401(k) Plans and Their Discontents

Posted on September 30, 2009


A couple of recent articles take a critical look at 401(k) plans. While many people – especially readers of this blog – may not agree that 401(k) plans are fundamentally flawed, the arguments presented in both articles are worth considering.

One of the articles is entitled “Workers discover 401(k) plans are failing them in retirement.” The article cites a number of worrisome statistics, including this rather depressing nugget:

At the end of 2006, with the Dow Jones index above 12,000 and booming toward its 14,165 peak the next October, half of private-sector workers in 401(k) plans had account balances of less than $25,000.

A figure like that might not be quite so worrisome, since it can include many young workers just starting out with their investments. But half of the workers with less than 10 years to go before hitting the traditional retirement age at 65 had nest eggs of less than $40,000. Over the course of a typical 20-year retirement, that would yield $204 a month, before taxes — and before the stock market crashed.

“That’s good for dinner and a movie but it’s not retirement support,” says Teresa Ghilarducci, economics professor at New York’s New School for Social Research.

The second article is an opinion piece entitled “The modern retirement plan: Cross your fingers.” Here the author notes that when 401(k) plans were introduced, they were intended to supplement other sources of retirement income – primarily, traditional defined benefit plans – not replace them all together. But now, the author writes, “. . . Americans are on their own. Retirement has become largely a matter of aggressive personal savings and investor savvy. It doesn’t matter that most of us are unqualified financial planners. . .”

It’s interesting that given the beating that 401(k) balances have taken over the past two years there haven’t been louder calls for reforms. Clearly that’s due at least in part to Washington’s focus on healthcare; after all, there are only so many huge issues that Congress and the White House can deal with at one time. But even with healthcare reform dominating Washington, there are a number of retirement related bills in various stages of the legislative process (Towers Perrin has an excellent overview of pending bills and pieces of draft legislation currently making their way through Congress). I suspect that once the healthcare debate quiets down, legislators will turn their focus to pension reform. When that does finally happen, it’s likely there will be significant changes to 401(k) and other employer sponsored retirement plans.