Last Updated Jan 19, 2010 5:45 AM EST
The estimable Mellody Hobson of Ariel Capital called to chide me about a post I wrote last week criticizing a recent slanted survey about 401(k)s. In addition to her role with Ariel, Hobson is on the executive committee of the fund industry trade group that sponsored the survey. Not surprisingly, we didn't see eye-to-eye on everything about the survey or the best way to improve 401(k)s. But Hobson made three good points:
- Investors largely did the right thing in 401(k)s last year. "If you read all the media at the time," said Hobson, "You'd think people in 401(k)s were running for the hills." They weren't. The survey found that 401(k) participants by and large didn't stop contributing or make wholesale changes to their investment strategy. ( Other surveys found 401(k) investors were a bit more panicky than that. ) It's not clear whether investors did so because they calmly took the long view or because they were frozen by terror. Doesn't matter. If you stuck to your guns, you have been generously rewarded since last March. Proof of principle: Investment decisions made in a panic--seling or buying--are almost always wrong.
- You can't stop contributing to your 401(k), just because the plans are imperfect. As I and others and still others have said, the 401(k) by itself has proven inadequate to fund retirement for most Americans, and there are half a dozen other reasons to question whether it should be the sole centerpiece of national retirement policy. But you can't afford to wait for the perfect plan. For now it's the best option you have.
- A lot of the problems with 401(k)s would go away if people just saved enough.There's no theoretical reason that 401(k)s can't fund an adequate retirement, but in practice they clearly haven't come close for most Americans. The single biggest reason: we don't save enough. Charlie Farrell of CBS MoneyWatch has calculated that you need to save 12% of your salary before age 45 and 15% after that. Honestly, are you anywhere close?
Yes, it would be nice if you were getting more help from your employer or Uncle Sam in sharing the risk of saving for retirement, as I think you should. But that can't stop you from saving now. You have to fight this battle with the retirement plan you have, not the one you might wish you had.