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Kill the 401(k)? No way

By Barbara Whelehan ·
Monday, April 8, 2013
Posted: 11 am ET

This week, President Barack Obama will unveil his long-delayed budget proposal to Congress. It involves a couple of changes to the retirement system, according to reports by the Associated Press and other news organizations.

As expected, Obama proposes using "chained CPI" as a cost-of-living measure for increasing Social Security benefits, which is a less generous inflation adjustment than the one currently in use. That change would cut spending by $130 billion over 10 years, according to the Wall Street Journal.

Chained CPI is effectively a cut to the Social Security program. But this is a concession to the political right.

The other change, a concession to the left, caps the amount of funds that can accumulate in tax-preferred retirement accounts at $3 million, according to the Journal. This limit would raise $9 billion over 10 years.

Public discussion 'rigged'

In a three-part series appearing this week on, Michael Lind, co-founder of the New America Foundation, addresses both aspects of the retirement system. He says public discussion about Social Security is rigged "to the detriment of most Americans and to the benefit of the rich and the financial industry." Obama's use of the chained CPI inflation measure "cheats elderly Americans out of the benefits they were promised," he writes.

Instead of being subject to benefit cuts, the Social Security program should be expanded, he argues. Yet expansion has become a taboo topic that is rarely mentioned.

Meanwhile, tax-favored private components of the retirement system should be abolished -- or at least curtailed, Lind writes. "If any tax-favored private savings plans are to exist at all, there should be strict contribution limits -- say, $5,000 per year -- to prevent the rich from squirreling away money and benefiting from compound interest at the taxpayer's expense."

Actually, limits were imposed on contribution levels during the Reagan era, with passage of the Tax Reform Act of 1986. Prior to enactment of TRA86, people could contribute the lesser of 25 percent of compensation or $30,000, but the act drastically reduced contribution limits to $7,000 in 1986, indexed to inflation.

"What it did was fuel executive/small-business owner interest in other programs that would allow them to actually replace a reasonable amount of their pre-retirement income in retirement," says Nevin Adams, director of education and external relations at the Employee Benefit Research Institute. "It would be nice if people would remember that these tax deferrals are just that -- folks get a temporary break on taxes because they voluntarily chose not to take some part of their current compensation in cash. It will come 'out' at some point -- unfortunately beyond the arbitrary 10-year budget accounting window -- and those deferred taxes will be paid."

Ticket to wealth for average guy

I sympathize with Lind's desire to expand Social Security. But why would Lind want to "abolish the 401(k) plan," which he calls for in part two of his series. He says these plans' benefits "chiefly go to the members of the top two income quintiles."

I don't believe that's true. Eight out of 10 Americans who participate in a 401(k) plan make less than $100,000, according to an analysis of figures from the IRS' Statistics of Income Division by the American Society of Pension Professionals & Actuaries.

The 401(k) plan gives ordinary Americans at every income level the opportunity to accumulate some real money on a tax-favorable basis. It democratizes wealth, makes it possible for average people to exert some control over their future. There are safeguards in place -- in the form of nondiscrimination rules and tests -- to prevent highly compensated employees from benefiting disproportionately more from these workplace programs than the rank and file.

"People all-too-frequently forget the important role that employers, including small-business owners, play in sponsoring these programs, in promoting them and in contributing to them," says EBRI's Adams. "And they also seem to forget that outside of these programs, there doesn't seem to be very much savings going on, much less retirement saving."

401(k) plans are a wonderful retirement planning tool, and no one should take them away from us or limit our contributions to them. Nor should anyone try to limit how much we can keep in them.

What do you think? Should 401(k) plans be eradicated? Are you unhappy with the budget proposals that affect our retirement plans? Or do you think they're fair?


Follow me on Twitter: BWhelehan.

Barbara Whelehan is a co-author of "Future Millionaires' Guidebook," an e-book written by Bankrate editors and reporters. It is available at Amazon, Barnes & Noble, iBookstore and other e-book retailers.

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April 10, 2013 at 11:50 pm

Lind is clearly uninformed if he truly believes that 401K's chiefly benefit more wealthy Americans. I retired last year from a well-known communications company, and my wife also retired from a radiology group last year. We are far from being wealthy Americans, but the savings from our 401K plans are a very substantial portion of our retirement. The government has made a mess out of every other part of retirement they have involved themselves in - they need to keep their greedy little paws off 401K's!!!!!!!!!!!

April 09, 2013 at 7:52 am

401k's ended up replacing mostly, secure pensions. On average the market allows approx. a 2% gain on your contributions. This is hardly the same as the old pension that promised 2 or $300.00 a month (for example). Fact is the new math has most of us Gen X'ers confused, especially when articles throw out numbers mixed with Percents. Realize a 2% gain on your money = $20,000.00 on a million dollars. What people don't concern themselves withis where does this 2% gain come from? Always the loss of someone elses money. This would typically be the worst investor, least educated...Likely, the least that can afford to gamble in the market. 401k's stole our pensions. 1 bird in the hand is better than 2 in the bush.

Eric Jaffa
April 08, 2013 at 2:09 pm

SIMPLE IRAs favor people with high-incomes.

Companies are required to match 3% of an employee's salary.

If someone who makes $50,000 and someone who makes $500,000 each put $10,000/year into a SIMPLE IRA, then a company adds $1,500 for the employee with the lower salary and $10,000 for the employee with the higher salary.

The employees who need the least help get the most help.

The matching amount should have nothing to do with salary. Instead, companies should be required to match whatever employees put in. The maximum employee contribution to a SIMPLE IRA in in 2013 is generally $12,000.

Lana Jimenez
April 06, 2013 at 2:02 pm

Ms. Whelehan, you could have at least done some homework before writing: "He says these plans' benefits "chiefly go to the members of the top two income quintiles." I don't believe that's true. Eight out of 10 Americans who participate in a 401(k) plan make less than $100,000..."

Just because 8 out of 10 Americans participating in a 401k make less than $100,000 doesn't mean that same group of people receives the majority of the monetary value of that benefit. The wealthy will receive a disproportionate share of this benefit because they are putting more money into their 401ks. Yes?

And what about all the Americans who don't participate in a 401k, either because they don't have enough money or their workplace didn't make it available to them? A LOT more Americans are in that situation than you apparently realize. With wages for average Americans having been stuck i.e. no pay increase for the last three decades, the fact is many Americans haven't been able to save enough money to put in a 401k or IRA.

The fact is, this year, the government will spend $165 billion to subsidize individual retirement savings, and 80% of that benefit will go to the top 20% of earners. So Lind is right, these instruments for encouraging savings -- which seemed like a good idea when they were set up many years ago -- unfortunately have turned into yet another vehicle for the better off to benefit at the expense of everyone else. Americans who have little savings but pay taxes in fact are subsidizing those wealthy people who have enough money stuffed into their 401ks and IRAs. It is a great example of a well-intended govt program having perverse effects.

I would hope you might consider the consequences of these policies a bit more deeply.

April 06, 2013 at 9:02 am

I can't understand Mr. Lind's statement: "...there should be strict contribution limits -- say, $5,000 per year -- to prevent the rich from squirreling away money and benefiting from compound interest at the taxpayer's expense." Imposing a dollar amount so low would drastically reduce the amount most people would have saved at retirement, and INCREASE their need for Social Social Security.

I will reach retirement without ever achieving a six-figure income, my husband is unemployed right now, and I am not independently wealthy. But by enrolling in a 401(k)and contributing 10 to 15 percent for the past three decades, I will have a far better retirement than I would have if I relied solely on Social Security.

April 05, 2013 at 10:29 pm

I would be furious if the government decided to raid, eliminate, or even TOUCH any of my retirement accounts! I first heard about this several years ago, after having read an article about an "economist" named Teresa Ghilarducci and her name has been anathema to me ever since!

I have various investments, as well as a 401K from my old employer, and a Simple IRA with my current employer of 11 years. Both retirement plans are with very well-known, low-cost brokerages, and I love them both. Everyone says that I should roll my 401K into an IRA, but I say why? Makes no sense to me, because my former employer pays most of the costs, and the investment choices are excellent.

I went to a financial planner from a different, but also very famous investment company. I showed her my personal financial statement, which I figure each month. She was impressed, but focused like a laser on that 401K!!! Her one and only recommendation to me was that I roll it over into an IRA with her company. She would help me find the best plan for my needs for "only a 1% to 3% annual fee" (depending on the "plan")! Needless to say, I told her thanks, but no thanks!

April 05, 2013 at 7:28 pm

401's are ok. Just DO NOT borrow from them. VERY BAD!!!!