A Rebuttal: Why 401(k) Plans still make tremendous sense for Savers
We recently read the article, "401(k) Plans No Longer Make Much Sense for Savers", published by Bloomberg Opinion. We do not recommend reading it. The fallacy starts with the title.
The author mentions that the “government offered a huge tax savings to encourage retirement savings, while today it offers little or no benefit”. The article compares generalizations about the tax environment in the 1980’s to our lower tax rates today. The author argues that because tax rates are lower today, there are fewer tax benefits for savers in 401(k) plans. That is a half-truth.
Let's rebut the title and highlight some of the reasons 401()k plans, given today’s tax rates, are indeed beneficial for investors.
Roth Savings
We have yet to meet someone who enjoys paying taxes, but we acknowledge that tax rates are lower today than they have been historically. See for yourself.
Rumor has it that Roth accounts are built for young people and those who expect their career earnings to increase in the future. However, it is often strategic for highly compensated people to have some Roth savings as part of their portfolio as well.
However, not all highly compensated individuals are eligible to open a Roth IRA account, but anyone inside a 401(k) plan with a Roth savings option may make contributions. The article failed to mention that because today’s tax rates are lower, there is a compelling reason to make Roth contributions to a 401(k). We believe that Roth savings make more sense than ever.
Choices
Regardless of the tax rate environment, 401(k) accounts allow participants to choose when they pay taxes on their contributions. As we know, We the People love choices. 401(k) accounts are different from many other savings accounts because taxes on interest and dividends are paid every year.
Contribution Limits
Contribution limits for a 401(k) account are higher than they are for an IRA account. Saving more today means having more later. Plain and simple.
Dollar-Cost Averaging
Aside from the financial advantage of Dollar-Cost Averaging, 401(k) accounts alleviate some of the behavioral burden investors face when trying to time the market. Instead of vacillating about when to let go of your hard-earned dollars, 401(k) accounts buy shares in the stock market every single pay-period.
Credit Protection
401(k) accounts are safe from lawsuits. These accounts are designed such that only a spouse and the IRS can claim on your savings. While this may seem insignificant, it is beneficial to have some of your assets protected in case of an unpredictable life event.
STAY INFORMED
Be skeptical. Get your news from a trusted source. At Human Investing, we are fiduciaries. We share the truth, the whole truth, and nothing but the truth. We operate with a higher standard of service. We are also a B-Corp, which is not a coincidence but rather a certificate that substantiates our values.
Be informed. This is especially important for your 401(k) fees and the taxes you pay.
Be proactive. Take advantage of your employee benefits. 401(k) plans make sense for a lot of savers.
