Question

Why is there a market failure in the 401(k) market? (Hint: read chapter 8 and its description of imperfect information) Write at least 2 paragraphs.

Answer 1

For the more than 50 million Americans with 401(k) accounts, last month the big stock market drop was bad news. Many of these investors are still recovering from the 2008 crash and rely on a market upswing to repair their lost land. However, even if stocks recover, most 401(k) holders will never raise enough money for safe pension provision on these accounts.

In the past 12 years, 401(k)s have been struck by two big bond crashes and many Americans have withdrawn money for the purpose of covering their emergency expenses from their 401(K). Pensioners expect millions of baby boomers in the middle class to fall into poverty in old age or close to poverty.

In the past 12 years, 401(k)s have been struck by two big bond crashes and many Americans have withdrawn money for the purpose of covering their emergency expenses from their 401(K). Pensioners expect millions of baby boomers in the middle class to drop into or close to poverty in the age of old age. First, there is an inherently inefficient 401(k) system of individualized accounts. Each 401(k) holder pays charges to the companies that manage their individual accounts, while the traditional pension funds invest worker contributions in large pools which keep the costs of the administration low.

Never covered all workers with the 401(k) system. About 40% of the workforce have no access to a 401(k) account, and other employees opt out of participating or make small contributions. With such vast holes in which 401(k)s are covered, it is incorrect to consider this scheme as the main private social security supplement.

The choice of the consumer does not compensate for the 401(k) system failures. Educated customers can buy 401(k) plans with the lowest costs in a genuinely competitive environment and move on to other plans. However, polls found that most Americans don't have an idea of the 401(k) fees. And it can be difficult for people to change plans because employers select the plans