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Kill the 401(k) plan?

By Barbara Whelehan · Bankrate.com
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 Demos.org. 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.

ProtectSeniors.org 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.

Follow me on Twitter: BWhelehan

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13 Comments
Anna
December 31, 2010 at 9:17 am

Reading this is like reading the tirades against people on welfare. Yes, there are people who game the system. Yes, there are people who won't take a job and just sit around and complain. But I still think there is something wrong with the economy and with people's perceptions in general if you think going from making $60k a a year job to a $20k a year job is ok. Because once you go down, you can NEVER go back up. After being out of the job market, you are no longer hire-able at the $60k a year job.

I don't say this from personal experience but from seeing people go through it. I was lucky - I lost my job but my husband kept his. We don't have kids and got through this economy ok. But I feel bad for the two income households with children who needed that extra income. This IS a real problem. Some jobs are never going to come back. And not enough jobs are coming back into the economy to replace what was lost. Add to that - job retraining programs suck.

We need a comprehensive program for retraining our workforce - not just extended unemployment benefits for people to look for a job. Wouldn't it be better to allow those on welfare to collect benefits while attending a school program? Wouldn't it be better for someone on unemployment benefits to have a REAL skill after attending training? So much of the training I've seen "allowed" are certifications given by professional firms versus letting them learn a trade such as welding or getting an associates (for those w/o degree) or bachelors (for those with associate degree).

Get people off welfare and out of unemployment benefits by retraining them into hiring paying jobs. The tax money received by these people would more than pay back what they used.

Kayfields
December 21, 2010 at 8:28 pm

Just got a letter today from my employer explaining how they're changing the 401K plan in 2011. As of January 1 they will no longer give any guaranteed match - instead "company contributions will change to an annual, discretionary match".

This is after 3 years when they did not provide any match at all. In 2010 they resumed the company match at 16% of the first 3% of employee contributions. At this rate I'll retire when I'm 167 years old.

Darrell
December 21, 2010 at 1:54 pm

401(K) does not automatically mean stocks. The individual has the choice as to where the money is invested. If you feel that company stocks are too risky, then put the money in the money market, or bonds, or whatever you feel comfortable with. Every plan I have ever seen offered several choices, and always defaulted to the safe conservative money market.

The same people that complain about how their 401(k) is invested are the same ones who refuse to educate themselves as to their choices. Without the 401(k) those same people would save zero toward retirement.

Laura
December 15, 2010 at 4:32 pm

I never trusted the whole 401K campaign and went instead with inexpensive rental properties. This has gone well for me.
The reason I never trusted the 401K thing was that it was like gambling, day in, day out, pushing more money into buying companies than those companies are in fact worth.

Phil
December 14, 2010 at 12:05 am

Renard,

Life has changed at lot over the last few years. Jobs are hard to get. Employers are not hiring. My wife has been out of work for over a year and she a MBA. It makes no sense for her to get a "low wage" job that does not even cover the cost of daycare. Because there are so many unemployed, employers are VERY picky. People do not want hire her because she is either over qualified or under qualified. And yes she has tried "temping", but again nothing.

Sue
November 21, 2010 at 12:06 pm

In this debt crises, I liquidated my 401k and applied that money to my mortgage. Being over 50, I anticipate much higher taxes in 20 years, and have no faith in the financial markets. I would rather pay my taxes on this money now, while I have the income to do so, and feel secure with a comfortable roof over my head. The huge sales efforts made over the past few decades, such as "the stock market is the only way to save for the future" and "buy as much house as you can afford - plus, the interest is tax deductible" have been debunked, as millions have lost their assets. Trust only yourself, invest in only yourself (education, job searches and home) and leave the scammers to themselves.

Andrew
November 20, 2010 at 3:00 am

the Gub'ment needs higher taxes to cover its HUGE DEFICITS.

What were those deficits caused by? Even more than the wasted $2 Trillion spent chasing Muslims around the mid-east and Afghanistan, is the huge cost of the Multi-Million $ Pensions each Government Employee seems to retire with (I mean at Fed. Level). Most retire with $50,000 to $120,000 pay per year (you do the math over 30 years, they retire typically at age 55).

Cops retire sooner at age 42 in my town, after only 20 years of work, and teachers never begin working (only work 180 days per year at most) yet retire with Fat Pensions as well, worth MILLIONS.

This is why USA is going broke. There's a solution other than raising taxes CUT GOVT. PENSIONS DOWN TO LITTLE, AS THE TAXPAYERS DON'T HAVE MUCH PENSIONS NOW EITHER.

Jo
November 17, 2010 at 12:44 pm

Taxpayers have to match what the highest earners in government earn, because they work for us. We should not subsidize the higher income earner, especially the president, the congress, or senators.

To pay for them to invest is welfare for the higher earner.

Renard
November 13, 2010 at 4:14 pm

I agree with HEBrazzell about the whining. That's what we've become, a nation of whiners. Much work IS available, but it is often not what people have been accustomed to in the past, nor at an "appropriate" pay rate. I see people come and go all the time - "this job looks great", and yet, within weeks they are gone. The job is too hard or too boring, car broke down, girlfriend is pregnant, etc. My boss likes to say, "no money makes solving one's problems so much EASIER!".

As far as the 401K, I have both a 401K from an old employer, and a Simple IRA from my current one. I've been contributing for over 15 years, and although the valuations have gone up and down, I have not wavered on contributions - I've always been a saver. I will not be happy at all if these retirement vehicles are eliminated (I don't think the politicians will dare do this, however), but even so, I will continue to save.

My wife of 22 years and I are each on our first marriage (and plan on staying that way), we have lived in our modest 1375 sq. foot house for over 13 years, and we live within our means. Quite frankly, the reason so many people are not prepared for retirement is that they do not make smart choices, and I refuse to feel sorry for them. Many choose to overextend themselves, making dumb housing decisions ("I'm sure we can swing this $300,000 house on our $60,000 income"), or constantly purchase new cars, clothes and electronic goodies. It always amazes me how many people with little money have the best cell phones, video games, and invariably, smoke like chimneys!

I feel the same way about those who can't find "suitable" employment. I just read a sob-story in the paper today about a guy who "just wants some kind of MANAGEMENT job". Years ago, when times were tough, I took temp jobs at minimal pay until more permanent work came around. In both cases, the temp employers wanted to hire me full time when I told them I had found other work.

Every one of our ancestors had life much tougher than we have it nowadays, and yet they, by and large, succeeded. I often think that my great-great grandparents would not recognize our country today, and if they could suddenly reappear, within days, would not like what they see.

HEBrazzell
November 12, 2010 at 10:36 pm

I understand the Debt Commission was to focus on reducing the national debt. It would be nice if all of the talk of raising taxes or doing away with incentives could also have included some ideas about growth. Some positive ideas and faith in our system would be a welcome respite from all of the gloom and doom and lowering of expectations. Sounds like more of the old "our best days are behind us" whine.