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Since the stock market's peak in October 2007, investors have lost as much as $2.5 trillion in their 401(k) and IRA accounts. Layer that anguish on top of existing frustrations with 401(k) plans -- that hidden fees nibble away at returns, balances are inadequate, and less than half of U.S. workers even have access to one -- and the question arises: Are 401(k)s a failed experiment, or are they just in need of tweaking?
We think that 401(k)s are a boon to retirement savers, if they can just hold fast to sound investment principles and summon some patience (see TLC for Your 401(k)). Nonetheless, it's clear that reform is on the way, says Alicia Munnell, director of the Center for Retirement Research at Boston College. "Because of the financial crisis, there's more interest in pension reform than I'd ever anticipated."
The most controversial proposal comes from Teresa Ghilarducci, a professor at The New School for Social Research, in New York City. Her Guaranteed Retirement Accounts would mandate an annual investment of 5% of wages in a government-run fund that would pay a guaranteed 3% return after inflation. Early withdrawals would not be allowed, and most of the payout at retirement would be as an annuity so that retirees wouldn't outlive their savings.
A $600 annual credit for all taxpayers would enable even the lowest-income workers to save. Ghilarducci suggested paying for the credit by eliminating the tax break for contributing to a 401(k), a break she says benefits high-wage earners. The credit would offset the loss of the 401(k) break for those making $75,000 or less. But going after 401(k) tax breaks caused such an outcry that she now says, "If I had to do it over, I would not make that part of the plan."
Critics call Ghilarducci's plan extreme and quibble with its assumptions. But she's not the only one calling for more predictability. Says Munnell: "There needs to be a new tier of retirement saving that is mandatory, that supplements Social Security and that is protected against market fluctuations."
Another scholar, J. Mark Iwry, of the Brookings Institution, says the worst thing about 401(k)s is that only about half of U.S. workers have access to a plan. His solution: automatic IRAs. Employers who do not sponsor a 401(k) would act as administrative conduits between employees and an IRA funded via automatic payroll deductions. "Automatic enrollment is even more necessary now than before the financial crisis," says Iwry. "It's one thing to decide to invest more cautiously. It's another not to save altogether."
Temporary responses to the financial meltdown could include eliminating tax penalties for early 401(k) withdrawals. Postponing mandatory distributions at age 70 would give older savers a chance to recoup their losses. Investors can expect more offerings of guaranteed-income products in 2009, including annuities and stable-value funds that provide a floor against losses. Lawmakers have recently introduced bills calling for more-transparent disclosure of 401(k) fees, and the U.S. Department of Labor is working on regulations to that effect. So we'll soon know even more about how our 401(k)s are working -- or not.
POSTED BY: ManOnBlog (January 29, 2009 05:51 PM)
How about they let me put my 401k money in a passbook savings or a CD? I hate stocks and bonds, and don't believe in gambling with my retirement in any way. Honestly, I'm just about ready to take the withdrawal penalty and manage it myself.
POSTED BY: Randy (February 06, 2009 11:23 PM)
Hey, it sure beats losing 50% of your retirement to a bunch of crooks on Wall Street. Furthermore, by having all this money invested in the stock market, we are now held hostage to these people and the government is now forced to pump trillions into the market to stimulate the economy. And for all those who don't like SS, it's all a lot of people have and it's going to be all that most people have after this fiasco.
POSTED BY: Scott (March 31, 2009 09:14 AM)
Uggh! Really Frank, do you think people manage money for free? You want cheap but will be the first to scream about service or the lack of plan education. ManOnBlog, don't buy high and sell low next time. You will go broke safely because your money won't keep pace with inflation and if you live too long the only check you'll have will be SS. Good luck.
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