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Are 401(k)s too risky to depend on for retirement?

Judy and Bob Dienell review their financial statements  Saturday, Oct. 25, 2008, in Braselton, Ga.
Judy and Bob Dienell review their financial statements Saturday, Oct. 25, 2008, in Braselton, Ga.

In a nation with increasing retirement issues, investing in a 401(k) is becoming a greater gamble, according to Frontline.

Retirement savings are becoming more complex. In 1970, some 42 percent of American employees were promised they would get a good percentage of benefits and salary for retirement from employers.

The retirement industry is big business. Americans are urged to start saving younger and younger. This is good advice as only one in three Americans have employer provided retirement plans and only half of those who do begin saving early report being able to save enough to live on in retirement.

Retirement businesses seek younger investors because the more that is invested, the more money the businesses make.

As for financial advice, Martin Smith, a correspondent for the Frontline article, said financial advisers use something called the suitability standard. This means they don’t give the worst advice, but they don’t necessarily give the best advice, either.

Fees from IRAs and 401(k)s can create a big drain on investments, according to the article. The Obama administration proposed a rule that would create a fiduciary standard to limit the fees.

Robert Hiltonsmith earns $61,000 a year as an economist. He is 31 years-old and is trying to save 10 to 15 percent of his salary each year in order to be able to retire without having to rely on food stamps. He said he hopes that someday he will be able to retire.

Over a 50-year period, a 2 percent annual fee on an investment could eat away 63 percent of what would have been in the retirement savings without any fees, John Bogle, founder of Vanguard, told Frontline.

Problems also come when savers take money from retirement accounts. Millions of baby boomers are facing 401(k)s without enough savings to be able to retire, or unable to until their late 70s. The issue comes from both not saving enough, and using the money as emergency funds.

However, 401(k)s are among the most heavily watched and protected investments under the law, according to a Journal Sentinel article.

The Employee Retirement Income Security Act (ERISA), which was passed in 1974, protects retirement savings from personal bankruptcy.

It also requires the retirement contribution pulled from the paycheck to be deposited in a trust account. The account is completely separate from the employer's and the financial institution's assets.