I am writing this as a direct response to Michael Reese’s article in Kiplinger Magazine on June 9th, 2016 (Is a 401(k) Really the Best Way to Save for Retirement).
In short, I respectfully disagree with the premise of his article and find the blanket, one size fits all suggestions dangerous to the average employee’s financial health!
In today’s society, controversial headlines grab all the attention (ask Donald Trump). But when it comes to personal finances and saving for retirement, we as Certified Financial Planners® have a fiduciary obligation to provide our clients with the best advice for their particular situation. The problem with blanket, one size fits all recommendations, like this one is they lead the majority of readers to think the advice applies to them. The reality is that these strategies work best with the disciplined saver or someone who is already maximizing their savings plans to begin with! Not the average person.
The author suggests that savers should look into the following alternatives to maximizing their 401(k) plan:
- Only contribute to the company match in a traditional 401(k) or max out the Roth 401(k) if available.
- Contribute any additional funds to a Roth IRA if you qualify (or explore the backdoor Roth strategy, again, if you qualify).
- Consider max funding life insurance as an alternative to the 401(k).
He has some valid points like the advantages of a Roth 401(k), how a 401(k) creates an additional tax liability in the future, or recommending a little known backdoor Roth strategy (which few 401k participants would be eligible for). In my opinion, these recommendations would rarely be implemented and would do more harm than good to the average employee. I have one simple reason why I disagree with his suggestions about limiting 401(k) contributions and considering alternatives. Human behavior!
The truth is that the average employee doesn’t understand how much they need to save let alone understand the complex set of rules surrounding retirement plans. This is why we have a retirement crisis in this country as defined benefit pension plans continue to disappear and the burden of savings rests on the employee. Simply put, the best thing any employee can do is to start saving as much and as early as possible.
According to the recently released retirement report by the bipartisan policy center, “only 61 percent of eligible employees participate in plans that require workers to take action to enroll, while the participation rate for automatic-enrollment plans has reached 89 percent. The effects of automatic enrollment are especially pronounced for younger workers.”
In summary, if an employee stops contributing to their 401(k) beyond the employer match, there is a slim chance that they will remember to contribute to other plans on an annual basis. Due to human behavior, the automatic nature of the 401(k) is its most valuable feature for the average investor.
Finally, I will leave the max funded life insurance scheme for another day. Like the author said, “be careful with this one.”
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Steve joined Planning Solutions Group in 2015 and specializes in providing comprehensive financial plans to high-net worth individuals and families. During his career he has realized that his true passion is for building long-term relationships with clients and helping them through the various financial challenges they may face. Steve’s mission is to act as a true advocate for his client’s financial well-being.
Prior to joining Planning Solutions Group, Steve spent four years as a CERTIFIED FINANCIAL PLANNER™ with Keeney Financial Group in Columbia, MD. He has also had the privilege of working for Convergent Wealth Advisors, Legg Mason and NVR, Inc. Steve currently holds the prestigious CFP® designation and has his FINRA series 7 and life and health insurance licenses.
In addition to providing clarity and confidence in all financial matters to his clients, Steve is passionate about giving back to the community. He currently lives in Baltimore City with his new wife and spends his free time rock climbing, travelling, cooking and volunteering with The Associated, a Jewish Philanthropic organization. To email Steve:firstname.lastname@example.org