I don't like 401(k) either

Felix Salmon hates the 401(k), and he explains his reasoning here. His strongest argument is the data, which shows that the first generation of retirees who grew up with these individual retirement savings accounts find themselves with meager retirement savings (average: $120,000, excluding those with zero).

I have always disliked 401(k), and here are some reasons:

I hate the myth of individual control. These accounts (just like health savings accounts and other similar things) are sold to us as an expression of individual freedom and choice. But it is a mirage.

First, it is never a good idea to chop up money into little pockets. The same banks who every day praise the benefit of diversifying our portfolios also lobby the government to establish these individual accounts. If you earn $60,000 a year, and get paid bi-weekly, then your paycheck is $2,500 less tax withholding. If you put 5% of your earnings into the 401(k), then every two weeks, you put away an extra $125. Imagine you then split the $125 into five or ten investments. It just doesn't make much sense.

And this doesn't even consider the per-trade fees that Charles Schwab, or E*Trade, or any of those firms charge us, as a percentage of the expected gains from your trade. Transaction costs are where individuals will always lose to funds.

Second, how many of us can truly beat investment professionals at the investment game? Most of us don't have the time or inclination to be monitoring our portfolio 24/7. The professionals have access to better information. They are able to react faster when something unexpected happens. In fact, our too-big-to-fail banks routinely have zero days of trading losses in a given quarter when they trade on their own accounts. (This does not mean these banks will perform the same when it comes to our money.) I'm aware that most professional fund managers are shown to do no better than some simulated simple-minded strategy. Is there a study that takes the investment performance of the average Joe and compare them to the average fund manager?

Third, moving from a defined benefit plan to a 401(k) is to shift risk from institutions to individuals. When we were sold the myth of individual control, we were also gifted the Trojan Horse of financial risk. Now, we are responsible for our own individual bad decisions. This is an important point. More people in the pool lowers the average risk.

Fourth, the 401(k) is regressive. The lower your salary, the smaller your biweekly contribution. The risk borne by the individual is higher when the principal is smaller.

If those are not enough, individual control is simply a lie, and becoming more so each year. Most of us find that the banks that run the 401(k) only allow us to put our money in one of the funds they administer. They charge a fee to put the money elsewhere. In one case, I was told if I really want to invest in funds not in the approved list, I must first buy one of the designated funds, and then transfer the money to the fund I really want. Needless to say, the in-and-out is not free. There is another company who matches my contribution but in company stock, which is the opposite of diversification; and if I want to transfer the money to a different asset, I have to pay fees.

It's a steep price to pay to enjoy that "individual control."