Saturday, July 05, 2008

“Diss” Ingenuous

Over the past several years, it has become “fashionable” in some quarters to bash the workplace retirement savings plan; most frequently, the 401(k). Critics have long bemoaned “anemic” participation rates as a sign that the programs aren’t working, faulted what were perceived as inadequate savings rates as an indication that participants didn’t grasp the need, and pointed to less-than-optimal investment allocations as proof that those who did save were not capable of, or not interested in, making those decisions.

In fairness, much of that “criticism” has been of a constructive nature—from professionals who care about retirement savings adequacy, who believe strongly in the support of the employer-sponsored system, and who truly want to see people have the opportunity to do the right thing, and to do the right thing with that opportunity. However, those well-intentioned voices were sometimes employed in contexts that, over time, have hinted (and sometimes done so more overtly) that there were inherent problems with that system that were perhaps beyond remedy. And there are suggestions, from time to time, that the retirement savings crisis is overblown, a concoction of investment providers and advisers who simply want to ensure their own retirement security.

More recently—and more insidiously, IMHO—is a growing voice that 401(k)s are little more than tax dodges for the better-off. That they, like any tax-advantaged program, provide disproportionately higher value to those who actually pay taxes—those who, by definition in our current “progressive” income tax scheme, have higher incomes.

Alternative Courses

Those opposed to the current employer-sponsored system do have alternatives. One is to remove the tax benefits from the 401(k) altogether, either as a “fairness” move (e.g., since everyone doesn’t have a 401(k), no one should), or that put forth by those trying to establish some fiscal responsibility “cred,” is the need to save the federal government money by not deferring taxes on those contributions and/or earnings and by no longer giving employers tax benefits for their contributions on behalf of participants. Some want to replace the current workplace savings program with something else; generally, some grand government-mandated savings program (yes, in addition to Social Security which, let’s tell it like it is, is not a savings program), while those opposed to “Big Government” hold out the notion of a government-sanctioned/mandated payroll IRA, where each worker would have the “opportunity” to set up their own account anywhere they chose to do so.

At the heart of each of these initiatives—yes, even the seemingly innocuous proposal to mandate IRA payroll deductions—is the weakening or outright elimination of the employer-sponsored retirement system.

Those of us who work with these programs in the real world can anticipate where that would leave retirement security. Without the encouragement of an employer match, the convenience of signing up in the workplace, or the incentives of pre-tax deferrals, most would not save at all, or would certainly save at a more modest rate than they do at present. One could, of course, simply mandate savings—but it is hard to imagine that we would be willing to enforce the level of savings necessary to achieve reasonable retirements (short of forcing it into some kind of pooling system like Social Security, and some have recommended just that – see “IMHO: Conspiracy Theories”).

What all too often gets lost in our criticisms of the current system is just how often it works well. Perhaps only three-of-four eligible to participate in such programs choose to do so, but on an employer-by-employer basis, participation rates north of 90% are not impossible to find—and that’s before the adoption of mechanisms like automatic enrollment. Contribution acceleration programs have allowed workers to readily do what was once a cumbersome process. Target-date funds have, in incredibly short order, gained the favor of plan sponsors and participants alike—with as yet incalculable benefits for those retirement investments. Those, and a whole new generation of retirement income alternatives are coming to market—alternatives that, unlike the prior generation, will benefit from the scrutiny of plan fiduciaries trying to make sure that a lifetime of accumulation isn’t decimated in a single moment. These innovations have come to light, and to market, because of the employer-sponsored system. What kinds of innovations have been brought to those disciplined enough to set aside money in a retail IRA?

In the real world, a lucky few know how to save and invest properly; somewhat more have access to the counsel and advice of a trusted adviser. But for most of us, the workplace retirement program is our first and only “investment” account. It is the one place where even those with relatively small balances can have access to professional advice, alongside the opportunity to gain the purchasing power of a group. But they might not have any of that without the involvement of their employer, the funding of that company match, and the tax incentive from the government to do the right thing.

Those that would take all that away have lots of reasons for throwing out the support of the employer-sponsored program—but they would really, IMHO, be throwing the baby out with the bathwater.

- Nevin E. Adams, JD


See “They’re Baaaack, Again!”

See also “IMHO: Vanishing Points?

IMHO: “Wonder Land”

IMHO: “Crisis Management”

1 comment:

  1. When the majority of 401k-eligible employees are retiring successfully – or on a path to do so – most critics of the plans will be silenced.

    Yet seemingly every week there are reports that 50% to 80% of employees eligible for 401ks are projected to fail to have a financially successful retirement.

    Ultimately, the success of 401k ‘retirement plans’ will be determined by how many eligible employees use them to achieve their retirement goals.

    There’s a word for older 401k-eligible workers who don’t have enough money to retire but are unable to continue working or no longer want to work – voters. Politicians listen to voters. Politicians also control benefit and tax laws.

    Some members of Congress get worked up if a DB plan covering a few thousand people is underfunded by 20%. What will Congress do when members learn that millions of workers (voters) who are eligible for 401ks are roughly 50% to 80% underfunded?

    Dozens of recently retired workers who were in 401s for 20 years testifying to Congress about their tiny or depleted accounts won’t be good for the 401k industry.

    Professionals involved with 401ks know that for people in their mid 60s, a $100,000 account can provide around $200 to $600 a month for life depending on the income approach used. Members of Congress and employees (voters) will figure this out soon. Sadly, if what is reported is correct, millions of 401k-eligible employees will retire with much smaller accounts – unless dramatic improvements are made soon.

    If Congress accuses 401ks of failure, will the retirement industry’s best defense be that employees had ‘opportunities’ … that employers followed the highest fiduciary standards … and some automatic features have been recently added? Will this defense persuade Congress to give 401ks a pass and to tell voters ‘too bad, it’s your own darn fault’?

    The 401k retirement industry controls its destiny. To shut up its critics and ensure the viability of 401k retirement plans, the industry needs to make sure these plans help the majority of employees succeed. If the industry doesn’t do this, unsuccessful 401k participants (voters) will assuredly expect government to fix the problem. Many older people with too little money will have no other choice.

    For the record, for nearly 20 years I’ve been writing and speaking about the importance of improving 401k plans so they help as many employees as possible retire successful. I support the employer-sponsored approach because I believe any government-operated alternative won’t be a good one.

    All the best,
    Dennis Ackley