retirement

Mending the cracked nest egg

"Congress should not mandate specific investment options or distribution methods or attempt to regulate exposure to investment risk," said Stevens in written testimony.

"Nor should Congress undermine the ability of plans to pay for services using asset-based fees. Finally, reliable data make it clear that the costs of 401(k) plans and mutual funds in those plans are very reasonable. Congress should reject attempts to scrap or undermine the existing system or fundamentally alter its structure."

In other words, things are just fine the way they are. Stevens' suggestions for improvements build on the current structure and include the following:

  • Improve disclosure about fees, risks, performance, etc., of 401(k) investment options (but "voluminous and detailed disclosure will not serve the interests of participants").
  • Consider requiring 401(k) plans to adopt automatic enrollment and automatic increases of contributions.
  • Make savings plans less complex so that more employers offer them.

Stevens proposed "Model T," a retirement plan like the 401(k) that would include automatic enrollment and simple diversified investment options, but employers would be relieved of "burdensome plan testing." He's referring to discrimination testing that plans must undergo to ensure that employees at all income levels participate in a plan rather than just highly compensated employees.

In other words, the Model T represents capitalism on all cylinders, with few solutions that address risk.

Impose a new order 
The problem with the status quo, in a nutshell, is that money managers extract value rather than create it, says John Bogle, founder and former chief executive of the Vanguard Group. "The investor feeds at the bottom of the costly food chain of investing."

Bogle criticized everything from "unwise and often speculative investment choices," to a financial system rife with conflicts of interest and greed. The major flaws in our 401(k) system, he says, are inadequate savings, too many opportunities for participants to raid their accounts, inappropriate asset allocation, and excessive investment costs -- not to mention high distribution costs for participants who annuitize their nest eggs.

So what's the solution? Get rid of every other type of defined contribution plan out there and consolidate investments in a single plan available to everyone. It should be overseen by an independent Federal Retirement Board that would act in the best interests of plan participants. Offer only low-cost broad market index funds through private providers. Balance risk and return through diversification and sensible asset allocation. For instance, the percentage of fixed income could match the age of the participant (a 60-year-old investor would have 60 percent in bond funds) with stock index funds making up the balance. Finally, mitigate longevity risk (the risk of outliving your money) by offering low-cost annuities at the time of retirement.

This solution would shake up the system, and we'd have to give up regular IRAs, Roth IRAs, 401(k)s, 403(b)s -- all the defined contribution plans that we've gotten to know.

But the dialogue is only getting started. The solutions offered by experts give us fodder to masticate as we work hard and contemplate our future theoretical, if not actual, retirement.

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