401ks are for suckers

Five out of five financial planners think you should have one, and 70 million Americans do. This clock-puncher says they're all wrong.


Photograph: Roxana Marroquin

So here I am, 26 years old, and I haven’t saved a penny for retirement. Like many folks my age, I have a litany of excuses for opting out of my company’s 401k—school loans, credit-card debt, high rent, low pay and a minor addiction to eating out. It’s that last vice that speaks to my true feelings: I can’t rationalize budgeting for a tomorrow that may never come. I want to live now. I want to spend my cash on everything listed in this magazine, not hoard it away so I can score a nice trailer in Clearwater, Florida, 40 years from today.

For this, people think I am insane. Of TONY’s 88 eligible employees, only 11 have not enrolled in the company plan. Our editor-in-chief, the unofficial poster boy for employer-sponsored 401k plans, was beside himself when he found out I was one of them. “Why would you turn down free money?” he said. “If you saw a dollar on the street, would you take it?”

Begrudgingly, I started to research our plan. TONY’s participant-directed 401k allows me to contribute up to $15,500 pretax annually, with a 50-cents-on-the-dollar match for up to 3 percent of my salary. Pretty sweet, right?

But wait—there’s fine print.

Employer contributions are discretionary (i.e., in times of “business hardship,” they may be nixed—though TONY financial adviser Wayne Banks tells me this has never happened); and while you’re 100 percent vested in your contributions from the get-go, the company’s match follows a timetable: stay only one year, and get 25 percent, and so on. In creative fields with high turnover (like ours), that level of commitment is, well, scary.

I also resent that more and more businesses are beefing up their 401k plans instead of offering living wages and bonuses. While I appreciate that companies aren’t required to offer any match at all, isn’t a vesting schedule diametrically opposed to the spirit in which 401ks were created—to empower employees after pensions went kaput?

Brian Fernandez, a financial planner at Smith Barney, paints a bleaker picture of why I should save for retirement instead of taking trips to Europe. “Social Security is broken,” he says. “Congress set up the 401k because it knew the American public needed to save its own money.”

David Wray, president of the Profit Sharing/401k Council of America, evaluated TONY’s plan and concluded that “while it isn’t a very rich match,” it’s unlikely you could outperform a 50 percent return elsewhere.

Kevin Kautzmann, founder of EBNY Financial LLC, also reiterated our 401k’s tax benefits, particularly in a city like New York: “It’s the best deduction you’re going to get.”

That’s all good, but why should Congress—or my boss, for that matter—care what I do? Is it out of the kindness of their hearts?

I’d like to think so. But there’s also an IRS rule that caps the amount of money a company’s highly compensated employees (or HCEs, defined as people who make over $100,000) can save based on the average amount put away by the rank and file. Assuming the boss is an HCE, it’s to his benefit that underlings like you, me and the janitor save for retirement. “The employer has an incentive, sure,” says Wray. “But it’s win-win.”

Win-win until your kid gets sick or your mortgage shoots through the roof. The 401ks are designed in such a way that everyone—financial advisers, stockbrokers, mutual-fund managers—gets paid before you do. I fundamentally object to that. It’s my money, dammit. Why should I be penalized 10 percent for a hardship withdrawal?

“It has to be enforced savings, otherwise people won’t do it,” says Wray. “The other benefit of a 401k is that the investment decision has been enormously simplified. That’s terrific because most people are never going to open a brokerage account by their own volition.”

But that’s exactly it—most folks enrolled in 401k plans don’t have a clue how they work. “If you offer more than eight choices, their eyes glaze over,” says Kautzmann. Clearly, I’m supposed to take comfort in knowing that the government and my employer are directing my investments. Just keep in mind, this is the same government that botched Social Security, and some of the same employers that didn’t think twice about screwing a whole generation out of its pensions. (That’s not TONY, thankfully. Enron, on the other hand…)

“Money is very emotional for people, and it’s really difficult for them to give up control,” says Wray. “A 401k requires that an employee trust his employer, trust the government and trust the financial-services industry.” Sorry, bud, but that’s a trust I just don’t have. My mother was what you might call a “mattress banker”—she ratholed money around the house, $5,000 under the sink, $10,000 in a boot. And my dad, well, let’s just say “the masses are asses” is his favorite catchphrase. So if I’m on the dole at 65, eating cat food out of a rusty hubcap, I’ll be content knowing that while y’all Steady Eddies were fastidiously stashing pennies, I was gorging myself on expensive cheese in Paris and snorting hard drugs off the backs of go-go boys in Berlin.

In other words, I was living.