Company pushing retirement saving

[tedhowe]

If you are paying yourself back with interest I see no problem in borrowing the portion that is invested in conservative funds. The borrowing I think we need to see tightened is the Federal Gov's borrowing of Social Security.

The problem with this idea, as far as I know, is that most plans don't allow you to drain one of your investment options for a loan (though thinking about it, I guess you could rebalance after the loan was funded).

I've come back around somewhat about 401K loans: I used to be somewhat for them - having good luck myself, but when you look at it historically, they are a bad idea from a cost/benefit risk/return basis.

I got lucky, that the 401K loan I did to help furnish our 2nd house was money pulled out of aggressive growth funds a few months before the dot com bust. In the long run, those funds (which were about 20% of my total 401K at the time) did better over the next 3 years than the money in the market did.

 

[disneysteve]

If you are paying yourself back with interest I see no problem in borrowing the portion that is invested in conservative funds.

There are numerous problems with borrowing from your 401k.
1. The whole point of a 401k is to save for retirement. If you look at that money as available for other general spending, you're missing the point.
2. Money you put into your 401k is pre-tax income. Money you use to repay a 401k loan is post-tax money. That means when retirement comes along, you will be paying taxes on money that has already been taxed once.
3. Due to #2, the numbers aren't as favorable as they might initially appear. Let's say you borrow $20,000 to buy a new car. You will actually repay about $23,064 with interest. If you are in the 25% tax bracket, you need to earn over $30,700 to come up with that repayment after taxes.
4. You lose valuable time for your money to be compounding and growing tax-free.
5. If you leave your job while you have a loan out, the loan may become due immediately.

Those are a few of the main reasons whey borrowing from your 401k should be a last resort, reserved for dire circumstances only.

 

[tedhowe]

I think the next step should be to tighten the rules and limits on borrowing from a 401K. It should only be an option for catastrophic situations - disability, death of a spouse, serious medical problems, etc.

I agree this is probably a good idea, but the real problem isn't loans... it's withdrawals.

I don't think there is any way you could say that someone can't withdraw their own funds - you can make it hurt a lot by increasing penalties, but those that want to take it, are going to do it anyway.

 

[tedhowe]

I don't think automatic enrollment is a terrible thing, but I seriously doubt their motives behind it are all that altruistic. I don't know the exact rules, but I know in some plans there's a limit on how much the top earners in a company can save depending on how much the lower wage earners are contributing. Therefore top management benefits if contributions go up among the lower ranks.

This may be true, but I'll ask the question: what does it matter what their motives are?

Isn't it much better to have the lower paid workers participating?

Last year I had a very unusual year from a compensation standpoint: my company was bought and I had both retention and severance bonuses. I ended up with a supplemental W-2 because some of my 401K contribution had to be refunded to me because of lower participation in the plan. (a lot of people had left the company already)

I'm well paid, but I certainly don't make VP/CEO type money on a regular basis - it would have been nice if I could have put that one time extra in the 401K plan.

 

[tedhowe]

There are numerous problems with borrowing from your 401k.
1. The whole point of a 401k is to save for retirement. If you look at that money as available for other general spending, you're missing the point.
2. Money you put into your 401k is pre-tax income. Money you use to repay a 401k loan is post-tax money. That means when retirement comes along, you will be paying taxes on money that has already been taxed once.
3. Due to #2, the numbers aren't as favorable as they might initially appear. Let's say you borrow $20,000 to buy a new car. You will actually repay about $23,064 with interest. If you are in the 25% tax bracket, you need to earn over $30,700 to come up with that repayment after taxes.
4. You lose valuable time for your money to be compounding and growing tax-free.
5. If you leave your job while you have a loan out, the loan may become due immediately.

Those are a few of the main reasons whey borrowing from your 401k should be a last resort, reserved for dire circumstances only.

As usual Steve, this is much better stated than I was able to.

I agree with most of what you have said here, and want to point out that my previous example was pure luck from a market timing standpoint that, even with these points, I DID make out better with the 401K loan, but only because the principal I had in the 401K had gone down in the overall bear market.

 

[mrsltg]

Maybe I'm missing something - we are discussing adults here, right? Grown up people who are of full mental capacity well passed the age of reason and responsibility? We must not be because people are using the word "force" and telling others what they should be "allowed" to do with their money. Using force and allowing particular behaviors are the jobs of parents and law enforcement - not companies, the government, and busy-bodies.

No, I don't agree this should happen. If you are an idiot and don't prepare accordingly you deserve what you get. If you are an idiot and want to take loans against your 401(k) to pay for a vacation, so be it. It's not my business to tell someone how they may or may not spend their money. It's *THEIR* money. Not mine. Not yours. Not Uncle Sam's.

While one person may see a certain situation as dire, another person may view something else as dire. Have we really arrived at the point where one person gets to decide for another?

What great idea is coming next?

 

[tedhowe]

Maybe I'm missing something - we are discussing adults here, right? Grown up people who are of full mental capacity well passed the age of reason and responsibility? We must not be because people are using the word "force" and telling others what they should be "allowed" to do with their money. Using force and allowing particular behaviors are the jobs of parents and law enforcement - not companies, the government, and busy-bodies.

No, I don't agree this should happen. If you are an idiot and don't prepare accordingly you deserve what you get. If you are an idiot and want to take loans against your 401(k) to pay for a vacation, so be it. It's not my business to tell someone how they may or may not spend their money. It's *THEIR* money. Not mine. Not yours. Not Uncle Sam's.

While one person may see a certain situation as dire, another person may view something else as dire. Have we really arrived at the point where one person gets to decide for another?

What great idea is coming next?

I agree that it is the individual's money, and they can take it whenever they want, but I DO like the idea of defaulting (my word instead of "force"... "force" does imply that they have no choice) to a state where they are contributing to a savings plan is a good idea.

Anyone who doesn't want to participate is still free to opt out, but research has show that MANY people don't participate because they don't want the "hassle" or simply because they didn't pay attention in their new employee orientation and didn't know that they could participate.

My own experience has shown that my spending adjusts to a level equivalent that that money that I leave "available" after taxes and automatic withdrawal savings... I think in that regard, I'm fairly typical... so if we can get more people to default to saving some percentage of their income, that is a good thing.

 

[emdav]

I am the OP. At dh's company, contributions will be invested in the target maturity model closest to the employee's 65th birthday until new elections are made.

This change was preceeded by a requirement that retirement contributions be full percentages. We were contributing a partial percentage. We could either increase or decrease (if we did nothing they would decrease.) We increased because we thought decreasing our contribution would be a step backwards.

 

[tedhowe]

I am the OP. At dh's company, contributions will be invested in the target maturity model closest to the employee's 65th birthday until new elections are made.

This change was preceeded by a requirement that retirement contributions be full percentages. We were contributing a partial percentage. We could either increase or decrease (if we did nothing they would decrease.) We increased because we thought decreasing our contribution would be a step backwards.

Wow, that is a good thing if it defaults to that type of fund. I think that is very smart and progressive of the company. I hope many companies will adopt that model.

Good for you on increasing your contribution!

 

[tor]

I don't think automatic enrollment is a terrible thing, but I seriously doubt their motives behind it are all that altruistic. I don't know the exact rules, but I know in some plans there's a limit on how much the top earners in a company can save depending on how much the lower wage earners are contributing. Therefore top management benefits if contributions go up among the lower ranks.

Im not positive but I believe the limit is set by the disparity of income not savings amount so for this to work they would have to pay them more. They motives though may not be pure more money in accounts probably means better fees from the company managing them.

The problem with this idea, as far as I know, is that most plans don't allow you to drain one of your investment options for a loan (though thinking about it, I guess you could rebalance after the loan was funded).


I've come back around somewhat about 401K loans: I used to be somewhat for them - having good luck myself, but when you look at it historically, they are a bad idea from a cost/benefit risk/return basis.


I got lucky, that the 401K loan I did to help furnish our 2nd house was money pulled out of aggressive growth funds a few months before the dot com bust. In the long run, those funds (which were about 20% of my total 401K at the time) did better over the next 3 years than the money in the market did.

You would have to rebalance but it is easier than getting the loan in most cases.

There are numerous problems with borrowing from your 401k.
1. The whole point of a 401k is to save for retirement. If you look at that money as available for other general spending, you're missing the point.
2. Money you put into your 401k is pre-tax income. Money you use to repay a 401k loan is post-tax money. That means when retirement comes along, you will be paying taxes on money that has already been taxed once.
3. Due to #2, the numbers aren't as favorable as they might initially appear. Let's say you borrow $20,000 to buy a new car. You will actually repay about $23,064 with interest. If you are in the 25% tax bracket, you need to earn over $30,700 to come up with that repayment after taxes.
4. You lose valuable time for your money to be compounding and growing tax-free.
5. If you leave your job while you have a loan out, the loan may become due immediately.

Those are a few of the main reasons whey borrowing from your 401k should be a last resort, reserved for dire circumstances only.

1 The money is for retirement and needs to be paid back for retirement that why its a loan.
2 If you need a loan the money from the bank is being paid back with taxed money and never comes back to you so why not pay yourself interest?
3 Do to #2 it is a better deal then a bank loan
4 You should only borrow the portion invested in the conservative portion of the account and the interest you pay yourself will cover the loss.
5 You are correct then you could cover the loan with a bank loan at that point.

Maybe I'm missing something - we are discussing adults here, right? Grown up people who are of full mental capacity well passed the age of reason and responsibility? We must not be because people are using the word "force" and telling others what they should be "allowed" to do with their money. Using force and allowing particular behaviors are the jobs of parents and law enforcement - not companies, the government, and busy-bodies.

No, I don't agree this should happen. If you are an idiot and don't prepare accordingly you deserve what you get. If you are an idiot and want to take loans against your 401(k) to pay for a vacation, so be it. It's not my business to tell someone how they may or may not spend their money. It's *THEIR* money. Not mine. Not yours. Not Uncle Sam's.

While one person may see a certain situation as dire, another person may view something else as dire. Have we really arrived at the point where one person gets to decide for another?

What great idea is coming next?

I am all for letting these adults act like idiots and not prepare for the future if the gov would stop taxing me to death to help out the poor old idiots that didnt save.

 

[patsal]

I disagree with it only from the standpoint of yet more freedoms being delagated by the gov't and big business. I do not believe we should protect people from their ignorance by forcing them to contribute to anything. Adults get to make decisions and should deal with the consequences positive or negative.

 

[kfeuer]

This may be true, but I'll ask the question: what does it matter what their motives are?

Perhaps not, but it annoys me when upper management acts like they care when in reality they have a vested interest in the outcome. DH's company pushes their 401K all the time, but I don't think for one second that they give a rat's behind about our retirement!

 

[dvcgirl]

Maybe I'm missing something - we are discussing adults here, right? Grown up people who are of full mental capacity well passed the age of reason and responsibility? We must not be because people are using the word "force" and telling others what they should be "allowed" to do with their money. Using force and allowing particular behaviors are the jobs of parents and law enforcement - not companies, the government, and busy-bodies.

No, I don't agree this should happen. If you are an idiot and don't prepare accordingly you deserve what you get. If you are an idiot and want to take loans against your 401(k) to pay for a vacation, so be it. It's not my business to tell someone how they may or may not spend their money. It's *THEIR* money. Not mine. Not yours. Not Uncle Sam's.

While one person may see a certain situation as dire, another person may view something else as dire. Have we really arrived at the point where one person gets to decide for another?

What great idea is coming next?

I agree with the premise here....people really need to be responsible enough to take care of themselves and their futures. However, you need to factor in that some people really just don't know any better. I have people like this in my extended family. They just don't seem to understand that a $50,000 nest egg will be gone in a matter of a few years.

There is huge education vacuum out there when it comes to retirement planning and how much people will need in order to be able to support themselves. And with the huge shift away from defined benefit plans to defined contribution plans, people in general need to wake up now, or suffer the dire consequences later. I'm for anything that can get the ball rolling in that direction.....

 

[mickeyfan2]

Maybe I'm missing something - we are discussing adults here, right? Grown up people who are of full mental capacity well passed the age of reason and responsibility? We must not be because people are using the word "force" and telling others what they should be "allowed" to do with their money. Using force and allowing particular behaviors are the jobs of parents and law enforcement - not companies, the government, and busy-bodies.

No, I don't agree this should happen. If you are an idiot and don't prepare accordingly you deserve what you get. If you are an idiot and want to take loans against your 401(k) to pay for a vacation, so be it. It's not my business to tell someone how they may or may not spend their money. It's *THEIR* money. Not mine. Not yours. Not Uncle Sam's.

While one person may see a certain situation as dire, another person may view something else as dire. Have we really arrived at the point where one person gets to decide for another?

What great idea is coming next?

This would all be fine and dandy if they did have to pay the consequences, but reality is they don't. They turn to the government to pay for their medicine, health insurance and living expenses. So they are not acting as an adult then. To force the adults who don't act like adults to do the adult thing is the governments business since the government will eventually be paying the bill.

 

[dvcgirl]

I don't think automatic enrollment is a terrible thing, but I seriously doubt their motives behind it are all that altruistic. I don't know the exact rules, but I know in some plans there's a limit on how much the top earners in a company can save depending on how much the lower wage earners are contributing. Therefore top management benefits if contributions go up among the lower ranks.

Well, everyone benefits if you ask me. When I worked at a non-profit hospital for a couple of years as a registered nurse we had a cap on what we could put into our 403b (and don't even get me started on our investment options within that thing...), It drove me crazy not being able to max out my 403b when we had the money to do so.

 

[tedhowe]

I disagree with it only from the standpoint of yet more freedoms being delagated by the gov't and big business. I do not believe we should protect people from their ignorance by forcing them to contribute to anything. Adults get to make decisions and should deal with the consequences positive or negative.

I don't see this at all as taking away any freedoms.

Each person is free to make a decision about what they want to do with their money.

The only thing that is different is what happens when they DON'T MAKE ANY DECISION AT ALL.

In that case, I'm okay with saying: if you don't actively do anything, then you'll start saving in the plan.

 

[mrsltg]

I agree with the premise here....people really need to be responsible enough to take care of themselves and their futures. However, you need to factor in that some people really just don't know any better. I have people like this in my extended family. They just don't seem to understand that a $50,000 nest egg will be gone in a matter of a few years.

There is huge education vacuum out there when it comes to retirement planning and how much people will need in order to be able to support themselves. And with the huge shift away from defined benefit plans to defined contribution plans, people in general need to wake up now, or suffer the dire consequences later. I'm for anything that can get the ball rolling in that direction.....

I'm not for anything where an individual's liberty is chipped away - be it for their "supposed" good or not. If there is an education vacuum than there should be something done to address that - I am thinking pamphlets, not law. I agree it will be a problem when the first generation goes to retire without enough funds. However, it will be a problem once- some people will wise up and save more. Those who don't will be stuck.

 

[CarolA]

DH's only problem with this law is that he says many 401K plans are set up such that 100% of the investment goes into company stock (ie. Enron, where most of the retirement plan was in Enron stock, thus now those people have nothing left). Is this true that most 401K plans are like this?

Most plans have more then one option. It's up to YOU to decide what works best. My boyfriend used to work for Mirant. (Same idea as Enron) Company management stood up there and TOLD employees NOT to put all thier 401K money in the Mirant stock option. A few months later Mirant went bankrupt and lots of folks lost thier investment. (WHY??? the handwriting was on the wall and management begged them to get their funds out, they were waiting on the "recovery"!)

 

[patsal]

I don't see this at all as taking away any freedoms.

Each person is free to make a decision about what they want to do with their money.

The only thing that is different is what happens when they DON'T MAKE ANY DECISION AT ALL.

In that case, I'm okay with saying: if you don't actively do anything, then you'll start saving in the plan.

Companies that match do so with their own stock--seems to me there is an agenda there.

 

[mrsltg]

This would all be fine and dandy if they did have to pay the consequences, but reality is they don't. They turn to the government to pay for their medicine, health insurance and living expenses. So they are not acting as an adult then. To force the adults who don't act like adults to do the adult thing is the governments business since the government will eventually be paying the bill.

Which of course is the result of the Nanny state. If we didn't pay for these things they wouldn't be there and that would eliminate the entitlement. The answer is not removing still more rights. Why not have the government say, "everyone must save 10% of their salary in a savings bank. Those who don't will be placed in jail." If we're just making laws why not go all of the way?