If you have a 401(k) plan with your employer, you already know how it works. Every time you get paid, a certain percentage that you’ve designated goes into your 401(k) account along with a percentage of that amount matched by your employer and also deposited into your account. 401(k) is supposed to be for your retirement and whether you’ve just started an account or you’ve been investing in one for the last 10 or 15 years, the opinion and sentiment could be the same.
The economic bombshells have stopped most of their down pouring and the air is starting to clear. What appears to be left amidst the rubble are disenchanted 401(k) participants who are hesitant or complete ceasing to continue the contributions to their 401(k) plans as schedule. Does this trend indicate the beginning of a vanishing of the traditional 401(k) plans as we know them?
Back in 2002, unknowingly, a downward decline in 401(k) participation began. It would be some five years later before that trend would change and the number of participants would take an upward turn. The Employee Benefit Research Institute studied these trends, taking notice of the fact that part of the decrease was due, in no small mention, to the fact that younger employees replacing older ones were simply not as likely to participate in 401(k), if they participated at all. This accounted for a significant portion of the multi-year slide but not all. The other more signification percentage was still attributed to the older employees who made up approximately 55% of participation members.
A pending recession wouldn’t scare away many 401(k) participants early on in the game. But more challenges would come. Challenges such as the huge Enron scandal. Many participants were blown away that such a large corporation was being run by individuals would take both public and private funds and squander them out of the company and into overseas accounts, leaving many employees without so much as a penny for their pensions.
As dreadfully unreal as it seemed, the Enron scandal could not be denied. Many people literally and actually took their money out of their 401(k) accounts and ran with it. It seemed safer and a wiser choice than to risk have to experience their own personal Enron scandal. Dishonest stock dealings impacted Martha Stewart in a similar manner, causing K-Mart to withdraw her line from their shelves and landing Martha Stewart in a jail cell to cool her heels.
Another factor inciting many to drop their 401(k) participation has been the changing role employers have started to take on matching contributions. Many companies, including large one like General Motors, are searching for ways to cut back the traditional matching contribution that has kept many participants on board. Without this matching contribution, many participants are losing faith in 401(k) and are considering other options for retirement such as an IRA or more specifically a self directed IRA LLC which allows for complete control of one’s finances and investment choices.
These fatal blows to the reliability of many 401(k) programs were quite enough to cause program administrators cause for worry. But there were not alone. The 9/11 terrorists attacks brought buildings, lives and yes, 401(k) and profit sharing accounts crumbling to the ground. Suddenly many lives were lost, many prominent important buildings were reduced to rubble, and thousands of American casualties, including deaths, resulted.
The question of living for today because no one know what tomorrow will bring was answered and the resounding answer for many was to live for today. For saving for a retirement that may never come ceased to be the fashionable thing to do. Especially if you could take the same amount of money, buy a house, refinish it or flip it and sell and avoid the 401(k) risk scenario all together. Who wouldn’t go for real estate rather than 401(k)?
By 2006, The Pension Protection Act allowed for many employers to get into the fight to save the vanishing 401(k). The act made provision for automatically enrolling new employees in 401(k) programs. This act was designed to help offset the continued decrease in participation that these companies have been witnessing for years now. Although it is anticipated that 401(k) will continue to decrease by an estimated 2 percent over the next year, it is believe that this decrease will be offset by the 2 percent increase that auto enrollments will generate.
What does this all mean for 401(k)? It means the trends have changed and are continuing to change. It suggests that if you have a 401(k) and it has less than $70,000 in it, that’s normal and you shouldn’t be worried about increasing it exponentially with the number of years you’ve had the account. There’s also an indicate that you should watch your employer carefully over the next couple of years to see what’s going to be done with your 401(k) in terms of the matching funds they contribute. You may find your 401(k) takes a back seat and slows way down in growth terms.
Does this mean that 401(k) is vanishing completely? There are no signs to indicate that 401(k) won’t be around for the long haul. So if you’re comfortable with the volatility that can happen, you should be secure enough to ride the storm out and see what the outcome will be for your investment.
If you don’t like the potential for your money to go asta la bye bye in a moment’s notice or should we say a crude executive’s overseas account, you may want to consider diversifying your retirement options with other ways to save for retiring than just a 401(k). A financial planner is a good place to start where you can just discuss your concerns and fears and learn some more information about what other options you have available.
Whatever your choice may be, don’t do anything hasty or regrettable because it’s your money and you’ve taken some time to get it built up.
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