Morningstar - Q3 2020 - 10

Dispatches

Retirement MythBusting The 401(k)
system is a success
worth building on.
PHILLIPS CURVE

Don Phillips
A pervading myth distorts the history of
retirement. Too many commentators envision
a halcyon past where fatherly corporations
provided robust pensions for all workers. They then
contrast this imagined utopia with a dire
picture of helpless individuals today either lacking
access to a retirement plan or bailing on the
one they have and squandering their retirement
savings. This rose-colored-past/depravedpresent view of the world seems to be ingrained
in human nature, dating back at least as far as the
Roman historian Livy, who contrasted the
virtuous days of Rome's origins with the sordid
time of his writing. But while such views may
be innate, they are not helpful if one seeks to build
a better tomorrow. It's better to start with
the facts.
Today's critics are quick and correct to point out
that small 401(k) plans fall far short of
ones offered by big corporations. Their costs
can be exorbitant, as detailed by John Oliver on
Last Week Tonight when he lambasted
the unattractive choices facing a small employer
seeking a quality plan for its employees. This
situation must be addressed, and the Secure Act,
which took effect Jan. 1, 2020, may do so,
as it allows unrelated small employers to band
together in multiple-employer plans. But
if smaller plans deserve scorn, the tremendous
improvement in large plans surely merits
praise. Many of these plans once relied heavily
on company stock, but over the past two decades,
they have evolved into well-diversified, lowcost packages of quality offerings, giving millions
of savers easy access to a powerful tool
kit for wealth creation. If big plans can become

Morningstar Q3 2020

world-class so quickly, surely smaller plans
can be improved in the years to come. The road
map is there.
It's important to remember that smaller
employers didn't move from offering wonderful
pensions to suddenly serving up rotten
401(k) plans. Their retirement offerings have long
been deficient. The great mythical pension
plan only existed for those who had long
careers at big companies that happened to have
good, well-funded plans and managed to
stay in business throughout their employees'
working and retirement lives. That benefited only
a fraction of the private workforce. For many
Americans, these great pension promises fell flat
or were nonexistent. Similarly, in the case
of many government employees, such as those
working for Chicago and Illinois, this utopia
of a secure retirement was built on promises
whose cost of fulfillment would later devastate the
very communities those governments and
employees were pledged to serve. Clearly,
the notion of past pension perfection misstates
the reality.
Similarly, the notion that today's retirement
system is irrevocably broken overstates the facts.
Yes, we need increased accessibility, and
we should consider safeguards to keep those
enrolled from squandering their savings. But we
shouldn't overlook the many beneficial ways in
which retirement planning has evolved.
Employees today who lack access to a 401(k) plan
have the option of an individual retirement
account, something unavailable in the imagined
retirement utopia of yore. Moreover, Social
Security continues to provide a needed safety net,
offering a third source of retirement security.
While those shut out from today's 401(k) plans
deserve much of our attention, some focus should
be given to the tens of millions of savers
who greatly benefit from them. I meet regularly
with people who are delighted that they
have saved tens or hundreds of thousands of
dollars toward their retirement. There are even
growing numbers of 401(k) millionaires.
These investors take just pride in the fact that
they contributed to their own success.
Unlike pension-fund participants who are passive

and uninformed players in their retirement
planning and who become ever more bound to
the corporate or government entities that
control their future, 401(k) or IRA investors garner
a true sense of accomplishment, developing
discipline and increased investment skill, as they
have an active role in securing their future.
In addition, they maintain the latitude to advance
their careers as they see fit. They can switch
employers if a better opportunity comes
along, whereas in the old pension system, such
a move would come with crippling consequences
to their retirement security. Again, the notion
of a splendid past and a depraved present in many
cases rings false.
A pernicious aspect of the decline-in-retirementfortunes myth is its underlying belief that
individuals are incapable of navigating retirement
planning, but that governments and corporations, despite being composed of the same
individuals, somehow are. Irresponsibility is not
a quality exclusive to individuals; corporations and
governments can be every bit as capricious.
Many of the blue-chip companies of yesterday
have collapsed. Corporate raiders have
decimated numerous pension plans. And governments often change the retirement rules
midgame, greatly altering the retirement security
of their citizens. All parties can wreck the bestlaid retirement plans.
If we are to secure better retirement planning,
we need to move beyond yearning for a fictitious
past. We must expand access for those not
participating, limit the damage that undisciplined
savers can do to their nest eggs, and stabilize
the rules for those who are engaged. We must also
pursue better ways to morph accumulated
savings into secure, long-term income streams,
recognizing that investing is a means to an
end, not simply a contest to amass the biggest
fortune. In short, we must make retirement plans
work as diligently as their participants do. K
Don Phillips is a managing director with Morningstar. He is
a member of the editorial board of Morningstar magazine.

Morningstar - Q3 2020

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