Is the 401(k) Really a ‘Horrible’ Retirement Plan?

A recent “news” post about a blog post finds some curious “faults” with the 401(k).

The news item carried the provocative title “‘Rich Dad’ Robert Kiyosaki Reveals Why the 401(k) Is a ‘Horrible’ Retirement Plan.” It originally ran on GoBankingRates.com, but was subsequently picked up in syndication on Yahoo Finance (at least). For the uninitiated, Robert Kiyosaki is one of those “I’ll help you get rich the way I did” types, providing that road map via books (notably “Rich Dad, Poor Dad”) and seminars. He offers comparisons to decisions made by his dad (poor dad) in contrast to those of the father of his best friend (rich dad). 

Suffice it to say that his dad worked hard and saved the old-fashioned way—which is NOT his advice to you. That’s included previous pearls of wisdom like “Why Saving Money is the Wrong Way to Prepare for Retirement.” Apparently rather than saving for retirement, we’re supposed to “look for an investment that will pay for your desired standard of living. Make your money work for you, not the other way around.”

What could go wrong?

All that said, the author of the GoBankingRates article has apparently just stumbled across Rich Dad Robert Kiyosaki’s blog, from which they draw most of this nonsense. Those ideas are (apparently) not new—the blogs draw back to a blog post last updated in August 2023 titled “The 401(k): Robbing Your Retirement Plan for Over 40 Years.”        

Now, according to the writer at GoBankingRate (and supported by posts on Rich Dad) Rich Dad’s[i] beefs with the 401(k) are the usual assortment touted by personal financial writers; high fees (more on that in a minute) and “low control.” On the latter point, such pundits always bemoan the limits of a 401(k) menu populated with fund offerings other than what they’d be glad to recommend (for a fee—Rich Dad has an affinity for real estate). He also doesn’t like the restrictions on withdrawals (including the penalties for early withdrawal)—and he’s bothered by the lack of insurance to insulate against a market crash. 

Rich Dad also sees as a fault the fact that there are limits on how much you can put into a 401(k)—as though those limits preclude other investments. Oddly, he says that if you want to set aside more than that, you’ll have to pay taxes and penalties—which clearly suggests that he (or the GoBankingRate author who restated his position) hasn’t a clue how 401(k)s and those contribution limits actually work (and there’s nary a word about catch-up contributions).

He also doesn’t like the taxes you’ll (eventually) have to pay—oh, and he sees the employer match as “false security,” arguing that if your employer wasn’t providing the match they’d have to give you the same amount in pay (to compensate for the lack of the 401(k) offering). He also says you have no control over the funds from the employer match, by which one can only assume that he means we can’t invest those funds how he would suggest, since in my experience the investment of employer matching funds is routinely left to participant direction.

All that said, he puts forth assumptions about fees that seem wildly out of line with reality—or at least what industry surveys and anecdotal evidence of the real world suggest. In his world, mutual funds usually take 2%—that’s 200 basis points—of your investments. He at least infers that that is in addition to “transaction fees, legal fees and bookkeeping fees”—which in MY mutual fund world are all included in the fund’s fee structure—and still come in well below 2%. 

Now, I’m not saying you couldn’t find a 401(k) out there that charges that much—my point would be that it wouldn’t be considered “the norm,” and to suggest otherwise is stretching a point, to put it mildly (Morningstar’s John Rekenthaler takes on this assertion quite handily here. He also makes several valid points about the state of financial journalism today, which are well worth bearing in mind given the circulation of pieces like this). 

Not that Kiyosaki is totally opposed to 401(k)s. In fact, he comments that “being forced into a 401(k) probably isn’t a bad thing for most people” … and goes on to note “because most people have little-to-no financial education and wouldn’t know what to do with the extra[ii] money other than save it or spend it.” 

Everybody else? Well, I guess they’re spending it on a Rich Dad, Poor Dad seminar. Now there’s a horrible retirement “plan.”     

 - Nevin E. Adams, JD

---

[i] As noted above, Kiyosaki isn’t the actual “rich dad.” That refers to his best friend’s father.

[ii] That’s the extra money an employer that doesn’t offer a 401(k) would have to pay you to get you to work for them.  

Do Roth and 401(k) Pre-Tax Holders Really Spend Differently?

An interesting—and somewhat counterintuitive—report came out last week, one that cast doubt on the “common wisdom” regarding Roth versus traditional pre-tax savings.

The assumption underlying the research[i] was that those who had not yet paid taxes on their savings (the traditional pre-tax savings) would be hesitant to tap into those savings and trigger taxes, certainly more so that individuals that had already paid those taxes. Instead, the research suggested that the opposite occurred; that individuals who had saved on a pre-tax basis actually withdrew more/sooner—but with a twist. 

This they hailed as good news. They noted that the research suggests investing in a CT (current-taxed, or Roth) plan could help ease concerns about outliving funds—because they spend at a lower rate (though they saw this as a negative for those who saved on a deferred tax (DT) basis).  They even managed to find a silver lining in the “cloud” of faster spending by the pre-tax crowd because those individuals appeared to be trying to adjust for the effect of taxes (with the caveat “despite our findings that they do not appear to adjust sufficiently, if at all”). And they saw as a positive this report’s contribution to the “accounting literature exploring the effectiveness and consequences of incentivizing behaviors through tax policy, by highlighting how past decisions motivated by taxes (e.g., retirement plan type) may continue to affect one’s quality of life long into the future.”

A few words of caution would seem to be in order, however. This wasn’t based on the patterns of actual people spending their actual money in the real world. Rather, and to their credit, they constructed a laboratory environment of sorts; they selected a group of volunteers, gave them certain criteria—basically a role they would “play” in the experiment—and set out a spending scenario. They then had them read about various spending choices—and, well—recorded how the individuals chose.

As for their conclusions, when you probe into the results more carefully, what you see is that even though those who had pre-tax accounts ostensibly feel the “pain” of taxes due on their retirement withdrawals—and that appeared to restrict their spending—it seemed to be offset by another reality. That, for reasons not understood/explained, those same individuals appeared to relish the expected benefits of consumption more than Roth holders. Said another way, their “reservations”— the cognizance of taxes—didn’t seem to constrain their spending because they were (more) enamored of the benefits of spending. Indeed, the researchers commented that those with “equivalent nominal balances” actually spent at the same rate.

I’ll just comment that it’s an interesting premise—and that the test environment created struck me as detailed and complex to map out, establish and execute. That said, I would be hesitant to draw any substantive conclusions on actual human behavior from this analysis. To me, all it seemed to “prove” is that people selected for an experiment tend to spend to the perceived “limits” of their hypothetical account, regardless of taxation. It didn’t strike me that Roth holders spent less (as many headlines covering the report suggested), but rather that pre-tax holders spent the same, even though they were going to have to deal with a tax bill at some point (hypothetically, of course).

And that, to me, isn’t a positive thing for Roths so much as it is a cautionary note for pre-tax savers—who may have forgotten that tax deferral is just that.

 - Nevin E. Adams, JD

---

[i] How Does Tax Timing Affect Spending in Retirement?  

The 'Luck' of the Irish

 As St. Patrick’s Day approaches, I’m reminded of a trip my younger brother and I made with my grandparents to the Great Smoky Mountains. 

Now, my grandparents had made many trips to that area, but it was a new experience for me and my brother. To this day I remember a hotel that had a pool with a breathtaking view of the mountains, another sitting right on a rushing stream—and some kind of trading post that had a big black bear outside. 

Throughout the trip, my brother and I would try to get a sense of where the next day’s adventures would take us as we followed along in one of those big fold out roadmaps. But in response to our repeated inquiries as to our next stop, my grandfather would demur, saying only that he was relying on “the luck of the Irish” to find us a place to stay for the night. To this day, I’ve no idea if he truly was or not (the Irish in my heritage doesn’t come from his side of the family, but from my grandmother)—but we always found a place to stay for the night—and comfortable, though certainly not luxurious, accommodations, to boot (not always in the first place we pulled in to, however). There’s some disagreement as to whether or not there IS such a thing as the luck of the Irish (more specifically as to whether that’s good or not-so-good luck), but I can’t come up on St. Patrick’s Day without remembering that trip and my grandfather’s reference[i]. 

A New ‘Mission’

That all came back to me some years back when I was driving with my family near the Grand Canyon. We hadn’t planned to be there until the following day, but our plans worked out differently, and we started talking about being AT the Grand Canyon for sunrise, and, in a rare burst of spontaneity, all of a sudden it became something of a “mission.” I remember sharing gleefully with my kids my grandfather’s vacation mantra.  

Well, as it turned out, our commitment to the new “objective” notwithstanding, it took longer to get there than I had thought, and when, sometime after 10 pm, after finding there was “no room at the inn” (literally) at an embarrassing number of places (and this after filtering the ones we called on the way and got the same answer), we began to seriously contemplate the possibility of spending the night in a hotel…parking lot.

Our lack of “planning” made for a chilly night at the Grand Canyon, though we spent it in a camper park, not a hotel parking lot. It was a miserable night, to be sure—SO miserable (it gets very cold in the desert at night) that it made it very easy for us to attain our primary objective—to see the Grand Canyon at sunrise (albeit unbathed and somewhat disheveled)—something we’d almost certainly never done if we’d actually gotten into a warm hotel bed that night. 

My grandfather was a great storyteller, though you couldn’t always tell when he was pulling your leg. As a consequence, I’ve no idea if my grandfather was at all stressed about not finding a motel in the Tennessee foothills the way I was out in the middle of the Arizona desert (in the middle of the night). 

That said, it seems that lots of American workers are heading toward their potential retirements with no real idea as to whether or not there will be suitable accommodations at the end of that journey. While there are—and have long been—plenty of surveys out there that reveal concerns about that possibility, there’s little to suggest that those concerns are motivating action, or even some time spent considering the possibilities. It’s as though they, like my grandfather, are relying on “the luck of the Irish.”

As St. Patrick’s Day approaches, there will be parades, the gathering of four-leaf clovers (which aren’t as rare as you may have been led to believe), and plenty of unnaturally green beverages, not to mention references to leprechauns and their pots of gold. Indeed, tradition says that if you catch a leprechaun, he can be coerced into giving you some gold—but tradition also holds that they’re hard to catch, and even harder to hang on to. 

As one might well imagine, a comfortable retirement without planning and action will be. 

 - Nevin E. Adams, JD

---

 

[i] Apparently, its origins go back to the 1800s here in the U.S., and a preponderance of Irish settlers here that fared well during the California Gold Rush.

A Penchant for Pensions?

  I’m not sure how old I was when I first saw “Night of the Living Dead”—but I have long been intrigued by stories of a zombie apocalypse—where mindless beings inexplicably rise from the dead, with no memory of their past, just a relentless (and apparently insatiable) hunger for…well, “us.”

That is perhaps an unfortunate comparison to last week’s hearing by the Senate Health, Education, Labor and Pensions (HELP) Committee, one ostensibly held to focus on how we were going to stave off the retirement “crisis” by…bringing “back”[i] defined benefit plans.[ii]

There were two fundamental premises underlying the hearing; first that there is, in fact, a retirement crisis, and second, that the restoration of defined benefit plan designs would remedy that situation.  

There remains in many circles (including last week’s hearing) a pervasive sense that the defined contribution system is inferior to the defined benefit approach—a sense that seems driven not by what the latter actually produced in terms of benefits, but in terms of what it promised. Even now, it seems that you have to remind folks that the “less than half” covered by a workplace retirement plan was true even in the “good old days” before the 401(k), at least within the private sector. And when it comes to defined benefit plans, it was significantly less than half.

And while you can (eventually) wrest an acknowledgement from those familiar with the data, almost no one EVER talks about how few of even those covered by those DB plans put in the time required to vest in their full pension (particularly prior to the Tax Reform Act of 1986, which accelerated vesting schedules). Those who demonize the 401(k) are never asked to speak to the “coverage gap” that was actually wider when defined benefit structures were “in vogue,” nor called for an accounting of the shortfall between the actual benefits delivered versus the “promise.” And yet, those 401(k) critics in last week’s hearing—with a straight face—held forth on how much better things would be…if only defined benefit plans would come back.

Don’t get me wrong—defined benefit plans continue to serve a valued societal purpose (not the least of which the income they provide my 93-year-old mother, though given the state’s finances, she remains concerned how long they will last), though they tend to work “better” in the public sector and among unionized workforces, where one’s profession and job tenure tend to be less volatile. That said, it’s not like there was some kind of cataclysmic event that wiped them out overnight in the private sector. Rather, their demise was one of a hundred painful “cuts”—all well-intentioned, of course. 

There were (and are) premiums to provide insurance backing for plans that “fail,” disclosures to try and avoid (unexpected) failures, demands for a full accounting of the potential financial obligations those plans represented for the organizations that sponsor them, and finally a demand that those financials be moved from footnotes to the corporate balance sheet itself. At any number of points along that continuum, one could well understand and appreciate why employers would choose to step away from that burden—and they did. 

Moreover, with few exceptions they were able to do so without opposition from employees—who typically didn’t (and largely still don’t) appreciate the cost or benefit of a promise that won’t come to fruition until years, if not decades, beyond the date they expect to be employed by the firm making that promise. And that ignores a criticism highlighted by several in the hearing—that these programs aren’t always well-managed or funded to provide those promised benefits.         

Yes, a fully funded, fully vested benefit that you’ve paid nothing for is certainly a good thing. Little wonder that a recent survey (by one of those firms represented at the hearing) suggested a massive public clamoring for the alleged panacea of these programs. And considering the plethora of headlines proclaiming the dire straits of today’s retirees, who can be faulted for clinging to a benevolent notion of a simpler time when someone else worried about such things?

All that said, there was little in the way of actual data at the hearing to suggest that a return of DB (certainly at the expense of the 401(k)) would actually resolve the issues. Mostly the witnesses focused on the alleged shortcomings of the current system (albeit with some sharp differences in conclusions, and a brief debate about the different results one gets from actual data versus surveys reliant on what people think in terms of establishing whether or not there is an actual crisis), alongside some optimism that SECURE and SECURE 2.0 had laid the groundwork for potential improvement in coverage, sufficiency and decumulation options. If there was a consensus, it might have been that we need to address the projected shortfalls in Social Security benefits—and, truly, if that isn’t, then we really will be looking at a crisis.

The thing that makes cinematic zombies so terrifying is that there are so many of them—and that they keep getting up and pursuing you no matter how much damage you inflict.[iii] That, and they manage to “convert” more with a simple bite. Let’s face it—a truly serious look at the retirement “crisis” would acknowledge that under traditional vesting definitions and job turnover rates in the private sector, defined benefit designs are, at best, a dubious solution. 

A penchant has been described as an irresistible attraction, as someone having a “penchant” for taking risks. 

A more practical one would be to look at a system that is already in place and working for those with access—and talk about ways to make THAT reality a reality for all.

- Nevin E. Adams, JD

 

---

[i] In fairness, there are still defined benefit plans about, even in the private sector—though they are considerably fewer than they were a generation ago, and many are frozen or in termination status. 

[ii] The hearing was titled and you can still listen to a recording of it here, "Taking a Serious Look at the Retirement Crisis in America: What Can We Do to Expand Defined Benefit Pension Plans for Workers."

[iii] Well, except for the occasional well-placed headshot.

‘Positive’ Thinking: Why Small Businesses That Offer a 401(k) Do So

Last week we explored the reasons why small businesses DON’T offer a retirement plan to their workers. But there are quite different—and positive—reasons for choosing to do so.

The obstacles that keep most small businesses from offering a retirement plan to their workers are an assortment of factors, real and (somewhat) imagined. There ARE remedies for those concerns,[i] but mediation of those concerns doesn’t seem to be a factor in the motivations of small businesses that DO choose to offer a plan.

Reasons ‘Able’

According to that recent survey by the Employee Benefit Research Institute (EBRI) and Greenwald Research, when the small business owners who offer retirement plans were asked the reasons that they do so, factors associated with attracting and retaining workers were the most prominent. Indeed, the vast majority—more than 9 in 10 of the small business owners[ii]—said that a reason they offer a plan is the positive effect on employee attitude and performance. 

According to the report, 90% said that a competitive advantage for the business in employee recruitment and retention is a reason for offering a plan. In fact, nearly a third (30%) said the positive effect of offering a plan is the MOST important reason, though nearly as many (25%) cited the competitive advantage as the most important reason.

Tax ‘Tacts’

Not that tax benefits and preferences weren’t factors; roughly two-thirds of the small business owners said that tax advantages for key executives and allowing the owner to save for retirement on a tax-deferred basis were (also) reasons for offering a plan, though only about 5% of the small business owners cited each of these as the most important reason.

The bottom line is there are any number of good, positive reasons—benefits for workers and business owners alike—for offering, and participating in, a workplace retirement plan. Unfortunately, there are also any number of reasons to put off doing so—not enough time, worries about the expense, confusion about the options, inertia, and that all-too-human inclination to put off big decisions for another day.

Then again, aren’t those the same reasons often put forth to justify not saving for retirement?

- Nevin E. Adams, JD

See also: 5 Reasons Why Your Small Business Should Offer a Retirement Plan | National Association of Plan Advisors (napa-net.org)

 

---

[i] Notably the tax credits included in SECURE 2.0.

[ii] While those small business owners seem committed to the offering, the survey DID find some points of confusion with regard to the obligations associated with that undertaking. Turns out the one statement the survey asked about plan design requirements that was not true had the highest percentage of business owners agreeing with it; two-thirds (63%) of these owners thought that employer contributions were always automatically vested (in fairness, those who didn’t offer a plan were even more mistaken—and that WAS cited as a reason for not offering a plan).