â€œRunning on empty. Running into the sun but Iâ€™m running behind.â€
– Jackson Browne
Internal Revenue Code section 401(k) is the only section of the US tax code average people can cite. They know it has something to do with whether or not they can retire with dignity. Or retire at all.
The adoption of section 401(k) in 1982 changed everything.
Most companies offer 401(k) money as a benefit to their employees. Itâ€™s the primary driver of investment markets and its performance is what often leaves people pacing the floors at night, worrying about the possibility their retirement plans could be delayed or destroyed.
Until 401(k) came along, pension plans were usually defined benefit plans. Similar to immediate annuities, they paid people a set number of dollars every month after they retired for the rest of their lives.
With defined benefit plans, it was the employersâ€™ responsibility to ensure pension money was safe and properly invested.
With 401(k) plans, however, the responsibility was transferred to employees who sometimes had little or no investment experience. Employers would require employees to pick among investment options, putting them in the position to fail. And many did.
Employers decide which investment companies should handle their employeesâ€™ money. If they pick a dog with few options, employees could be out of luck.
Even worse, some employers push employees to invest 401(k) money in their own companyâ€™s stock. If the company goes broke, employees could lose their jobs and retirement savings, too.
There is a second major problem: Not putting enough money in the 401(k) to begin with.
401(k) plans give people a lot of freedom. But from my experience working with injury victims and lottery winners who get big money, Iâ€™ve learned that too much freedom isnâ€™t necessarily a blessing. Freedom without perceived consequences could lead to disastrous decisions.
Iâ€™ve always encouraged people to put the maximum amount of money into their 401(k) plans. But few do. Many put in little or nothing at all and are now looking at a bleak retirement.
Defined benefit plans encouraged people to remain with the same employer. But 401(k) plans donâ€™t.
Iâ€™ve watched tons of people quit their jobs and then blow 401(k) money before even starting their new jobs.
Itâ€™s been said that 90 percent of people with a lump sum of money will run through it in five years or less. The same statistic can hold true for lottery winners and people who receive 401(k) roll overs.
When historians study the cause of the 2008 economic meltdown, theyâ€™ll see that the switch from defined benefit plans to 401(k) plans in 1982 was a factor. It was one of many shifts that caused dramatic changes in peopleâ€™s lives and liberties. People didnâ€™t realize just how dramatic until years later.
If weâ€™re going to keep from running behind, 401(k) needs fixing.
Don McNay, who lives in Richmond, Ky., is an award-winning financial columnist for Huffington Post Contributor. You can learn more about him at www.donmcnay.com.