Does the 401(k) deserve an F?

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The 401(k) is under siege lately, and it’s not the first time. During the financial crisis, Congressional committees held hearings during which all the pimples and warts of the 401(k) plan were exposed.

A few days ago, the Wall Street Journal ran an article called, “Retiring Boomers Find 401(k) Plans Fall Short.” It cited the results of an analysis conducted for the Journal by the Center for Retirement Research at Boston College. Its conclusion: Americans suffer a savings shortfall which will hamper their ability to maintain their standard of living during retirement. The problems cited in the piece include:

  • A too-low deferral rate over the years, resulting in not enough savings.
  • Too much exposure to stock during the market collapse.
  • Too little or bad advice.

The median 401(k) plan held $149,400 in assets in 2009, and the median income of households was $87,700 that year, according to the Journal. Just eyeballing those two numbers reveals the nest egg won’t suffice to carry someone through retirement, even factoring in Social Security.

A liberal perspective

In the current issue of The American Prospect, Teresa Ghilarducci, an economics professor, says 401(k)-type retirement plans are a failure for six reasons. In her words:

  • Only half of the work force has access to a retirement account or pension plan.
  • The plans are voluntary, making retirement savings rates too low and too inconsistent.
  • 401(k) and individual retirement account management fees are too high.
  • Financial markets are too volatile.
  • Many people cash out their accounts to meet immediate needs.
  • And lopsided tax breaks go mainly to the richest taxpayers.

Her solution would be Guaranteed Retirement Account plans funded by workers, employers and the government with built-in provisions that would protect the accounts from greedy brokers, wild markets and the workers themselves.

Wisdom to know the difference

Some of the 401(k) flaws Ghilarducci cites are beyond our control. Plan fees, for instance, have been shrouded in secrecy for many years. A couple of years ago, I attended a conference of retirement industry professionals where there was much hand-wringing over this issue. Panel speakers wondered aloud how in the world they’d be able to explain the complicated fee structures to plan sponsors, let alone plan participants. But beginning next year, at long last, they’ll have to disclose fees in terms everyone can understand — in dollars.

Financial markets are beyond our control, as are unfair taxation policies. Most politicians, no matter their leanings, appear to believe that raising taxes is a crazy idea, regardless of an imminent government shutdown or looming national debt crisis.

But certain things are within our control: the amount we invest for retirement, the types of investments we choose and the discipline to avoid raiding our retirement plans before we actually retire.

I asked Ted Benna if the 401(k) plan can be the main pillar on which Americans can depend for a successful retirement. Ted Benna is known as the “Father of the 401(k) plan” because he discovered back in 1981 the loophole in legislation that enabled businesses to offer these retirement plans for their workers. They were never intended to be a complete retirement solution, but rather one leg of the proverbial three-legged stool.

Benna says there’s nothing inherently good or evil about 401(k) plans — or old-fashioned pension plans, for that matter. “Both have positives and negatives,” he says.

“That said, yes, 401(k) plans could provide a sufficient level of retirement income when combined with Social Security, provided each worker starts saving early, saves enough, achieves investment results that have matched historical long-term returns, avoids raiding this money for other purposes, doesn’t retire too early, and either manages this nest egg wisely during the drawdown stage or converts all or a substantial portion to a guaranteed life annuity.”

So, the 401(k) plan is not a failure. It’s a valuable retirement planning tool that we can exploit to enhance our future lifestyles. No one promised it would be easy.


Check out Bankrate’s Retirement Realities series. We’ll be adding stories to it throughout the year.

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Written by
Barbara Whelehan
Contributing writer
Barbara Whelehan is a contributing writer for Bankrate. Barbara writes about a range of subjects, including homebuying, real estate, retirement, taxes and banking.