IMHO: "Myth" Information

For the most part, the  article  was little more than a tired rehash of criticisms that continue to be trucked out with disappointing regularity by those who, IMHO, should, by now, know better.  

Here's my take on five "myths" that keep being told about the 401(k).

(1) You can't save enough to retire on in a 401k.

I'll concede that when one looks at the "average" 401(k) balance today, it's hard to imagine how anyone could live out the year, much less retirement, on that sum ¹ .   Even if you look at the average balance of a near-retiree (rather than an average that includes the accounts of 25-year old savers), it's hard to see how most could live for another 20 years on that balance.

That said, there's a difference between saying you can't save enough and you haven't saved enough ² .   Every situation is unique, but ultimately, a voluntary savings system "suffers" from the reality that it is voluntary.   That isn't the fault of the 401(k), however—a design that basically allows workers to defer taking (probably spending) and being taxed on pay today as they prudently set it aside for retirement.   

Of course, we all know the 401(k) was never designed to be the sole source of retirement income (even its critics acknowledge that).   IMHO, those, like the authors of that recent Time article, who want to "retire" the 401(k) because it isn't ready to carry a load it wasn't designed to do are ignoring the critical role it is playing—and will play—in making a more financially secure retirement possible for millions.   They might just as well fault the design of a car that fails to reach its destination because the driver refused to fill the tank.

(2) It's a tax dodge for executives.

One of the most pervasive arguments of 401(k) critics is that the plans are little more than a tax-sheltering scheme for the very highly paid, one into which only they can afford to contribute to the maximum amounts the IRS permits for the plan.  

Now, it is true that higher-compensated individuals generally do have more disposable income, and thus they are significantly more likely to hit those caps.   It is also true that those who are paying income taxes do benefit more from a system that provides for a deferral of those taxes, and those with higher incomes (who pay higher tax rates) benefit even more.

On the other hand, as tax dodges go, the 401(k) is a pretty inefficient way to go, IMHO.   Those higher-paid deferrals are hemmed in by discrimination tests, limits on considered compensation, and a hard cap on the annual amount that can actually be deferred into these programs on a pre-tax basis, in addition to maximum annual additions.   So, take a second; add up how much (little) can actually be deferred into these programs by those executives.   Then, compare that to the base pay of folks who qualify as "highly compensated" (which, in many areas of the country, is all-too middle-income)—and think about what they'll be trying to replace (at least in part) with the $16,500 (plus match and maybe another $5,500 if they're old enough to qualify for catch-up).  

And then, hope that they don't do that same math, and figure that there are better ways to spend company resources than in keeping up with a 401(k).  

⁽¹⁾ those "average" 401(k) balances also don't include the accumulated balances from other 401(k) plans that workers roll into IRAs.

⁽²⁾ there remains a heated debate about just how much people need to save in order to retire - see " Scare Tactics "