Can 401(k)s get you where you want to go?

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It seemed like such a great idea. Workers could set aside some of their own money to save for retirement. But now the original advocates of the 401(k) plan say it didn’t work out so well.

In a recent Wall Street Journal story, the people who originally encouraged the use of the 401(k) now say it was a fail.

Some of the things they said that went wrong include the death of the pension, increased longevity, poor savings rates and over-optimism.

The workplace retirement plan should never have been viewed as a replacement for pensions because they operate differently, says Joshua Gotbaum, a guest scholar at the Brookings Institution and former head of the U.S. Pension Benefit Guaranty Corp.

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We’re not investment experts

Pensions succeeded, Gotbaum says, because of all the expert advice and administration: They had investment professionals investing the money, with an eye toward the costs of investing. The companies running pensions also decided how much to invest and provided a lifetime annuity – so people didn’t have to worry about how long they were going to live and how to invest for that.

The workplace retirement plan, on the other hand, leaves almost all the decisions up to the employee. The employer can encourage workers to save by offering a match – but that’s optional. The employer can also offer an easy, no-decision way to save, through a target-date fund. But that’s also optional.

No lifetime income

Pensions offer income for life after someone retires. But in the workplace retirement system, Gotbaum points out that employers have a very difficult time even offering annuities because of the regulation and responsibility.

“The federal government discriminates in favor of mutual funds and against lifetime income products or annuities,” Gotbaum says.

As a result, almost no workplace plan offers the option to invest in something that will give lifetime income.

Joe Ready, director of institutional retirement for Wells Fargo, agrees that 401(k) plans need to do more than just help people accumulate assets. Products and services that produce income in retirement are vitally needed.

We’re not good savers

Part of this is the fault of employers. Thanks to the Pension Protection Act, more people are saving through a workplace plan, Ready says, “(but) we know that contribution rates aren’t where we’d like to see them.”

The problem is that employers often don’t get their workers into the plan saving at an adequate rate.

Over the last 30 years, the percentage of total payroll that goes into savings in the U.S. has stayed about the same, according to Gotbaum. But people are living longer.

If the money had been going into traditional pensions, the amount of money would have gone up, he says.

In other words, the level of savings is actually below what’s needed.

It’s too easy to cash out

When you leave a job, the easiest thing to do is take a lump sum payout of your 401(k). It’s usually the first choice on the forms that you receive. This is a real problem, especially for younger workers. Taking the payout means more than losing some to a penalty. If a 25-year-old could keep assets in an investment account, the compound savings would be considerable.

So that’s the bad news.

But we offer suggestions from the experts on how to improve 401(k) plans.

“Whether or not people intended 401(k)s to be a primary source of retirement savings, nonetheless they are,” Gotbaum says. “And what we have to do is not pretend that we can wish them away, but make them a better form of retirement security. And that is entirely feasible.”

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Jill Cornfield

I'm a reporter at Bankrate, talking retirement – my own as well as yours. Sign up for my free newsletter.