Wednesday, September 12, 2012

Should the 401(k) Be Reformed or Replaced?


Published: September 11, 2012

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JOHN GREENE worked for 30 years at an Oscar Mayer plant in Madison, Wis., deboning hams and loading boxes of hot dogs. His 401(k) plan grew to $60,000, and soon after retiring he began withdrawing $3,600 a year from it, money that allowed him and his wife to take what he called a wondrous two-week trip to Scotland, his ancestral homeland.

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Andy Manis for The New York Times

LOSS The Greenes lost about 70 percent of their 401(k) savings in the market downturn. Some experts wonder if the 401(k) rules need to be revised.

But when the financial markets plunged four years ago, his 401(k) dropped to less than $18,000.

“We lost more than 70 percent,” he complained, even though a highly recommended investment firm was managing his 401(k). “They’re very risky.”

For Mr. Greene, 77, the money he withdrew each year provided him and his wife some breathing room — and comforts — on top of the $29,000 they receive annually in Social Security and pension payments.

But though it has rebounded a little, his nest egg has declined so much that he withdraws far less than he used to. The result: “We can’t do trips like Scotland anymore,” he said.

Like millions of Americans, Mr. Greene has suffered losses from his 401(k) even as such plans have largely supplanted traditional pensions and become the central pillar of America’s employer-sponsored retirement system, with 60 million workers participating in them.

Now, although Social Security and Medicare generate far more political heat, a quieter, more nuanced debate of large consequence engulfs 401(k)’s, the voluntary, privately financed plans that some see as a savior of American retirement and others see as an impediment: Should 401(k)’s be fine-tuned and expanded or should they be replaced entirely? And for many looking to retirement after the Great Recession, there is this pressing question: What to do about woefully underfunded 401(k)’s now.

David L. Wray, president of the Profit-Sharing/401(k) Council of America, an association of companies that sponsor retirement plans, said that 401(k)’s — and the Individual Retirement Account system that many people roll their retirement money into — worked well, despite some shortcomings. These 401(k) plans now hold $3.3 trillion in assets, seven times the level two decades ago. “If the goal here is to accumulate money, this system has accumulated more money than any system ever,” he said. “It’s been an incredibly effective accumulator of assets.”

But many investment experts and economists give the 401(k) system low marks. They note that fewer than half of the nation’s private sector workers are in 401(k) plans and that nearly a quarter of businesses with more than 100 employees do not offer 401(k)’s. Moreover, many Americans put only 3 percent of their earnings into 401(k)’s when investment experts often recommend saving 10 or even 12 percent.

The typical worker age 55 to 64 had just $54,000 in a 401(k) in 2010, according to a new report by the Center for Retirement Research at Boston College, and households with workers in that age group had $120,000 in retirement savings on average, if the money rolled into I.R.A.’s was included. That $120,000 is less than one-fourth the savings recommended by many retirement experts. Moreover, the center calculated, that $120,000 would provide an annuity of a paltry $7,000 a year.

Teresa Ghilarducci, an economics professor at the New School and a leading critic of 401(k)’s, said, “Every good retirement system needs to have adequate accumulation for individuals, the money needs to be invested appropriately and the payout needs to meet the needs of retirees for life. Unfortunately, 401(k)’s fail in all three categories.”

She criticized giving $80 billion in tax breaks annually to 401(k) participants to nourish a system that does not provide secure retirement savings for all. Moreover, she said, 60 percent of those tax breaks go to the top 10 percent of earners — people who would probably save even without the tax breaks.

John C. Bogle, the founder of the Vanguard Group and an esteemed figure in the world of investing, also voiced sharp criticisms. “We have a 401(k) system that is profoundly flawed even as it has moved to the position of pre-eminence in our retirement system,” he said. “There are elements of the 401(k) system that are just unacceptable if you’re trying to build a system that accumulates for retirement.”

In his new book, “The Clash of Cultures: Investment vs. Speculation,” Mr. Bogle rattled off a list of 401(k) shortcomings, among them excessive Wall Street fees, misguided asset allocation and failure to deal with longevity risk; for instance, someone living to age 92, but emptying a 401(k) by age 82.

Mr. Bogle ridiculed how easy it was, despite withdrawal penalties, to take money out of 401(k)’s — whether for a down payment on a house, to send children to college or to buy a new rug. Likening 401(k)’s to savings plans, he said making it so easy to withdraw money was the opposite of what retirement plans should do.

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