As the nation's retirement population continues to grow, 401(k)s have become a target of critics who contend that the system has failed American workers and that it will never allow participants to accumulate enough money for a secure retirement.
Some are calling for the abolishment of 401(k)s without offering any serious alternatives. Others are suggesting changes, such as eliminating the tax deduction on 401(k) contributions, which would be the death of the system and would do the opposite of what advocates for retirees are trying to accomplish: giving participants more money during retirement.
Originally designed to supplement Social Security, 401(k)s are playing a bigger role in the lives of retired Americans.
A 2010 Bureau of Labor Statistics study found that 78% of all full-time civilian workers had access to retirement benefits at work, with 84% of those workers participating in these arrangements.
In addition, 74% of active participants in 401(k) and profit-sharing plans make less than $100,000 in adjusted gross income, according to the American Society of Pension Professionals and Actuaries.
The ASPPA also reported that fewer than 5% of workers save for retirement without a workplace plan.
So at a time when pensions are being eliminated, Social Security is at risk and the stock market remains volatile, Americans shouldn't throw the best retirement savings vehicle out with the bath water.
Fixing the 401(k) is the most realistic solution to the nation's troubled retirement system. The overarching principles of reform include access to a plan for every employee; shared responsibility among employer, government and employee; simplified investment decision making using professional asset allocation; and providing a stream of income at retirement.
Here are a few common-sense reforms that could make a dramatic difference in the long-term well-being of our retirement system and our retirees.
A focus on fees. New 401(k) fee disclosure rules are a good first step, but employers and participants need to focus on investment costs in plans, as investment costs represent 84% of a plan's fees. Unnecessarily high fees will eat away at the value of retirement savings over time.
Mandates for savings. The single most effective step that Congress could take to increase retirement savings is to set mandates requiring employers to offer some form of a retirement savings vehicle along with mandating an employer match and employee participation in the plan. By providing access to a savings vehicle, forcing contributions at some level and automatically enrolling participants on day one, mandates will jump-start retirement savings for millions of Americans.
Defined investment options for workers. The 401(k) has opened the door to broad investment choice, but many workers feel confused rather than empowered by the options. One solution is to simplify the investment process by automatically enrolling participants in a professionally managed investment program providing most workers with an appropriate investment for their situation based on all investment assets, not just those in the retirement plan. For those wanting to go it alone, there would be an option to do so.
Restricting distributions. Under the rules, it is too easy for workers to take withdrawals from their 401(k)s, and as a result, too many participants treat their retirement savings like a checking account. Over time, and with the power of uninterrupted compounding, individual 401(k) accounts are likely to grow and be put to use as intended — to provide an income stream in retirement.
Meeting the need for reliable retirement income. With people living longer, retirement dollars need to last longer.
Throughout the 401(k) industry, there are continuing efforts to merge the best features of traditional defined-benefit and defined-contribution plans to create an investment option that guarantees income for life. More needs to be done in this area to meet growing needs for reliable retirement income. Although this seems to be a new trend in the industry, solutions are emerging that could make a lifetime of difference for retirees and their families.
There is no doubt that Americans need to save more for retirement. With sensible changes, we can make the 401(k) an even better plan both for retirement savings and for providing adequate funds during retirement.
Tom Gonnella is executive vice president of Lincoln Trust Co., a provider of 401(k) plans.