Back in the 1980’s, a benefits consultant named Ted Benna started telling employers about a little-noticed provision in the IRS code that allowed workers to set aside pre-tax earnings in a retirement account. At first the idea was dismissed by many, but gradually it caught on – and the 401(k) was born.
Now about 35 years later, Ted Benna, called “the father of the 401(k),” is well into his 70s. His assessment of his creation has grown distinctly negative: a few years ago he was quoted as calling the 401(k) “a monster.” The 401(k), which Benna says was never intended to replace but rather to supplement traditional company-paid pensions, has left millions of Americans facing retirement with little or no savings. You can read about this problem, and what some experts are suggesting we need to do about it, in this just-published article in the Washington Post. It may be too late for many of today’s boomers, but it’s possible that adjustments to the laws governing 401(k) plans might benefit those who still have time to change their saving habits.
The Washington Post article lists four reasons why saving with a 401(k) account has proven so difficult for so many, and we’ll get to those in a moment. But first, let’s consider how serious this problem has turned out to be. According to this MarketWatch article published a year or so ago, Ted Benna began expressing his dissatisfaction with his creation some years back. “The plans had grown so overcomplicated and so fraught with hidden fees and opportunities for bad decisions that they were better at enriching the financial industry than the actual savers — precisely the abuses that nearly drove him out of the business,” said MarketWatch. Today, the number of American workers who have $25,000 or less set aside in this type of retirement account is the same as it was back in 2004: about 54 percent. Barely one worker in five has $100,000 or more saved.
“Today,” said the Post, “too many people are reaching retirement age with a paltry account balance that is unlikely to carry them through their later years. Illness, job loss and other emergencies can force people to tap their nest eggs sooner than expected. And millions of Americans, about one in two workers, still don’t have an easy way to save for retirement.”
In the Washington Post analysis, there are four reasons why 401(k) plans have turned out to be a disappointment, leaving millions poorly equipped for life after full time work. The problems, say several experts, are these:
Complexity: In 1998, says the Washington Post, about half of all employers offered a traditi0nal pension to their workers. Today, thanks in large part to the 401(k), the number of employers with pension plans has plummeted to about 5 percent. “When Benna first started trying to persuade employers to use a 401(k),” writes the Post, “the accounts were supposed to supplement pension income. Instead, many employers tried to save money by freezing or eliminating pensions, making the 401(k) the main retirement plan.” The result was a far more complex set of choices for the employee. “The trend shifted the risk and the burden of preparing for retirement to the worker.” Some employees fail to save because that burden of preparation proves too daunting.
Procrastination: Everyone knows they should save when they’re young so they can spend when they’re old. “But,” says the Post article, “in many ways, the system runs contrary to human nature (because) it’s not easy for people who are worried about establishing their careers, starting families and paying off debt to plan for retirement.” The best way to overcome this human tendency to put off what’s good for them, say retirement experts, is to give everyone access to a retirement account and to sign workers up automatically. “Lawmakers, states and small businesses are experimenting with ways to expand access to retirement accounts, which some say is the biggest obstacle of people saving enough for retirement,” reports the Washington Post. Some companies who have shifted to automatic enrollment in their plans have seen participation rates jump to levels as high as 90 percent.
Lack of Access: If you’re among the half of all workers who work part-time jobs or who work for employers without one of these plans, all the talk of 401(k) participation is of little relevance. But even though people without workplace access to a retirement plan can open one on their own, few every do: AARP says that those with workplace retirement plans are 15 times more likely than their counterparts at non-participating companies to save for retirement. Many states and several benefits consultants like Ted Benna are seeking ways to make it easier for more workers to save through payroll deduction, either in individual plans sanctioned under the tax code or through a state-run “retirement marketplace” for small employers.
Lack of Incentives: “If policymakers want to encourage more low-income and middle-income workers to save, they need to offer incentives that will benefit them,” writes the Washington Post. Tax credits for saving in a 401(k) account are limited, benefiting only a small number of savers. One expert proposes that the government “should create a system that requires workers to contribute a minimum amount to a retirement account that could supplement their Social Security income. Workers would receive lifetime benefits that vary based on how long they worked and how much they’ve contributed, similar to a pension.” While that may be an idea worth considering, it’s hard to see such an innovative proposal ever seeing the light of day in today’s political environment. “Just as individuals are less likely to save until they’re close to their golden years,” the Post article concludes, “lawmakers and industry groups may drag their feet on crafting a solution until the retirement crisis is full blown.”
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(originally reported at www.washingtonpost.com)