Plan Sponsors Smile: Hooray for the 401k!
Congressional overlords loom like the Sword of Damocles over the unknowing heads of millions of American workers striving to save for retirement in these troubled economic times. If we believe the reports (“Will Congress balance budget on backs of future retirees?” BenefitsPro, October 5, 2011), the failed “Supercommittee” of Congressmen and Senators considered reducing tax incentives for retirement plan salary deferrals. No doubt, if accepted, this act would have hampered the proven ability to encourage individuals to save for post-employment years. Investors fought hard a decade ago to get lawmakers to allow deferral rates to increase with inflation. It seems like Washington wants to bring us back to the future.
Since this week of Thanksgiving signifies the traditional start of the Christmas Season, why not imagine – George Bailey style – what life would have been like had the 401k never existed.
As Clarence might point out, (the plan sponsor, whose name is not Clarence – Clarence was George Bailey’s guardian angel if you didn’t remember – did not grant permission to disclose the plan’s name, but this is how he described the plan to FiduciaryNews), with no 401k, then, sometime in 1994, a construction company in Buffalo, New York would not have established a 401k plan exclusively for laborers (management would have had its own plan). That means by 2011, more than 17 years since this 401k plan’s non-inception, during the worst decade of stock market performance in the modern era, though earning modest salaries, those employees, through regular contributions and consistent investment, would no longer each now have more than half a million dollars in retirement assets.
So, in a time period representing only about half the typical career length, with the 401k plan, these workers already have in excess of $500K each to their names. They’re well on their way to a comfortable retirement. If Congress doesn’t change the rules, it’s possible these employees will have retirement assets in excess of a million dollars when they call it a career. If Congress changes the rules, all bets are off. For these men and women, the 401k plan has been a benefit that will help them lead better lives with less dependence on (increasingly cash-strapped and unreliable) government programs. In fact, they may end up being net givers (in terms of paying taxes) instead of net takers. This is what a 401k success story looks like.
Timothy R. Yee of Green Retirement Plans, Inc., in Oakland, California has no problem disclosing his name to Clarence. Yee spoke of a 52-year-old female whose retirement assets are worth $1.1 million – and she continues to contribute (now the maximum) to her current 401k. According to Yee, she “has been saving as much as she can since she started work at 22. She is relying on her retirement plans along with a diversified portfolio and disciplined contributions to get her to where she wants to be.” Where would she be today had the 401k never existed? If Congress makes it more difficult to save for retirement, she might not be able to afford to retire to California. As it stands, she has, perhaps, another decade of work left, and, with the current 401k deferral allowance, this woman has a good chance to exceed $2 million dollars when she retires. This is what a 401k success story looks like.
From one coast to the other, the well-traveled Clarence, no doubt now with red eyes, listened to Elle Kaplan, CEO & Founding Partner of Lexion Capital Management LLC in New York City. Without the 401k, Kaplan’s client, a widow of an air conditioner repairman, would not now have “a net worth of well over a million dollars.” How did this happen? Kaplan says of the deceased husband, “from 18 till his death in his 50’s, he contributed to a 401k.” Needless to say, had her husband not suffered an untimely death, the opportunity offered by the 401k savings plan would have yielded an even larger portfolio. Still, this is what a 401k success story looks like.
Finally, Clarence, a bit of an old-fogey, decides to take the Twentieth Century Limited to Chicago, where he meets up with famed fee-only financial adviser Roger Wohlner, CFP®. Wohlner reveals to Clarence, “I have several clients who over the years have accumulated 7 figure (or close to it) balances in their 401k plans. None of these clients were senior executives or even high earners. Rather they saved and invested on a regular basis over the course of their working lives and were able to accumulate the funds needed for them to enjoy retirement.” With no 401k, these workers would never have had the chance to amass million dollar retirement portfolios. They would have been more likely to depend solely on Social Security or a potentially meager company pension plan. Thanks to the 401k, though, these folks can live independently through their own means. This is what a 401k success story looks like.
Of course, not all believe the 401k has been a positive, but many of these negative stories stem from either employees failing to take advantage of their 401k or plan sponsors failing to follow-through on their fiduciary duty (see “Time Magazine is Wrong!” FiduciaryNews, October 8, 2009). For many, however, their 401k savings have been a boon to their net worth, despite the ups and downs of the market. Perchance it’s best if, on his next trip, Mr. Clarence goes to Washington. It’ll be a shame if Congress tries to “fix” what ain’t broke and penalize working Americans in the name of atoning for its own mistakes.
After all, through these last nearly forty years, the 401k plan has allowed many to live a wonderful life. It’s the gift that keeps on giving.
And that, Charlie Brown, is what 401k is all about.