New column: Should the 401(k) be killed?

My latest column is online and in the issue of TIME with something about Detroit on the cover that won’t be on newsstands until tomorrow. It begins:

Teresa Ghilarducci has always had more interesting — and controversial — things to say than your average retirement-policy wonk. An economist who moved this year from the University of Notre Dame to the New School for Social Research in New York City, she has railed for years against the decline of the traditional pension. She recently wrote a book subtitled The Plot Against Pensions and the Plan to Save Them; the less contentious main title is When I’m Sixty-Four.

Still, as she sat at the witness table on Oct. 7 at a hearing of the House Committee on Education and Labor, running through the litany of what’s wrong with the 401(k) and other defined-contribution retirement plans — they have high fees, for one — Ghilarducci didn’t think she was courting controversy. “I was saying things that seemed completely milquetoast,” she recalls. Ghilarducci did bring up a bold proposal to replace the 401(k) with a mandatory, government-run pension plan and suggested that Congress immediately allow retirees to swap 401(k)s battered by the stock market’s collapse for monthly payouts from the government. But she had floated both ideas before, to little effect.

This time, all hell broke loose. Her proposal caught the attention of talk-radio juggernaut Rush Limbaugh, and over the next few weeks Limbaugh hammered on Ghilarducci’s idea as a Democratic plot to kill the 401(k). “McCain has gotta tie Obama to these people,” he said on the air. Republican presidential candidate John McCain did try, but only perfunctorily. It didn’t help him much on Election Day. Read more.

I’ll provide some links and caveats and background info later, but somebody wanted me to put this post up pronto so that it could be commented upon and I’ve got to go make Curious Capitalist Jr.’s lunch and get ready for work and stuff like that.

Update: You can download Ghilarducci’s testimony and watch a video of the hearing here. A transcript of Rush Limbaugh’s initial tirade on the subject is here. Factcheck.org takes on the more wacky stuff being said about the Democratic 401(k) plot here. And the Ric Edelman piece mentioned by lunaport in the comments is worth reading too.

As for caveats, I’m aware that there have been improvements made in 401(k)s since the passage of the Pension Protection Act in 2006, although I don’t think they change the basic point. I’m also aware that there are more problems with traditional pensions than just portability, but those are problems for the guarantors of the pensions (shareholders and taxpayers), not the recipients. And some background: I wrote an anti-pension screed for CNNMoney a couple years ago. I haven’t really changed my mind. I just feel even more strongly than I did then that we’ve got to come up with a better replacement than the 401(k).

lunaport

Financial Advisor Ric Edelman has been following this mess (http://www.ricedelman.com/cs/education/article?articleId=852)
plukasiak

the problem is that 401ks should have been killed last year — at this point, disaster has already struck for those who had made retirement plans based on the value of the stocks in the 401k plans.

I find the idea of guaranteeing 3% above inflation interesting. Back in the late 1990s, The I Bond series of US Savings bonds were offering somewhat over 3% above inflation; but that policy has changed for some reason under Bush. (http://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iratesandterms.htm )
Andy from MA

Justin, what about 403b’s for those who work non-profits like health care? Also, while so many companies got out of providing the pension benefit, what is the likelihood that they’ll return to them.
.
I’d much prefer the pension plans of the nation’s CEOs. Now that’s change I can believe in.
mbirchmeier

Justin:

One issue that seems to be tiptoed around is that Retirement is much more expensive today than it was a generation ago.

Lets look at the average life expectancy for a 60 year old white male*. In the 1930′s when social security was introduced, the average 60 year old white male lived 15 years to age 75. In 1970 the average 60 year old lived an additional 16 years, to age 76, virtually the same amount of time. Today the average 60 year old will live to age 81. This means the average length of retirement (assuming a retirement age of 65) has increased from 11 years to 16 years almost 50% in about 40 years. Additionally these increased life expectancies are likely related to increased health care costs as health care improves, thus making each year more expensive in addition to needing to fund additional years of life.

From what I understand companies moved away from pensions because they were too expensive, they were unwilling to fund pensions until the last moment, when time was not on their side, and companies were overly optimistic about the yield of the market, and remaining unaware of the relationship between risk and reward. The only ‘failure’ of 401(k) seems to be that people have fallen victim to the same misconceptions the companies did decades ago.

In my opinion people either need to start saving more (whether it be through pensions, 401(k)s or other savings methods**) or change their idea of what retirement means.

-MBirchmeier

*this source doesn’t have numbers for all males or all workers in general, I apologize for the simplification numbers obtained from http://www.infoplease.com/ipa/A0005140.html

**I purposely leave social security out of this list. I believe social security is not meant to be a retirement program, rather a program to keep people who are unable to take care of themselves from needing to become impoverished.
markwolfinger

Pensions must be killed. The actuaries who helped set them up made all sorts of errors on longevity, cost of future heath costs, etc. No one can meet the demands of paying pensions.

That leaves voluntary savings and 401 (k) plans would work if employers insisted that thsoe who set up the plans charged VERY low fees. But no one does that. whether it’s ignorance or kickbacks, the workers get cheated.

We need 401 (k) plans that charge fees comparable to Vanguards S&P 500 index fund. We should mandate indexing rather than paying mutual fund managers high fees for underperformance. Or we could mandate companies look out for their employees when choosing a plan manager. Those high profits (management fees) to wall street must end – when it comes to the retirement accounts of American workers.
odograph

If interest/dividend income were not taxed, up to some reasonable level, saving would be much easier and more natural.

I think getting people to do casual savings is the path to them doing serious saving.