OK, the 401(k) retirement system didn’t work. What’s next?

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?

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3 thoughts on “OK, the 401(k) retirement system didn’t work. What’s next?

  1. As usual, folks miss the point. It is not that 401Ks are a bad way to save (not that they are great), but that the whole idea of passive investing is just crazy. Mutual funds as a good investment in my opinion is the greatest fraud put upon the public since the Warren Commission. That you can depend upon someone else to make good investment decisions for you is wrong as we get taught again and again. Diversification as an investment strategy and/or asset allocation strategies, fail to reduce risk and guarantee low rates of returns over the long run. The data is out there if anyone takes a little internet time to find out.

    That the Wall Street Times runs an article so clearly against Wall Street interest is great, but it leaves blank the question as to what workers can do about their situation.

  2. The idea of the 401(k) still sounds reasonable, given the assumption that the United States economy grows indefinitely and that corporations are the biggest part of that. The 401(k) incentivized people to save for retirement in what was assumed to be a stable part of the economy – equities of large companies.

    The problem is, if our economy reaches a major turning point (knowledge economy transition – manufacturing sector + badly run housing bubble – banking debacle + two expensive wars + Boomers retiring) AND corporations merge to the size of dinasaurs, the sacred cow of investing in giant private industry gets made into gristly school cafeteria hamburgers.

    Business does well (ostensibly) at making profit, but has no vested interested in providing a social safety net to millions of Americans. Our collective mistake was putting so much of the national welfare on the back of the profit performance of a very few organizations.

    Back to the drawing board…

  3. Look at the history of market returns, it is eneven with twenty year periods of good returns followed by long stretches of bad returns. If you are depending upon the return to get you to a decent retirement, then you better be lucky so you are in that twenty year good return period or the whole idea falls apart. It is a crazy ideologically driven strategy that is failing. Active investors aren’t dependent on the entire market’s returns, so can achieve good returns in good years and bad or at least limit their losses in bad years. Then you have a shot at it.

    This current stock market swoon is really no different than the six before it! The difference is the individual has been left to deal with the bear market and is not psychologically or intellectually prepared for it!

    This is the real crisis and it is rearing its ugly head as we speak!

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