means that many Americans are betting on how much financial security they’ll have in their golden years. Although pensions still exist, they’re typically for unionized jobs.
Therefore, only the top earners in the country can handle the risk of the stock market, as well as save enough money if there’s a sudden dip. In addition, not all companies offer 401(k)s, leaving millions of employees to fend for themselves when it comes to saving for retirement.
However, there are still ways you can use a 401(k) to your advantage — even if you’re not in the top 1%.
Why some people dislike 401(k)s
Ghilarducci had predicted, years ago, that the move to 401(k)s would leave millions of Americans with little to no savings — pushing them into poverty or forcing them to remain in the workforce well into their 60s and 70s.
She isn’t the only one who thinks 401(k)s are creating a great wealth divide among retirees. BlackRock CEO Larry Fink agrees with her, while even Ted Benna, the man who invented the 401(k) in 1978, conceded to the NYT that far too many Americans are being let down by the retirement system.
The Federal Reserve’s most recent numbers show that households in the 90th to 100th income percentile have a mean retirement savings balance of $913,300. Yet, households in the bottom half of the income percentile hold much less: a mean of $54,700 in their retirement savings accounts.
These lower-income retirees often depend more on Social Security than their 401(k)s. But many current retirees claim that the monthly benefit doesn’t cover their basic needs and, as a result, they are forced to return to the work to bring in more income.
This is why Ghilarducci thinks 401(k)s don’t work for the average American: it rewards savings over a lifetime. However, many employees across the country are living paycheck to paycheck or juggling debt, so they can’t save money for retirement.
Ghilarducci, who is 66, has been talking about this for decades, prior to the 2008 and pandemic recessions. “It’s a big ‘told-you-so,’” she said in her interview. “And that told-you-so is on the backs of around 40 million middle-class workers who will be poor or near-poor elders.”
Read more: This little-known investment strategy can save you thousands on your taxes
How you can still make the most of your 401(k)
Although Ghilarducci would prefer to see more investment guarantees for retirement savers, there are ways to take advantage of the 401(k), even if you’re not already wealthy.
Personal finance personality Dave Ramsey has noticed how teachers tend to retire with more than a million dollars in their 401(k)s — even though they earned a median annual wage of $64,390, according to the Bureau of Labor Statistics.
This is because the teachers put money in their 401(k)s every month. Many people now automate their 401(k) contributions so that they don’t even have to think about it.
Just like those teachers, you don’t have to earn billions to retire with a cushy nest egg. You can put away a small amount of money every month and watch compound interest work its magic.
But make sure that your 401(k) portfolio is diversified and within your risk tolerance. In 2008, so many 401(k)s tanked that Ghilarducci argued in an NYT op-ed at the time that the government should bail them out, just like they did for the banks.
A safe risk tolerance and an assortment of investments will help you feel more secure in your financial situation and hedge against any economic downturns.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
