June 26, 2005
THE KEY TO CHOICE...:
Conundrum: how to get procrastinators to save (Randy Dotinga, 6/27/05, The Christian Science Monitor)
Who'd pass up "free" money? More people than you might think. Nearly a third of American workers fail to take advantage of 401(k) plans.
Never mind that employers typically match a worker's contributions with hundreds or thousands of dollars a year. Never mind that employees don't have to do anything to qualify other than stash money away for retirement. For a variety of reasons, including inertia and ignorance, many workers don't take the perk.
Even of those who do sign up, about 1 in 5 doesn't contribute enough to meet their companies' full match, according to a new survey by the Hewitt Associates human resources firm. [...]
Young people are especially stubborn, with just 46 percent of workers under 30 contributing to 401(k)s, according to the Hewitt Associates survey, which examined the investing habits of more than 2.5 million Americans who have the investment option at work. The rest miss the opportunity to save money, tax-free, until the IRS comes calling during retirement.
...not giving them the initial one.
Posted by Orrin Judd at June 26, 2005 11:49 PM
The key to choice is having the default one be better. Switch the default to saving the maximum, and even if you allow opting out very few will.
So why are you so in favor of savings all of a sudden? Don't you know that these people need the money to make the interest payments on a $500K condo? They'll just do a reverse mortgage when they retire.
That's how they'll afford it.
The minimal tax advantages of a 401K are far outweighed by the effect of keeping all that money essentially non-productive, not contributing to current wealth accumulation. Sure, you can touch it when you're an oldster, but aren't you better off diversifying and enjoying your money throughout your life?
Actually, bart, you can do both in some cases. My former company had a 100% match to $1500. So you could contribute $1500, have $3K at the end of the year, withdraw most of it, take the 10% tax surcharge and have your original $1500 back plus some left over in the 401(k). Yet people didn't even do that.
As for the minimal tax advantages, I don't see what you mean. My 401(k) money is just as productive as any of my other investments straight up, and when you consider I get to invest money that would otherwise have been taxed away and keep the proceeds, it seems like a big win.
On top of that, I'm also diversified since my annual savings are much larger than I'm allowed to put in my 401(k).
There are limits to its liquidity. If I can't use it, what good is it?
Also, there are limits to what you can invest in. There are plenty of places in the economy where you can get a significantly higher rate of return than the stock market and there always will be, particularly if you can take the benefit of training you've had.