Retirement 401k News Blog

Americans lost over $1 trillion in their 401(k)s in 2008. Ouch! Evidence, says Teresa Ghilarducci, a New School for Social Research economist, that America needs to radically alter how workers save. She proposes eliminating the tax breaks for 401(k)s and replacing them with guaranteed retirement accounts. Under Ghilarducci’s plan, outlined in her book When I’m Sixty-Four: The Plot Against Pensions and the Plan to Save Them, all workers who don’t have a traditional pension would be required to contribute 2.5 percent of their income to a government account with a 2.5 percent employer match. A 3 percent return above inflation would be guaranteed by the government. U.S. News asked Ghilarducci about her controversial retirement plans. Excerpts:

What’s wrong with the 401(k) retirement system?

The biggest problem with the 401(k) retirement system is the people who need them the most don’t get the biggest benefit from the government subsidy. The people who get the biggest subsidy are in the highest tax bracket. The biggest problem with 401(k)s in general is that the contributions into the 401(k) are voluntary on the part of the employee. Sometimes, the employee gets help from the employer match, but it’s not guaranteed. Because the employee puts the money in it, employees think of it as a savings account for hardships and for retirement. Because of the ability to take money out before you retire, it’s not enough when you retire. The employee also has to make investment decisions. Most workers are not well suited to make those decisions. And they can’t spread the risk over time. Basically, a pooled fund can pool it over many life spans, but a worker has only an individual time span to plan for. There is also market risk, and there is very little they can do to hedge against that risk.

If 401(k)s are serving investors so badly, why do people like them?

What they wrongly say is that the stock market does better than the government would. But your 401(k) is not in the stock market. Your 401(k) is in mutual funds, and you have to pay a fee for that. Because of fees and because of common mistakes that people make in managing their own money, the average returns have been about 3 percent without an inflation adjustment. They also see high-profile plans being terminated. When there are no other better options that are available, it’s the best they have.

Related posts:

1. Teresa Ghilarducci: The 401 Retirement System Has Failed
2. 401 Foe Teresa Ghilarducci, the Most Dangerous Woman in America
3. Would Obama, Dems Kill 401 Plans?
4. Would Obama, Dems Kill 401(k) Plans?
5. Fidelity 401(k) Balances Down 27 Percent