“Running on Empty. Running into the sun but I’m running behind.” — Jackson Browne
Internal Revenue Code section 401(k) is the only section of the U.S. tax code that the average people can cite. They know it has something, and often everything, to do with whether or not they can retire with dignity.
The adoption of section 401(k) in 1982 turned out to be one of those big moments that changed everything.
401(k) plan investments are a primary driver of the investment markets. It is the employee retirement benefit that most companies offer.
These plan investments are also the reason that many people are pacing the floors at night, watching their retirement get delayed or destroyed.
Until 401(k) came along, pension plans were usually defined benefit plans.
A defined benefit pension is one that gives you a set number of dollars for set period of time. It usually pays out over the course of your lifetime after retirement.
With a defined benefit plan, the employer takes responsibility for making sure pension money is safe and properly invested.
State and local governments are about the only entities that currently offer defined benefit plans. Most, like my home state of Kentucky, are struggling to figure out how to pay for promises to current retirees by politicians from long ago.
As a financial consultant, I advise anyone who can get a defined benefit plan to maximize it. As a taxpayer, I don’t want to pay for my neighbor to retire at age 50, when that is not an option for me.
With the advent of the 401(k), employees with little or no investment experience were required to pick among investment options offered by an employer.
Employees were put in the position to fail. Many have.
It is up to the employer to pick what investment company handles the employee’s money. If the employer picks a dog, with few options, the employee is out of luck. (more…)