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Kill the 401(k) plan?

By Barbara Whelehan ·
Friday, November 12, 2010
Posted: 3 pm ET

This week the 401(k) plan has been under attack by forces on all sides.

"401(k)s fail millions of retirees," decries a new report from Its argument: America's retirement plans don't provide security because of their high fees. Not to mention that their "benefits vary with the size of employer and employee contributions and the volatile swings of the stock market," according to a press release from the organization. struck with a survey that found 9 out of 10 retirees, or 89 percent, believe it will be more difficult for their children to live the American dream, in large part due to "an over reliance on stock-backed 401(k) plans, which have all of the economic stability of a slot machine," says Thomas Mackell Jr., Ph.D., in a press release. Mackell is former chairman of the Federal Reserve Bank of Richmond and former White House ERISA adviser.

Meanwhile, the much ballyhooed draft report released on Wednesday by the co-chairmen of the National Commission on Fiscal Responsibility and Reform takes aim at the 401(k) plan, too. Because the report takes a shotgun approach to debt reduction, most of the media buzz has focused on the proposal's effects on sacrosanct programs such as Social Security and Medicare.

401(k) plan also a target

The draft report proposes lower income tax rates as well as the elimination of many tax credits and deductions, including retirement benefits.

"We are deeply concerned that recommendations from the draft report ... would eliminate tax incentives for retirement savings and negatively impact the ability of working Americans to effectively prepare for retirement," says Brian H. Graff, executive director and CEO of the American Society of Pension Professionals & Actuaries, or ASPPA.

Currently, in a traditional 401(k) plan, workers get a tax break in the year they make their contributions since the contributions are excluded from taxable income. And employers get to deduct any contributions they make to a plan. Plus, the contributions accumulate in the plan's trust on a tax-deferred basis.

"If it were not for the special tax rules, the employee would be paying tax on the contribution in the year it is made, and investment earnings in the individual's account would also be taxed as earned. The employer would only get to deduct the contribution when the participant pays tax on it," says Judy A. Miller, ASPPA Chief of Actuarial Issues and Director of Retirement Policy.

The problem: When they don't have an employer-sponsored plan available, Americans generally don't go out of their way to save for retirement. Only 5 percent of workers save for retirement on their own, according to data prepared by the Employee Benefit Research Institute. "By contrast, 70 percent of moderate to low-income workers earning between $30,000 and $50,000 participate in employer-sponsored retirement plans when they are offered," according to the ASPPA press release.

Says ASPPA's Miller: "We do believe that a proposal to eliminate the tax incentives for employer-sponsored plans is a threat to the employer-sponsored retirement system, and to the retirement security of the millions of workers that are benefitting from it."

I think the proposal is an idle threat, and that the scope of the rifle will move and focus on other targets. After all, there were so many Congressional hearings over the past couple of years about the dire shape of Americans' retirements.

In an interview yesterday on NPR's "All Things Considered," Jan Schakowsky, D-Ill., who is a member of the Debt Commission, distanced herself from the proposals that were drafted by the commission's co-chairman. "Something huge like the co-chairs put on the table yesterday, there's no one on the commission right now that would support that," she said.

With all its flaws, the 401(k) plan is still the best thing that Americans can use for retirement planning purposes. So it may be a little too early to write a eulogy.

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Barbara Whelehan
January 11, 2011 at 12:44 pm

Hi Dan -- A lot of organizations are critical of the 401(k) plan. The point of my post was that while the program takes a lot of heat from all quarters, it's not in any real danger of getting axed, which was the fear expressed by ASPPA. As for your retirement plan, it's great that you're taking full advantage of the 6 percent match, but if I were 25 again, I'd up it to 10 percent at least, 15 percent if I could possibly afford it.

Dan K
January 11, 2011 at 12:38 pm

The 401k is the best vehicle for retirement savings. {Not to mention that their "benefits vary with the size of employer and employee contributions and the volatile swings of the stock market," according to a press release from the organization.} What retirement plan isn't subject to swings in the stock market? Pensions are subject to one company's ability to pay it's promises, much less diversified risk than the entire market. And as any financial advisor worth a darn will tell you, the closer you get to retirement, the more conservative (and thus, less volatile) investments should be. Fixed income anyone? Lots of idiocy in this article. (For the record, I'm 25 years old and take advantage of the full 6% match. At least I know I'll be prepared for retirement.)

January 07, 2011 at 3:28 pm

The U.S. is in freefall. Our "best days" are WAY behind us -
probably back in the 50's at least. That is when there was NO competition from hardly any other country. Most countries had poorly educated people and very little industry. We had the best of all worlds. Lowering our expectations is about all that we have left. "Eat soft pine in 2009" was that year's motto. (If you can find something to rhyme with 2011 be my guest.) Maybe: "It sure won't be heaven in 2011?" Good luck to all.