Baby Steps on Retirement to Precede Overhaul
It's only fitting that the first post Baby Boom president chooses retirement reform as one his first priorities. But while President Obama focuses on the big picture of Social Security, Congress will also take a look at tweaking the battered down 401(k) system that has become the bulk of many workers' retirement plans. Declining portfolios knocked out $1 trillion of 401(k) savings between the stock market peak of October 2007 and the market meltdown in October 2008. Since 50 million Americans have such plans, where employees contribute a portion of their pretax income into market based funds, it's no wonder lawmakers are worried that many Americans won't have enough for retirement, particularly given looming woes for Social Security.
Making matters worse about two dozen large corporations have temporarily suspended 401(k) matches since June 2008, including GM, Sears, Eastman Kodak, Motorola, U.S. Steel and FedEx. Up to 10% of the country's 56,000 employer sponsored plans will follow suit. By contrast, after the downturn that followed Sept. 11th, 2001, about 5% of sponsors cut their match. Especially hard hit will be those in troubled sectors tight on cash such as media, automobiles and tourism. While such moves will only last about a year, the losses have a domino effect because they wipe out years of future compounding that the money would have created.
The alarming situation has forced lawmakers to rethink the 30-year march that has largely shifted responsibility for retirement savings from employers on workers' shoulders. Defined benefit plans such as pensions have been eclipsed by defined contribution plans such as 401(k) plans with company matches. But both approaches are suffering in the current recession and market collapse.
Strapped companies have reneged on pension obligations. And it turns out that most workers aren't so good at taking care of their 401(k) plans. They often don't understand the choices and don't really think about the investment after they make their initial decisions. So about a quarter of employees close to retirement had about 90% of their account balance in volatile equities rather than more stable bonds, according to the Employee Benefit Research Institute.
This doesn't mean 401(k) plans are about to disappear. Rather, there will be continued efforts to make them more effective investment vehicles. Companies, for their part, have started tweaking the plans to help make them work better for employees. They are scrubbing the investment choices that have lower fees and better meets the needs employees at all stages of their careers. Many are moving toward target date funds, which gradually rebalance portfolios towards stable investments like bonds as workers age.
But Congress will push companies to go further. Expect rules that will try to eliminate hidden fees and make the costs of funds clear and a big push to better educate employees about investing and saving for retirement from independent advisers and experts.
Some policymakers want to go even beyond that and explore options that combine the security of pensions with the growth potential and lower employer costs of 401(k) plans. That will be a long time coming, but there are already some plans that could serve as models. Money purchase pension plans require employers to put in a fixed amount not tied to profits. Another option could be multiemployer plans like those seen among unionized industries such as construction. They offer portability for workers, while spreading out investment risks more broadly.