Discussion: Is the 401k plan dead?

A recent Bloomberg article went viral in the personal finance world — it reads as an obituary for the 401k plan. This article inspired response articles from other major media outlets and tons of discussion on Twitter.

The Bloomberg headline reads “401(k) Plans No Longer Make Much Sense for Savers”.

I’m not a tax professional, and I recommend that you speak with a a fiduciary financial planner before making any investment decisions. However, I’d like to offer my initial thoughts.

I’m curious to hear what you, the reader, think about this!

Summary

First, here are author Aaron Brown’s main points:

  • Using a median-earning married couple with two children as an example…
    • Marginal federal income tax rate was higher in 1980 than today
    • The capital gains tax rate was higher in 1980 than today
    • The likely retirement bracket tax rate was higher in 1980 than today
    • Interest rates were higher in 1980 than today
    • Therefore, the tax benefit of the 401k plan in 1980 was higher than it is today
  • Low-cost index funds are more widely available today than in 1980 (as an alternative to 401k plans)
  • Suggestion that it would be better to make it easier to roll 401k plans into self-directed IRA plans
  • Suggestion that it would be a better incentive for consumers if there were new tax advantages built into the 401k structure

My opinion

I’ll tease my own response here, but I’m genuinely interested in other opinions too.

It’s not 1980

Brown constantly references 401k options in 1980 as a point of comparison. I think that’s a fair reference point for how the tax environment has changed over time.

However, today’s investors aren’t choosing between the option to (1) invest in 401k plans today or (2) invest in 401k plans in 1980. Brown is not comparing investor’s actual alternatives/substitution options, so it’s a form of a strawman argument.

Instead, Brown should have compared today’s 401k options to investor’s current alternatives. Is the 401k really worse than other investment account type options?

Again, speak with a tax professional before making your own investment account choices, but in my opinion (while Roth accounts can be a good option for some) many families may still find tax-deferred accounts to be a good option.

Dismissing the employer match and tax deferral

Brown mentions tax deferral and the 401k employer match, but then dismisses them.

The 401k plan is still superior to taxable brokerage accounts in these ways, even if it’s less of a tax advantage than 1980.

Not everyone is married and has 2 kids

This one speaks for itself. Brown’s argument is only based on numbers from a sub-set of the population.

401k mutual fund fees are lower now too

Yes, index fund fees are super low now. I love that and recommend that readers consider exchange-traded funds (ETFs) for any self-directed investments.

But the index funds in 401k plans are lower now than in 1980, too.

So what do you think?

Are Brown’s points valid?

Is the 401k plan dead?

Do you still consider the 401k to be one of the best retirement planning options available to American workers?

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