Fidelity (Accidentally) Makes the Case Against the 401(k)

Fidelity just released its quarterly analysis of accounts in the 17,500 401(k) plans it administers. The nation's number one administrator and manager of 401(k) assets reports that the balance in its average account rose 13.5% to $53,900--a nice jump. Then, in an odd follow-up feature, it listed what its analysts had identified as "key behaviors that are hindering savings for workers at different life stages." It reads (inadvertently, of course) like a behavioral economist's textbook indictment of the problems with the 401(k) concept.

The language in quotes is Fidelity's:
  • Young workers don't participate. "Less than half (44%) of eligible workers in their 20s contribute to their workplace plans today."
  • People in their 30s and 40s borrow too much from the plans. The report notes that people in this age group have pressing needs for their money that are closer at hand than retirement, including starting a family and acquiring a home. As a result, they tend to borrow heavily from their 401(k)s. "... [N]early one in four workers (23%) in this age group has one or more outstanding loans, and more than one in 10 (10.6%) initiated a loan over the past 12 months...workers in this age group also tend to be repeat loan users. Nearly one third (31 percent) of continuous active participants in this age group who took a loan last year also took one this year."
  • Older workers either take too little or too much investment risk. "Over a quarter (26%) of pre-retirees either have no exposure to equities or hold 100 percent equities in their 401(k) plan. More than one in 10 (11.4%) pre-retirees holds no equities in their 401(k) plan, a strategy that has historically resulted in significantly lower returns on an inflation-adjusted basis than those of more diversified portfolios."
  • People mis-time the market While Fidelity didn't describe it as a life-stage-related problem, it did note that its plans' participants had begun investing more conservatively as the market went down. Usually the stock allocation in the accounts averages around 75% (it toppped out at 80% at the top of the tech stock bubble). It's now down to 68%, just in time to miss the biggest rebound rally since the Great Depression.
It's the view of the 401(k) industry (see the comment from the
on my
), it's the job of well-intentioned employers and plan administrators to educate participants not to make errors like these. As if a few hours in a room with a whiteboard and pie charts would put everyone on track to retire prosperously.

But seriously, folks. It's not a lack of financial literacy that makes a majority of 20-year-olds not participate in a 401(k). It's human nature. How many at that age are thinking 40 years into the future? Similarly, when are 30- and 40-year-old householders not going to put the immediate needs of their growing family before the still highly theoretical needs of their retired selves, 25 or 40 years off? As long as the plans permit people to take loans for what they consider more pressing needs, or to spend the money between jobs, or not participate in the plans in the first place, they will. As for 401(k) investors' tendency to get too conservative or too aggressive at just the wrong time, when in recorded history have investors not done that?

Yes, we need a retirement savings plan in this country that, like the 401(k), combines the efforts of government, employers and employees to help build a source of adequate income in retirement. But it needs to be realistic about people's behavior. If you give people the freedom to put short-term needs ahead of their long-term savings needs, they will, and they will wind up short of retirement money as a result. Fidelity's report is pretty clear evidence.

Continue on CBS