The 401(k) Took My Baby Away

Among other things, the Crash of '08 has caused many to reconsider the efficacy of 401(k) plans. Certainly, when people have to watch helplessly as their savings shrink, unable to "rescue" their money and put it into a higher return investment (not that there are any around...), it's no wonder that many have become dissatisfied. But, I think blindly running away from 401(k)'s is not the way to go. Some "reformers" on The Left have suggested doing away with 401(k) plans entirely, and replacing them with government sponsored retirement accounts. Well! What could go wrong with that? Well you could make it much easier for your glamorous Leftist president to nationalize (i.e. seize) the pension system under the guise of an "emergency", and simply take all of your hard earned money that - really - you should have been paying taxes on all along. 

Having said the above, I will admit that 401(k) plans could stand to be improved. It seems like people like the idea of a savings plan that allows for the trade off of a tax benefit in exchange for the ability to save for the future. However, a lot of people end up putting their savings into investment vehicles that they might not understand, or might not be right for them. As usual, the banks and employers setting up the plan often do a poor job explaining the available options. And, a lot of the options are actually quite limited. In the linked article, it says that most 401(k) plans do not allow you to invest in an index fund, but force you to invest in high-cost mutual funds. Excuse me? 

Of course, the real problem with 401(k) plans isn't their potential for losses; it's the passivity they inspire. Most people are content to simply sock some $ away in the 401(k) and that's it. They don't want to think about what it's doing, or where it is going, or whether that is the right place for their retirement savings. As the Madoff investors will tell you, that is a foolish way to go through life. Understanding investments and savings is not difficult. You just need a high school level of math and reading comprehension. Too many Americans seem content to rely on a kind of magical thinking that their $$ can sit in one spot without worry. The 401(k), like Social Security, inspires a false sense of security that is dangerous.