How to Craft a 401(k) Crisis

Last week an article in an industry publication led with the title “401(k) experiment has failed, fueled U.S. retirement crisis, labor economist says.”

In what I am sure generated a fair number of “clicks” that turned out to be the pronouncement of none other than Professor Teresa Ghilarducci, teeing up a new book[i]—one that she says aims to review the last 10 years of research by multiple entities on something she’s labeled the “liminal” period of life—that apparently intended to refer to an “intermediate” stage of life. According to the article, she is taking aim at certain assumptions that are made with regard to retirement investing/saving between the ages of 55 and 70. Bad assumptions, apparently.

Now, considering that Professor Ghilarducci has written an entire book on this particular subject, extrapolation from a short interview about it (particularly when someone else did the interview) is a hazardous undertaking. But in that article—based on the upcoming book—she asserts that “experts and professionals and policymakers” have got it wrong; in this case “wrong” appears to be thinking that when people get to be about 62 and realize they don’t have enough resources to do so—they’re simply counseled to work longer. She also takes issue with the advice promulgated by a number of experts (and advisors) that folks should postpone taking their Social Security benefits—something she says (in the article) that “does not speak to the lives of most Americans.”

On the latter point (and I hope you’re sitting down), I completely agree.[ii] The logic in that advice is based on a solid strategy designed to maximize Social Security benefits—but increasingly is “buddied” by financial professionals/experts with the approach of using what may be inadequate retirement savings to bridge living expenses between leaving the workforce for good and age 70. That said, and as the article acknowledges, the decision to leave the workforce for good often isn’t a choice, which not only shortens the accumulation opportunity, but extends, and thus undermines the ability to stretch those savings.  Particularly when that happens late in one’s career, there’s no question it creates problems, and surely for some, financially insurmountable ones.

While that apparently isn’t the focus of the book, those type misapplications do seem to be at least a contributing factor to the crisis Ghilarducci perceives. More than that, she apparently sees an overarching theme at work here. In the interview she says that some unnamed “experts and professionals and policymakers” have embraced this notion if you find yourself later in your career short of funds, you simply have to work longer—a presumption she claims is further undermined by the debt carried by those heading into retirement. THIS she says is undermining retirement security, though in the article she lays the fault for this (“much of the loss of their security”) on the loss of defined benefit plans, before proceeding to label the 401(k) an “experiment,” and a “failure”—labels she has applied to these programs…repeatedly

On this, as you might imagine, we disagree. Now, I’ve got no beef with the comfort of a federally insured and well-funded defined benefit plan, particularly those in the private sector that traditionally required no involvement with[iii] or investment by individual participants. Of course, even at the height of their popularity, fewer than a third of private sector workers were ever covered by those plans, and only about 1 in 8 of those ever met the service length criteria to fully vest in those benefits. As retirement coverage “experiments” go, those are surely shortcomings.

Indeed, when you consider the coverage gaps left by the defined benefit “system,” I don’t know where we’d be without the 401(k)—or, more precisely, I do—and it wouldn’t be a good place. 

Those of us who actually work with real people know that this so-called “broken” system works amazingly well—for those who have access to it—including, most especially, those at the lower end of the income scale.[iv] Academics routinely target the well-off in their criticisms, but ignore the needs of middle-income households for whom Social Security will almost certainly not be… enough. And they routinely completely discount and/or ignore the role that the current tax preferences play in fostering the formation and maintenance of these retirement plans. With all its admitted imperfections, thanks to this “failed experiment,” tens of millions of Americans now have trillions of dollars of retirement savings set aside…and they—and their employers—have done so voluntarily, deferring, not avoiding, tax obligations. 

No, as “experiments” go, it seems to me that the real failure is that not enough Americans have the opportunity to do so. And we’re working on that.

 - Nevin E. Adams, JD

[i] Titled “Work, Retire, Repeat: the Uncertainty of Retirement in the New Economy.”

[ii] In the interests of full disclosure, the author considered, but did NOT defer taking his Social Security benefit until age 70. 

[iii] So little involvement, in fact, that surveys routinely still find ridiculously high number of individuals think they have one. 

[iv] I have never understood the notion that the “rich” are gaming the system with the maximum (in 2024) $23,000 annual 401(k) contribution (not including the $7,500 in catch-up contributions for those over age 50), often less due to the limits of non-discrimination testing.

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