The Changing Landscape of 401k Planning
Today 401K planning is more important than ever. The retirement landscape has permanently changed in ways that will penalize those who fail to do adequate 401k planning:
The last twenty years has seen a dramatic shift in responsibility from employer to employee in terms of who bears the risk of retirement. According to Boston College’s Center for Retirement Research, 63% of American households rely solely on 401k type plans for their retirement security. This means that these households are responsible for planning, investing and administering their 401k retirement accounts to ensure they will have enough to live on in retirement.
In the 1980's, the situation was much different. Back then 62% of workers were fortunate to be covered by “defined-benefit” pensions that employers guaranteed and were responsible for. Defined benefit pensions guarantee retirees a fixed monthly pension check regardless of swings in the financial markets.
| Year | Defined Contribution |
Defined Benefit |
Both |
|---|---|---|---|
| 2004 | 63% | 20% | 17% |
| 1983 | 20% | 62% | 26% |
| Source: BC Center for Retirement Research October 2008 | |||
The shift away from defined benefit plans will undoubtedly continue. The current financial crunch coupled with strict corporate funding level requirements included in the Pension Protection Act of 2006, will force more and more companies to reduce their retirement funding risks.
As a result of the shifting nature of pensions, 401k planning has emerged as a critical exercise for all households. Workers in a 401k world will bear the full brunt of investment risk and financial market turmoil. If adequate resources for a secure retirement are to be accumulated, it will be entirely up to individual households to carefully plan and closely monitor their 401k accounts.
Between October 9, 2007 and October 9, 2008, U.S. households lost $2.0 trillion dollars of wealth in their 401k and similar retirement plans. While much of the damage could not be avoided, it is likely that those who had a 401k plan to follow are faring better than those who did not. Moreover, looking ahead, the only real path to recovering losses and getting retirement funding back on track will be to develop and follow a sound 401k plan.
This site provides information, tips, news and tools to assist you in the 401k planning process.
