Is It Time To Reinvent The 401(k) Or Our Expectations Of It?

The 401(k) plan has failed.  At least, that’s what an increasing number of articles and pundits would have us believe. 

It seems to me that unreasonable and unintended expectations have been placed on the plan that derives its name from the only section of the Tax Code that most people know.  I wrote an article on this topic last year for the Journal of Pension Benefits; but with the emergence of more recent negative press, I couldn’t resist commenting.

By now, it likely comes as no surprise that many U.S. households are projected to fall short of their retirement needs based on current account balances and savings rates.  However, I fail to understand how the 401(k) plan can be blamed.

A couple of quick Google searches led me to the following information on U.S. spending for 2009:

• $165 billion on consumer electronics
• $101 billion for beer
• $7 billion at Starbucks
• $10.5 billion on movie tickets
• $307 billion at casinos (a 57% drop from the prior year)

That’s almost $600 billion in these 5 categories alone in the year following one of the most precipitous economic declines in our history…and somehow, it’s the 401(k) plan’s fault that people don’t save enough?

Before you scramble to hit the comment button, I know these are broad figures that don’t consider variables such as non-U.S. residents spending money in the U.S., wealthier individuals with increased discretionary spending capabilities, etc., but this still paints an interesting picture.

The 401(k) plan, from its inception, was intended to a savings plan used to supplement other retirement plans, not a retirement plan in itself.  According to the ICI, 401(k) plans held nearly $3 trillion in assets as of September 30, 2010, and statistics from the Employee Benefits Research Institute continue to show that individuals covered by a workplace retirement plan are nearly 20 times more likely to save than if they do not have access to a plan.  Sounds pretty successful to me.

Yes, the average American needs to accumulate more retirement assets to achieve a comfortable retirement, but to somehow scapegoat the plan that has been so successful in getting people to save at all just seems short-sighted.

 

Comments

[john t]

The problem isnt with the 401k, as the 401k was intended to be one leg of the 3-legged stool. The problem is that one of the legs, the db plan is going the way of the Edsel, and no matter how we try to dress up the 401k, it is still just one leg of the 3-legged stool.

[Marc A. Schoen, ERPA, QPA, CRFP]

A 401(k) plan was a cash or deferred option addition to a 'qualified' plan. It is superimposed upon a 'qualified' plan. It was not designed to be a stand alone retirement plan. When it morphed, I don't remember. The deviation is more in the mindset of the beholder. Reinvention means going back to the basics of what is a retirement plan. In the olden golden days, a retirement plan was a privilege of employment not a trendy right of employment.

[Devin]

It has basically turned into a savings account for people, its no longer used for retirement. I take phone calls to help people with there 401k plans, very few people are actually using the 401k to save for retirement only. 401k plans should have more restrictions as to how people can take money out of the account. Plans should only allow hardships for Safe Harbor reasons, in-service withdrawals at 59.5, and termination withdrawals. Loans should not be allowed for any reason.

[Jim Greenspan]

Well traditionally the "three legged stool" was comprised of 1)Employer funded pensions
2) Personal Savings
3) Social Security

With the demise of DB plans the 401k is more of a combination of stools 1) and 2) with GREATLY reduced Employer funding.

So it is now more like a 2.25 legged stool which is almost certainly goping to tip over

[Kurt Dietrich]

The 401k plan was originally concieved (and served its original purpose well) as a retirement plan to supplement the primary retirement plan at that time, the defined benefit plan. Since db plans are being phased out, the k plan needs to take on the new role of primary retirement plan for most employees. As such the "new" k plan needs to evolve and be enhanced to include a (db like) life income benefit which will put a third leg back on the stool.
DB plans haven't gone the way of the buggy whip because the life income benefit was not valuable to participants. Their demise was due to other factors having nothing to do with this form of benefit.
If practicioners don't incorporate a life income benefit back into retirement plan design then we truly "threw the baby out with the bath water" as we watched db plans terminate and fade away.

[Lawrence Laier]

It is worth noting why the DB plan has gone the way of the Edsel - Employers felt compelled to shift market risk and volatility from themselves to employees. The 401(K) plan is predictable in terms of its costs. It is not predictable in terms of its outcomes. In effect, we have shifted professional management of retirement resources to millions of "asset managers" with minimal training. It is a lot to ask people to defer gratification to both save money for the long term and to manage their investments in a sophisticated way. As those of us who administer 401(k) plans know, many employees see them as little more than a revolving line of credit.

If employers are as concerned about the outcomes of retirement plans as they are about costs, they will clearly need to rethink the structure of the programs. Such things as more restrictions on loans, life income benefits, etc. would be logical. My sense is there is little appetite among employers for substantial change. They are happy to have delegated that responsibility to their employees. There may be even less appetite among employees, who are focused on maximizing their current income.

[Robyn Kurdek]

Common wisdom used to dictate that the key to increasing participation and savings rates was through effective participant education and communication campaigns. In your experience, is that still the case? Are there ways we can modify those campaigns to be more targeted and effective? Is the message about the importance of maximizing an employer-sponsored retirement savings plan getting through, or is it merely "noise" at this point?

[Adam Pozek]

For more comments on this post, check out the 401(k) group on LinkedIn - http://linkd.in/f11iQj.