Background on Retirement in the United States
Prior to the popularization of the 401k as the retirement plan of choice for corporations, the favored retirement plan was that of the pension. The pension plan put of onus of planning, saving and distribution after the employee’s retirement on the employer. It guaranteed that the retired worker would get a percentage of their salary and benefits upon retirement and they did not have to figure out how to manage their savings plan as it was done for them. However, this standard fell out of vogue as people started living longer, new accounting rules were put into place, global competition increased and the market became more volatile. Maintaining a pension plan became an expensive system. Although initially a corporate dodge not meant for anyone other than high wager earners, 401k’s became more popular.[Click Essay Writer to order your essay]
With the 401k taking over as the preferred method of saving for retirement, banks and financial institutions saw an opportunity for new business. They promoted their plans as beneficial to everyone involved and sold their funds with optimistic jargon such as growth, value and balance. The bull market of the 1990’s appeared to back up these claims and the investments made appeared to be so beneficial, most people disregarded the high fees charged by management. The growing industry allowed people with minimal qualifications and even brokers and salespeople for mutual funds to market themselves as financial advisers.
However, with the collapse of the market in 2000 and the succeeding crash in 2008, retirement plans turned out to be a lot more risky than they initially appeared to be. Many corporations filed for bankruptcy leaving their employees without any semblance of a retirement plan and the housing bubble bursting all but insured the real estate they had purchased would decrease in value. With few other options, many started to withdraw from their retirement plan prematurely despite the penalty fees associated with doing so. The delayed or destroyed plans for retirement caused many to reevaluate the system by which many invest their savings.[Need an essay writing service? Find help here.]
Major Players and Influences
It could be stated that the major players in the risk associated with retirement plans are the employers, employees and those in the retirement planning industry. The primary difference between 401ks and pensions was that the burden of planning and investing was shifted from the employers to the employees. It became the responsibility of the workers to figure out the exact amount they needed to save for retirement, how to invest and how to withdraw after retirement. As previously stated, this was beneficial to the employers as they no longer had to manage the risk associated with retirement planning for their employees. However, the majority of people planning for retirement were simply not equipped, in either time or expertise, to take the necessary steps to ensure their retirement plan was appropriate for their specific situation. This was further compounded by those in the retirement industry’s vested interest in making sure they did profitable business. This was never more apparent than the year of the crash when Wall Street doled out eighteen billion dollars in bonuses.
The long jargon filled documents and agreements all but assured the layman would be unable to decipher the particulars. It was often overlooked that many plans contained poor funding choices and fees as high as 5% per year. In his 2012 study on the impact of fees on retirement savings, Robert Hiltonsmith found that fees could erode as much as two thirds of an investors financial gains. Often, compound returns in retirement plans were exceedingly overwhelmed by compound costs. In the end, despite providing all of the capitol and taking on all of the risk, the employees with 401k plans only benefited from a portion of the returns.
Impact and Speculation for Better Outcomes
The derailed retirement plans resulting from the consecutive market crashes in the early 2000’s completely changed the culture and standards for retirement in the United States. Some who assumed that their savings were well over a million dollars have been disappointed to find that it it, in fact, a faction of the anticipated total. Many have altered their plans so that they will work for as long as physically possible. It is to be expected and hoped that they will show a healthy dose of skepticism when doing business with financial institutions. If the market crashes of 2000 and 2008, respectively, have been exemplary of anything, it is the volatility of the market. Though it seems callous to blame the employees for a portion of the situation as they are the ones who suffered the most loss, had they not been dazzled by the high rising markets of the 1990’s, taken the time to look through complicated portfolios and understood that businesses operate for profit rather than their sole benefit and scrutinized their plans more thoroughly, they may have avoided the ruination of their plans for retirement.
It would have been more ethical for the employers and corporations switching over to 401ks to look out for their employees interests by screening the brokers representing the retirement plans and by providing their employees with information and opportunities to learn more about the process of investing for retirement.
Finally, those in the retirement industry could have avoided this situation entirely had they provided more straightforward information regarding where the investments were being placed, how much of the investments were going towards fees and expanding opportunities and options for the employees under their plans. [“Write my essay for me?” Get help here.]
Gaviria, M. and Smith, M. (Writers) Mangini, T. (director). (2013). The Retirement Gamble[Television series episode]. In Fanning, D. (Producer), Frontline. Boston, MA: WGBH.