We’ve come full circle on retirement saving. Just 15 years ago 401(k) plans were widely embraced. Workers enjoyed managing their own money, believing that 10% annual returns for life would be a layup. Employers were happy to match contributions, giving them cover to shift away from costly traditional pension plans. Policymakers thought they had found an answer to the fraying social safety net.Today it all looks like a big mistake. Numerous reports in places like the Los Angeles Times and Wall Street Journal have chronicled the 401(k)’s shortcomings. They are legion. Too many people don’t contribute enough, don’t diversify and don’t repay loans from the plans; too many take early distributions and try to time the market.
The primary reason for the shortcomings of the 401(k) plans is how they are sold to employers. Brokers and banks see the 401(k) plan as a cash cow, with little interest in the welfare of the plan participant. These plans were originally implemented as a supplement to a pension plan. They have become the sole source of retirement for most Americans. We must provide a 401(k) plan with the plan participants best interest as the focus.
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