Have you ever thought there has to be a better route to retirement savings than a 401(k)?
I've had a 401(k) for 30 years. It has grown, thanks to steady contributions. But along the way, the total has been up, down and sideways. Despite getting professional management in recent years, I have always had a sneaking suspicion that my retirement nest egg would have been safer -- and increased just about as quickly -- if I had put the money under my mattress.
In a recent proposal to revamp 401(k)s and individual retirement accounts, the Center for American Progress, or CAP, a liberal-leaning, nonpartisan think tank, seems to mirror my skepticism. CAP proposed a new way of structuring 401(k)s. The new plan would provide guaranteed lifetime payouts while relieving employers of management costs and fiduciary responsibilities. The plans would be organized as nonprofits and run by independent boards who would contract with investment firms. By pooling contributions, the participants would increase their investment clout and distribute the risk. No tax dollars would be involved.
CAP actually supports two proposals that would change how 401(k)s work -- its own as well as a similar one that was proposed last year by U.S. Sen. Tom Harkin, D-Iowa.
Actuaries analyzed CAP's proposed plan, compared it to a conventional 401(k) and concluded that because the CAP plan controls management costs and inefficiencies, a participant would have to contribute half as much as a worker saving in a typical 401(k) plan to achieve the same monthly income for life.
Even if you quibble with the calculations -- and you might, in part, because CAP's plan calls for buying an annuity at retirement -- the difference is astounding in the gross outcome, thanks to lower costs, pooling of funds and distributed risk.
Because employers would have few responsibilities in these plans beyond setting up payroll deductions, when employees changed jobs, they would not face the savings interruptions that they do now. Also, unless a worker deliberately opted out, he would be automatically enrolled, starting with his first job, and his contribution levels would automatically increase along with his pay.
The devil with these kinds of plans is in the details -- and the reality is that 401(k)s are big business, so they won't change quickly. But I'm encouraged enough by what I've seen to want to see more. Creative thinking about retirement planning is rare, and we need more of it.