For years the conventional wisdom has been to plow money into 401(k) plans for retirement. Anyone who didn’t was considered a financial dunce. Well, so much for conventional wisdom. The 401(k) system has “serious shortcomings,” says The Wall Street Journal (“Big slide in 401(k)s spurs calls for change,” 8 January 2009). Employees have seen their retirement accounts drop, 20%, 30%, 44% in the economic downturn.
“This is the biggest test that the 401(k) plan has seen to date, and it has failed,” says Robyn Credico, head of defined-contribution consulting at Watson Wyatt Worldwide, noting that many baby boomers are ready to retire. “We’ve put people close to retirement in a very challenging position.”
The timing couldn’t have been worse.
[E]ven when workers make good choices, a market meltdown near the end of their working careers can still blow their savings to smithereens.
“That seems like such a fundamental flaw,” says Alicia Munnell, director of Boston College’s Center for Retirement Research. “It’s so crazy to have a system where people can lose half their assets right before they retire.”
The U.S. Congress is beginning to take a look at retirement and 401(k) policy, starting with an October 2008 committee hearing with a variety of witnesses.
Some proposed setting up “universal” retirement accounts, which would cover all workers. One such plan called for establishing accounts that would receive annual contributions from the federal government, and would offer a guaranteed, but relatively low, rate of return. Another proposed automatically investing contributions in an index fund that holds stocks and bonds, with the mix getting more conservative as workers approach retirement.
U.S. Rep. George Miller (D-Calif.), the chairman of the House Education and Labor Committee, recently issued the following principles for future 401(k) reform:
- Expose excess fees that Wall Street middlemen take from workers accounts.
- Bring young and low-wage workers into the system at a higher rate through automatic enrollment for employers already offering 401(k)s.
- Ensure that retirement accounts have diversified investment options with low fees, including low-cost index funds.
- Ensure workers have access to reliable independent investment advice.
- Reduce vesting periods and improve portability of 401(k) accounts.
But is this just minor tinkering with a system still dependent upon the wildly fluctuating stock market (not much different from gambling)? Do we need more radical reform that provides a solid financial foundation for retirement?
- Are Retirement Savings Too Exposed to Market Risk?
- The failure of our 401(k)s
- Deloitte white paper, 2007: Future of 401(k)s (.pdf)
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