An Employee Looks Back At The 401(k)

By Cyril Tuohy
InsuranceNewsNet

Amid the gloom and doom headlines about ill-prepared retirees, this is a happy retirement investing story. But this happy story is one that has transpired quite by chance.

My first experience with the defined contribution system dates back to 1991. That was when, three years out of college, I snagged my first full-time job working as a reporter for a small daily newspaper in southern New Jersey.

The paper holds one of the most memorable newspaper titles in the industry. It was called Today’s Sunbeam. It declared itself the community’s “good morning” newspaper.

Even if some of my big-city friends weren’t sure whether I worked for a newspaper or for a bread distributor, I couldn’t have cared less.

The job paid a salary before taxes of $14,533 a year, I was getting some of the best training in local journalism I could have hoped for, and the job came with benefits.

One of those benefits was something called a 401(k), which no one at the office had really heard of before.

My editor at the time mentioned in passing that the 401(k) was something that I should take advantage of. The human resources department included information about it in their welcome package.

Off I went and set aside a portion of every paycheck into my 401(k). I don’t recall the percentage I set aside, but I remember the company making a matching contribution. I had enough good sense to recognize that it was free money and I took advantage of it.

Although I started my job in February 1991, my records indicate I didn’t begin contributing to my 401(k) until August 1992.

That month, the records show, I put aside $25.99 of every weekly paycheck. Net pay after taxes and my pension contribution: $198.21 a week.

It was my first investment and I told my father about it. He, too, was impressed and thought it shrewd that I sock away money for my retirement. He was 66 at the time and well aware of the power of compound interest.

I was 25 years old and the brochures distributed by human resources were enough for me: I sank my retirement savings into an aggressive growth fund run by Twentieth Century Funds. I don’t recall that I received any formal investment advice, and there was certainly no discussion about fees.

I’m sure the company had a toll-free number, but I never once picked up the phone to speak with anyone there.

At the age of 24 in 1991, I belonged to the leading edge of Generation X. Unbeknown to me, I had become an early adopter among workers offered 401(k) plans, which were then gaining in popularity among employer-sponsored plans.

Since I had never heard of a defined benefit pension plan, I had never even considered another savings option. I figured a 401(k) was enough for me.

I understood the general concept of higher risk and higher reward, and that the more years you had before retirement, the more risk you could take.

I also assumed that every dollar in principal that I put in would be there for me, with interest, when I reached age 80 — if I lived that long.

Rarely did I compare notes with colleagues about what I was doing with regard to taking advantage of the 401(k) plan. The conversation simply didn’t come up. We had other things on our minds.

Like millions of other Gen Xers in their 20s, I was mostly carefree. Unlike millions of millennials today, I had neither college debt nor credit card debt.

There was no Internet in those days, at least it wasn’t available to us. Early versions of Microsoft Excel were on the market, but none of us owned or were supplied laptops so we didn’t have access to the software and compound interest graphs and pie charts that are so easy to come by today.

I did exactly as I was supposed to do: Put away a percentage of my income and forget about it.

At the end of 1992, I joined a larger newspaper which paid overtime. It was owned by the same company that owned my previous newspaper, so the retirement account assets carried over without my having to move money in or out.

My records show that out of my 1993 calendar year earnings, $1,546.40 went toward my defined contribution. Gross earnings that year: $20,485.

In calendar year 1994, I put away another $2,374.77.  My 1995 earnings records show that I’d set aside $3,165.78 that year.

The retirement balance on the mutual fund statements was starting to add up.  Because I kept setting aside principal year after year, my balance always seemed to me to be growing. I never paid attention to the market and I still had not lived through a recession.

In 1998, I left New Jersey for New York and joined a large trade publishing company that used Putnam Investments to manage its retirement accounts.

I moved the retirement balance — more than $31,000 — from my New Jersey employer into a Roth Individual Retirement Account (IRA) opened at Vanguard, where my father had his retirement holdings.

In New York at my new employer, I again put away between 12 percent and 15 percent of pretax income into the Putnam New Opportunities fund, an aggressive growth fund.

By then, the Internet had exploded and the dot-com bubble was in full swell. A 401(k) seemed fail-safe.

Then, I did exactly as I wasn’t supposed to do.

Every week or two for about a year, I would go online and watch my account grow — which is what advisors tell you not to do.

I wasn’t alone, of course. Millions of employees were checking their balances as well and the defined contribution system was giving us the burden of managing our own retirement funds.

I’d read enough to know that markets move up and down, that investing for retirement is a long-term proposition, and that any middling retail investor such as myself had better focus on the job instead of checking the retirement account balances.

But the Internet was new, compound interest calculations and modeling scenarios were popping up on mutual fund and financial media websites. That made it easy for employees to get an idea — for the first time and without any paid outside help — of accumulated balances after 20, 30 or 40 years of investing.

Even when the Nasdaq collapsed in March 2000, because of the contributions I had made, my account kept growing and I was immune to the sting of a contracting market. When I lost my job two years later, the account balance had grown to more than $35,323.

I transferred that into a new rollover IRA at Vanguard in 2007.

Over the next decade, from 2003 to 2013, I squirreled away from 12 percent to 17 percent of pretax income in the 401(k) at my next job. Again, when the 2008 recession hit, the balance kept growing because of the growth in the principal.

Then, in February 2013, my retirement contributions hit a dead end after I was terminated. No more employer-sponsored benefits, no more automatic withdrawals, no more company matches. It was a moment I knew would come.

The 401(k) account balance, which stood at more than $110,000, was transferred from Fidelity to my rollover IRA at Vanguard.

It was the end of the line, at least temporarily. I have not contributed to my IRA since, but dividends and the capital gains keep my rollover and Roth IRAs growing. I’m planning to contribute again later this year after slaying a remaining medical bill or two, but I don’t know whether I’ll ever be able to set aside 15 percent of my income again.

No matter. The funds are reaping the golden — if counterintuitive — rule of long-term investing, which is that it’s more important to set aside money early than it is to save later.

I’ll turn 49 next month. In a year, I’ll be eligible to join AARP. Better to experience a couple of fallow years at 50, than to wait to save money at 27 instead of at 25.

The employer-sponsored defined contribution model has served me well. There is no more convenient way to build up a retirement nest egg than through automatic payroll deductions—although I have no idea how much in fees it has cost me.

Looking back, I’ve done better than most people, judging by retirement surveys. Yet good fortune has befallen me more by happenstance than by starting with a clear accumulation strategy, which my father occasionally talked about with me.

I did make two mistakes, though.

The first was not setting aside money as soon as I could at my first job instead of waiting nearly a year and a half to begin saving.

The second was not setting aside enough cash in liquid savings. Obsessed, or perhaps bludgeoned by the retirement fund industry’s focus on accumulation, I’ve found myself short of cash once or twice, and have had to seek temporary help from family.

Personal treasury management isn’t the responsibility of retirement investing, of course, but it raises the question: Where are the liquid savings features that deduct a portion of payroll straight into a bank savings account?

Whether I would have done as well under a defined benefit plan with a professionally managed pension, I’ll never know.

I do know this: I’ve done better than most because I’ve been fairly disciplined, yet this new experiment in defined contribution retirement funds has left me looking back on a somewhat haphazard journey.

My retirement funding experience leaves me with a “cobbled” feel, and I’m not sure that’s the best way for our nation to approach retirement funding.

Without a doubt, though, I also was lucky.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

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Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].