Posted on October 13, 2008

401(k) Plans Taking Hits From All Sides

By now, the fact that the recent stock market volatility is wreaking havoc with 401(k) plans is old news. But the drop in asset values isn’t the only thing plaguing the popular accounts.

According to a recent Wall Street Journal article,

  • Many investors in the pre-retirement phase have far too much of their nest eggs invested in stocks. This means that if a downturn hits, they may suffer large losses with little or no time to recoup them.
  • Companies have increasingly been pushing so-called “target date” funds as a simple solution to the asset allocation problem. But these funds have recently been performing poorly.
  • Downturns scare many workers into dialing back or eliminating contributions to their 401(k)s. This means that they may miss out on the very buying opportunities that could help them recover from losses more quickly.
  • Employers sometimes reduce or eliminate their “match” or contribution during difficult times.

The last possibility is particularly worrisome, since it entails, essentially, robbing employees of their safety nets just when they’re teetering on the tightrope.

At AAFR, we believe that the inherent risks in 401(k)s do not in and of themselves make them bad investment vehicles, but rather, that 401(k)s should only be depended upon for supplemental income. Workers should be able to depend on Social Security for basic income regardless of market conditions. This is why we stand in particularly strong opposition to Social Security privatization.

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