401(k)s for Everyone

It's time to make the 401(k) mandatory, with every employer offering a plan and both employer and employee required to contribute.

When the 401(k) was created in 1978, it was never intended to be the main pillar of most workers' retirement security, a burden that then fell to traditional pension plans and Social Security. But that's what 401(k)s, as well as 403(b)s and similar plans, have become. And, as now constituted, they're not up to the challenge.

An estimated 40% of all private-sector workers don't have access to any retirement plan. Of those who do, about one-quarter don't make use of it. Most who do participate are not contributing nearly enough to ensure a comfortable retirement. And most employers pay in only if their employees do first.

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There are a slew of 401(k) reform plans out there, ranging from modest proposals for automatic employee enrollment (but undercut by the employee's right to opt out) to replacement of the 401(k) by a new system run by the government or a nonprofit organization. (For a useful description of the various ideas, see a study by Robert Hiltonsmith for Demos, a liberal think tank that espouses total overhaul.)

Rather than scrapping the 401(k), I'd like to see it revised and extended to every worker. What I envision:

Coverage. Every employer of any size would be required to offer a 401(k) plan. All workers would automatically be enrolled the day they start work.

Funding. Workers would be required to make a pretax contribution to their account (say, 3% of their earnings), which would automatically rise with age and income toward 6% or more. Employers would be required to make a similar cash contribution. Companies and workers could both contribute more, with no limit. Employers could throw in some of their company's stock, too, as long as it's a small portion of the employer's contribution.

Investments. The default choice would be a "life cycle" asset allocation in which bonds and cash roughly equal the employee's age (25% for a 25-year-old, and so on), with stocks (both U.S. and foreign equities) accounting for the rest. The default investments would be index mutual funds and exchange-traded funds with low management fees.

Vesting. All funds in the 401(k) -- including the employer's contributions -- would belong to the employee immediately. No funds would be forfeited when an employee resigns from a job and rolls the money into a new employer's 401(k) plan.

Early withdrawals. Loans and withdrawals before age 65 would not be allowed, except in the event of permanent disability. The 401(k) would be reserved for retirement security only, not midlife financial distress.

Income stream. In retirement, the 401(k) balance would be paid out like an annuity, not in a lump sum, to improve the odds that it will last a long time. But any remainder would go to an employee's estate or a charity.

At Kiplinger, we practice what we preach. We automatically enroll all new employees in our 401(k) plan, and we contribute 3% of their earnings, whether they put in any of their own funds or not. Our and their contributions are instantly vested, and there are no forfeitures even if a colleague leaves us in the first year.

I'd like to see these practices and my other suggestions made universal. Some libertarians will argue that mandatory retirement saving, like mandatory health insurance, would be an imposition on their personal freedom. It sure would.

But absent a mandatory 401(k) system, those who don't plan for their own retirement will surely be a burden on compassionate others, whether family, friends or the government. And that's an irresponsible imposition on all of us.

Columnist Knight Kiplinger is editor in chief of Kiplinger's Personal Finance magazine and of The Kiplinger Letter and Kiplinger.com.