This week’s Time Magazine cover story looks at the nation’s de facto retirement program, the ubiquitous 401(k), and pronounces it inadequate. Welcome to the club, Time. This blog has been calling the 401(k) a failure since June. In August, the NY Times weighed in, making the same points. Glad to see MoneyWatch.com is being read in all the right places.
You should read the Time story. The writer is the excellent Steve Gandel, a former colleague of mine at Money, and he makes all the right points.
- The problem with the 401(k) savings plan is not the plan’s design (although fee disclosure and behavioral savvy could stand improving). It’s that the plan is being asked to do more than it was meant to do. It was always meant to supplement Social Security and pensions. Instead, it has replaced the latter, and it’s not up to the job.
- It’s not about the current downturn, either. Downturns will inevitably happen over the length of anyone’s career, but when they occur matters hugely in the ability of the plan to assure you a decent retirement income. If you’re now in your 30s or 40s, you’ll be able to shrug off the losses of 2008 by the time you retire. If you’re within 10 years of retirement, you’ll never recover. The timing-is-everything aspect of the 401(k) isn’t so terrible if it’s a supplement to a traditional pension, which provides a stable base of income. But now that the 401(k) is the foundation of Americans’ retirement planning, it simply leaves too many people subject to the random busts of the market.
- The solution lies in a finding a way to share the end-point risk, if you will-to insure it away. The GAO and other organizations have reviewed some of the options. Making it easier to roll part of your 401(k) balance over into an annuity is a start-in a sense, that would allow you to create your own pension and insure yourself to some extent against outliving your money. (Or, let’s face it, outliving your ability to make good judgments about your money; you won’t always be as sharp as you are now.)
Time may not quite command the attention of policy makers and corporate titans the way it once did. But the idea is now in the mainstream that the nation deserves a better retirement program than “401(k) and pray.” Good.
