A financial planner once shared a dirty secret with me about 401(k) plans. According to her, they were originally designed as a first step towards eventually luring Americans away from their social security benefits. And as if to confirm her dark prediction, the federal government soon began to introduce other forms of tax-exempt and tax-deferred retirement savings plans, including IRAs and Roth IRAs. And then a few years later, the government began making noises about an even more radical retirement plan. They proposed a kind of "hybrid" plan in which individuals still invested money in the stock market - but this time, the money they were investing was taken out of their social security accounts!
It was 2008 when some people pointed out the obvious flaw with that plan. People save for their retirement so the money is there on the day they retire. Instead, they could end up with much less money than they'd expected if the social security money was invested in the stock market - and then the market takes a dive in the year they retire. Unfortunately, that's the situation people are facing already with their 401(k) plans. Because 401(k) contributions are often invested in a pool of stocks, they can often drop and rise in value just like the rest of the broader market.
Unfortunately, that's going to be the biggest problem facing 401(k) plans in the years to come. Economists are predicting several years of slow growth and high unemployment in the United States, and that's obviously going to affect the returns on 401(k) plans which are invested in the stock market. Fortunately, it doesn't look like Congress plans to make any major changes in the framework of the 401(k). But there will be some small changes in the future for 401(k)s.
For example, one small change was identified by a personal finance correspondent for the New York Times. She wrote that the Department of Labor had finally established new rules which will affect the way 401(k) companies report their fees to employers and investors. In the past it was very difficult to determine how much of the invested money was lost to the management fees of the 401(k) provider. This could ultimately be one of the most positive developments to hit 401(k) plans since they were first created in 1980.
"I've seen small companies, and I’ve seen very large companies that have hundreds of millions of dollars in the plan who do not understand what they are paying," one consulting firm told the newspaper!