401(k)'s and private pension plans in America

This is a good piece from last fall on the drastic decline in private pensions in the US and on why the 401(k) has been only a very partial replacement: Why It's Time to Retire the 401(k) Time 10/09/09:

Invented nearly 30 years ago as an executive perk — one more way to dodge Uncle Sam - the 401(k) was never meant to replace the employer-guaranteed pension fund, supplemented by Social Security, as the cornerstone of our nation's retirement system. But propelled by a combination of companies looking to cut costs and consumers who wanted control of their retirement destiny, that's exactly what happened.

The ugly truth, though, is that the 401(k) is a lousy idea, a financial flop, a rotten repository for our retirement reserves. In the past two years, that has become all too clear. From the end of 2007 to the end of March 2009, the average 401(k) balance fell 31%, according to Fidelity. The accounts have rebounded, along with the rest of the market, but that's little help for those who retired — or were forced to — during the recession. In a system in which one year's gains build on the next, the disaster of 2008 will dent retirement savings long after the recession ends.

Actually, I wouldn't go quite that far. The 401(k) does offer people a way to shelter some current income from taxation. But it's like any other investment: you need to invest it sensibly in accordance with your retirement goals.

Tags: retirement planning