401 (k)

from Wikipedia, the free encyclopedia

401 (k) , 401k, or 401k plan means an employer -sponsored model of private retirement savings in the United States . The model owes its name to its anchoring in Section 401 (k) of the Internal Revenue Code , the main part of American tax law. In 2016, 55 million Americans had retirement benefits through 401 (k) programs.

functionality

Average balance of 401 (k) accounts with the asset manager Fidelity Investments

Employees can voluntarily deposit part of their monthly income (as of 2018: up to $ 18,500 per year) into a separate 401 (k) account. For this purpose, a contract is usually concluded with a private investment company. The employer pays the money directly. Employees can opt for various investment strategies such as equity , mixed or bond funds and freely choose their personal asset allocation ; they bear the entire financial market risk. During the savings period, neither the money transferred nor any income ( interest , dividends ) must be taxed as income. Many employers share a percentage of the payments; some employers also automatically create 401 (k) plans for their employees, provided they do not explicitly object to this (“opt-out”). In 2000, an estimated 97 percent of all U.S. firms with more than 10,000 employees offered a 401 (k) plan. If the employer changes, the 401 (k) savings can be taken with you without tax. From the age of 55, funds can be withdrawn from the 401 (k) plan. The withdrawals are then subject to income tax (which is usually low in old age) .

Advantages and disadvantages

From the employee's point of view, the plan has the advantage that the taxation of money is shifted into the future. The compound interest can work freely and in the course of several decades, large sums of money can come together. At the end of 2019, over 200,000 of the active 401 (k) plans were worth more than $ 1 million . In addition, the system allows the individual citizen to decide how risky his investment should be. The investment strategy is not fixed and can be changed at any time. A 401 (k) plan also allows employees to flexibly increase or decrease payments depending on their personal situation. In addition, the process is very transparent, as every citizen can find out about the content and status of his or her retirement provision at any time.

For the state, 401 (k) plans have the advantage that the system of state pensions and retirement provision is relieved by private provision. In contrast, there are losses in income tax.

A disadvantage for employees is that substantial parts of their own assets are not available in liquid form. Before the age of 55, the funds in the 401 (k) plan are inaccessible or difficult to access.

A common criticism of 401 (k) plans is that laypeople without basic knowledge of the stock market have to make far-reaching investment decisions for their own retirement savings. A 2002 study showed that more than 8 million savers had more than 20% of their 401 (k) savings invested in their own company's stocks. They underestimated the risk of an insufficiently diversified portfolio and, as a result, risked losing large parts of their retirement savings in the event of default. An extreme example is the bankruptcy of the Enron company in 2001. 47% of employee savings were invested, sometimes exclusively, in the company's own employer's shares. In the course of the bankruptcy, the share value fell from over $ 80 per paper to a few cents. Some of the savers suffered a total failure and lost their entire private pension scheme.

Research suggests that even negative examples like Enron have little impact on saver behavior. Despite the intensive media coverage, little changed in the behavior of other 401 (k) investors:

“The current paper ads grist to this mill by showing that a year of headlines about decimated 401 (k) accounts did little to drive investors out of employer stock. Our estimates suggest that the media publicity surrounding the Enron / Global Crossing / WorldCom bankruptcies reduced the fraction of 401 (k) assets held in employer stock by at most 2 percentage points, from 35% to 33%. ”

“This paper is grist to the mill of this debate, as it has been shown that years of headlines about decimated 401 (k) accounts have done little to encourage investors to place less trust in their employers' stocks. Our estimates suggest that media coverage of the bankruptcies of Enron, Global Crossing and WorldCom reduced their employer's stake by no more than 2 percentage points , from 35% to 33%. "

Reception in Germany

There are repeated calls to promote private, capital market-oriented old-age provision in Germany. 401 (k) would be such a model. However, the Scientific Service of the German Bundestag considers the extensive introduction of a 401 (k) model in Germany to be "implausible":

"A complete transfer of the old-age pension programs tailored to the USA to Germany does not seem plausible, given the different social security systems."

Individual evidence

  1. ↑ a b c 401 (k) and Roth IRA Retirement Security Programs in the United States. (PDF, 227kB) Scientific Services of the German Bundestag , August 7, 2019, accessed on February 17, 2020 .
  2. ↑ Kathleen Elkins: How much money Americans have in their 401 (k) s at every age. CNBC , May 23, 2019, accessed February 18, 2020 .
  3. ↑ Michael Ferber: Private provision is becoming increasingly important. Neue Zürcher Zeitung , June 20, 2018, accessed on February 17, 2020 .
  4. ↑ a b c Pembe Bilir and Tanza Loudenback: 26-year-old with 130,000 euros in his account says: This is the best investment of my life. Business Insider , December 15, 2019, accessed February 17, 2020 .
  5. ↑ a b c d e Gottfried Heller: Germany's old-age provision has to become even smarter. Die Welt , April 15, 2016, accessed on February 17, 2020 .
  6. ↑ a b Beatrix Wirth: Private old-age provision as a normal case. Die Welt , December 6, 2001, accessed February 18, 2020 .
  7. ↑ Jessica Dickler: The number of 401 (k) millionaires hits a fresh high. CNBC , November 14, 2019, accessed February 18, 2020 .
  8. ↑ a b Alicia Munnell and Annika Sundén: 401 (K) s and Company Stock: How Can We Encourage Diversification? (PDF, 117kB) Center for Retirement Research at Boston College , July 2002, accessed on February 21, 2020 (eng).
  9. ↑ Carsten Volkery: The fraud of millions on pensioners. Spiegel , December 21, 2001, accessed February 22, 2020 .
  10. ↑ David Laibson and Brigitte Madrian : Are Empowerment and Education Enough? Under-Diversification in 401 (k) Plans. Brookings Papers on Economic Activity, February 2015, accessed February 22, 2020 .
  11. ^ Friedrich Merz calls for shares for everyone. Die Welt , June 11, 2019, accessed on February 18, 2020 .