Retire the 401(K) System

As troubled as the 401(k) system may be, retirement plan experts argued recently for reforming it rather than getting rid of it.

The tax-advantaged accounts deserve a tough review in the wake of the stock market collapse that has crushed account values and evidence that 401(k)s tend to benefit wealthier workers, said attendees of the annual West Coast Defined Contribution Conference in San Francisco late last month.

But by and large, officials with retirement plan sponsors as well as industry officials conveyed a “mend, don’t end” attitude about the 401(k) system.

Jeff Maggioncalda, CEO of advisory firm Financial Engines, said it’s not enough to stick new employees in an automatic 401(k), where workers are enrolled by default into a plan, contributions gradually increase and investments are prudent. Current employees also need help, he said.

“Applying the automatic 401(k) to existing participants is critical,” Maggioncalda said in his keynote presentation.

The conference took place amid growing concern about 401(k) plans.
An estimated 50 million people have the plans, which enable employees to sock away money on a pretax basis for retirement and control their investment choices. Some employers make contributions to the accounts.

But compared with traditional defined-benefit pensions, 401(k) plans transfer investment risk from companies to individuals.

The nature of that risk has become starkly clear in the last few months, as dramatic sell-offs in the stock market have decimated many 401(k) accounts. At an October 7 congressional hearing, Rep. George Miller, D-California, said that in the past 12 months, more than a half-trillion dollars has “evaporated” from 401(k) plans thanks to the crisis in financial markets.

Until September, criticism of the plans had focused largely on low contribution rates, poor investment choices and questions about account fees.

But the public debate has intensified.

The hearing chaired by Miller included the testimony of Teresa Ghilarducci, a professor at the New School for Social Research, who proposed dismantling the 401(k) system and replacing it with “guaranteed retirement accounts,” to which the government would pay a 3 percent inflation-indexed return.

Ghilarducci testified that “the shift toward 401(k) plans increases tax expenditures, does little to expand retirement savings and favors workers who need the help least.”

The “shocking results” of the 401(k) design, she said in her testimony, are that “6 percent of taxpayers with incomes over $100,000 per year get 50 percent of the tax subsidies.”

Miller is raising legitimate questions, said Ron Eisen, co-founder of Fiduciary Benchmarks, a firm that aims to help retirement plan sponsors meet fiduciary obligations. Miller is “doing everyone a favor by forcing the attention,” Eisen said at the San Francisco conference, which was presented by Workforce Management and sister publication Pensions & Investments.
 
Still, a number of conference attendees argued that the 401(k) system is not beyond repair. Maggioncalda doubts the country will abandon a core principle of the 401(k)—having people in charge of their own retirement fate.

“Individual responsibility for retirement risk is here to stay,” he said.