Is the 401 K Plan Broken and Should It Be Replaced?

Couple FinanceIs the 401 K Plan Broken and Should It Be Replaced?

Dr. Teresa Ghilarducci is on a mission to make the 401 K plan obsolete. I had the opportunity to interview Dr. Ghilarducci on my radio show. I found her to be a very interesting and delightful person. Her reputation isn’t very flattering.

She has been referred to as the most dangerous woman in the world. It was rumored that she was the person who was pushing the idea of the Government confiscation of 401 K plans. I always thought that it was a rumor and untrue. I have followed her story very closely through the years. In our interview, she confirmed that to be the case. IT was a made up rumor.

She thinks the retirement system is broken. She proposes a mandatory retirement plan that provides guaranteed accounts which acts somewhat like a social security II. Mandatory, guaranteed, government based retirement accounts fits the socialist model which seem to be her leanings.  So once again, it is up to the government to get more involved in our lives.

Is the 401 K plan really broken? Is the retirement system broken? Should the government get involved?

There are several issues I have with Dr. Ghilarducci’s argument.

First, I don’t believe the 401 K plan is broken. I believe the educational system is broken because of the refusal to graduate financially literate students from high school. It is just as important to teach money skills in high schools as it is history. Financial illiteracy is the problem. People don’t understand how to effectively invest and use 401 K plans.

The financial services industry is the next problem. They force feed self serving beliefs on the public insisting that these beliefs are the foundation for how investments work. The reality is those beliefs only make the industry richer and investors more prone to investment mistakes. Investors would see that if they had a good solid education on money.

Second, the reality is that people don’t save for retirement. That is their choice. The government has no business forcing people to save money.

Finally, guaranteed accounts produce marginal returns which is going to produce a paltry benefit. People are going to mistakenly think that this government program is going to cover their retirement.  That will be far from the truth.

I agree that there is a problem. Getting the government involved is not the answer. However, people relying on themselves and getting an education on how money works would go a long way. How about we make that mandatory?

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