From the February 2009 issue of Treasury & Risk magazine

401(k)s Come Up Short

While the Obama administration hasn't revealed its suggestions for retirement savings account policy, change is coming. With Starbucks, Motorola, Sears and more than 20 others suspending matching funds, reform is sorely needed. Economic hardships, meanwhile, have forced 20 percent of U.S. workers to halt contributions, says the American Association of Retired People. And calculates that defined contribution (DC) plans have lost $1.1 trillion collectively since the market's peak.

"The 401 (k) experiment has failed," says Teresa Ghilarducci, a New School for Social Research professor. "We have road-tested them and they don't stand up to the bumps of the normal financial markets and the limit of what human beings can do."

She is not alone. "It's time for a radical U-turn," say Pamela Perun of the Aspen Institute and C. Eugene Stuerle of the Peter J. Peterson Foundation in an Urban Institute report. They endorse a U.S. variation of the U.K.'s "Super Simple" savings program, which will require the government to provide a 1% tax break, workers to set aside at least 4% of pay, and employers to contribute at least 3% of pay.

Ghilarducci recommends a government-administered, government-guaranteed plan that would require workers to save 5% of income, some of which could be contributed by employers. The government would pay $600 to start, indexed for inflation. The program, which would run in tandem with Social Security, would pay for itself using the tax breaks now given to businesses, Ghilarducci says.

Others suggest less radical changes. "We should not reject the 401(k) but reform it," says J. Mark Iwry, a Brookings Institution senior fellow, Georgetown University professor and former Treasury Department official. "Practices should "evolve from a do-it-yourself, laissez faire model to a smarter model." He suggests increased automatic enrollment, adding annuity options and more investment alternatives that combine loss protection with some growth potential and contributions from healthy companies.

The loudest argument against change comes from the Profit Sharing/401k Council of America, which insists the problems are only temporary, and not the industry's fault. "It is hardly surprising that 401(k) plans did not escape a collapse that has stricken almost every financial system or arrangement in the world," says David Wray, president. He says the clamor for change should be aimed at the Securities and Exchange Commission to "ensure a similar collapse never happens again."


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