This Article is About
downward spiral
retirement planning
droves
stock market
illusion
speculation
social security
How Safe Is A 401(k)?
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401(k)'s have been promoted as one the best savings vehicles for retirement planning but how safe is a 401(k)? They are relatively safe as long as three things continue to stay intact:

  1. More people are paying in than withdrawing
  2. The underlying stock holds its' perceived value
  3. The Government keeps their hands out of it

This may be pure speculation on my part, but there seems to be good reasons to be concerned about all three of these factors and why they may not stay this way much longer.

1.) When the 401(k) was enacted after the signing of ERISA people who never owned stock were suddenly making weekly investments in the stock market. When cash began to flow into the stock market, the value of stocks began increasing which reinforced the idea that they where the smart investment. 401(k)'s, much like Social Security, are stable as long as more people are contributing than collecting.

We are reaching a tipping point in the U.S. where retirees will soon outnumber workers. If there are 8 people collecting to every 3 paying in, it may become tricky to keep that market stable. When people become fearful, they tend to flee from a market in droves creating a downward spiral that can be very difficult to recover from.

2.) The value of many stocks have always relied on the "greater fool" theory meaning that you can always sell your stocks at a profit as long as you can find a greater fool than you. That is not to say that only fools buy stocks, buy it is an interesting way to look at it. The price of most stocks is based more on market mood than fundamentals. As long as people perceive value in a stock, it continues to appear to be a good investment. This brings us back to our first problem. If there are more people selling than buying, the illusion of value quickly disappears.

3.) One of the featured benefits of having a 401(k) is that you can hide a portion of your taxable income from the government. Your investment grows tax free until you begin withdrawing the money. This is not a bad deal as long as the government stays out of it but can they continue to do so? It's their game and their rules so I am always suspicious. There have been reports of government talks to force people to invest a certain portion of their 401(k) in government bonds.

I believe that most people really understand that our government is in way over its' head with debt. Buying U.S. bonds is not as attractive as it once was but the government needs to sell more of them than ever. So they will probably do what they do best. That is, to force people to buy things they don't want to fuel the cost of a government who acts only in the interest of the government!

Is anybody else concerned about this or am I just being paranoid? I'd love to hear from you.


Street Talk

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