When a venerable mainstream media institution such as the New York Times wades into the normally placid waters of the 401(k) world, you know that there could be some ripples.
So this week, when the Times did a virtual roundtable to probe one simple question – should the 401(k) be reformed or replaced – it probably got more than a few of you thinking about this standardized, controversial and befuddling retirement tool, one that generates equal amounts love and hate.
From the participant point of view, the 401(k) has certainly demonstrated that it's not the be-all, one-stop-shopping solution to every American's retirement future. The market risk factors that were designed to accentuate the 401(k)'s positives back in the early days also turned out to be tremendously disappointing to millions and millions of contributors over the past few years.
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For many, seeing their savings decimated has led to a general malaise: Why would I continue to contribute to a financial product that lost so much of my money in recent years? What's the point? What level of faith should I have in a mysterious and elusive recovery that might (emphasis on might) help rebuild those losses?
You can't blame them for wondering. And you only need to scan those monthly corporate and public pension plan performance results roundups to see that it's not just the little investors with their $54,000 401(k) nest eggs who are being brutalized by a laughably flat market. when a multi-billion-dollar entity like CALPERS nets the kind of return you'd get from the worst strip-mall bank's checking account, it is a tad disheartening.
The NYT's look into the subject surrounded many of the usual suspects in the industry and at the legislative level, but pointed out that major changes – the kinds that might actually help guarantee the 60 million or so Americans currently enrolled in 401(k)s a more fulsome retirement, with or without Social Security assistance – are still difficult to agree upon.
And a figure no less than Vanguard Group founder John C. Bogle is one of the leading voices of dissent, notes some of the basic structural problems inherent in the 401(k)'s rewards system: Fees, soon to be more easily understood by the participant public, help to consume the currently paltry returns, at an alarming rate.
That's the kind of math, good or bad, that led to the Demos debacle – with the widely reported research which claimed that investment fees would ultimately eat up more than 40 percent of a participant's holdings. Luckily, investment losses have taken care of that for most people instead.
If not the standard 401(k), then what? How about the Guaranteed Retirement Accounts plan floated by Teresa Ghilarducci of the New School – mandating that workers be required to withhold 2.5 percent of their earnings for a government-subsidized and guaranteed retirement plan?
Or there's the Harkin plan, the even more wide-reaching government-run retirement savings vehicle.
Critics note that, given the recent success of the federal goverment creating and trying to adopt nationalized programs with the best interest of taxpayers in mind, swapping out the existing 401(k) system for an elaborate replacement is highly unlikely, at best.
The bottom line? Like so many things in American society, the defined contribution system depends on participants actively participating – understanding the risks, but also being aware of the risks of not taking part – and all that folks in the retirement industry can do is try to help on the positive side. Until some new and all-healing solution comes along, if there is one out there.
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