>> 401K plans were introduced nearly thirty years ago, and at the time billed as a way to democratize investing. Soon after their debut, 401Ks began to replace pension plans as the primary retirement savings vehicle for most Americans. Now as Congress debates changes to the plans, and workers contemplate billions of retirement dollars that have vanished in the aftermath of the credit crisis, it's time to take stock of the 401K. Joining us to discuss the current state of retirement in America, and the future of 401K plans, is MoneyWatch.com's editor-in-chief Eric Surenberg assumed spelling. Thanks for joining us, Eric.
>> Hi Jill.
>> So thirty years later, how are the 401K plans doing?
>> Jill, I think it's time to declare the 401K a failure.
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>> Tell us why. That's shocking.
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>> It is. But look at it. As a savings plan it's fine. It has tax breaks, it has a company match, it encourages people to put away. But as the de facto retirement policy plan of America, it just doesn't measure up.
>> Wait a minute. We are told that it's the only way, the best way. What's wrong with it? Be specific.
>> Well it's the best way because it's the only way left. But look, if you're gonna have a retirement plan that is essentially the national policy plan, it's got to be seen as fair. It can't favor one group of people over another group of people for no good reason.
>> Fair? Wait a second, how's it not fair? All the employees get to participate. What's wrong with that?
>> Well what's wrong is that the result you get depends an awful lot on when you retire, the accident of your year of birth. So you can put in the same amount of money over your forty year career, you can invest it exactly the same way, and whether you retire wealthy or in poverty depends a lot on whether there was a bare market the year you quit work.
>> But 401K plans have this myriad of investment options. Isn't choice good? Isn't that a good part of the plans?
>> I think too much choice is not a good thing, it overwhelms people. But the worst choice that's available in a 401K plan is the choice not to participate. If a plan is going to be the basis of a national retirement policy, it's got to be adequate. And what we see with 401Ks is that when times get tough, as they are now, people stop contributing. They stop contributing at the point where they need to the most, when asset values are low, where they could stand the most money, and yet they panic. And what's even worse is that employers also stop contributing. And we've already seen about thirty percent of companies that offer 401K plans have stopped putting in their match, and that's just not forgivable.
>> So it's a pretty risky bet to not be in a plan. But there are some risky bets about being in the plan as well. What are some of those risks? And how can participants better manage them?
>> Well that is the other thing that I think makes a 401K fall short, is a retirement policy plan. It shouldn't force people to take risks that they don't have to take. Now there is always gonna be risk in a retirement plan, there's always gonna be risk in the economy. But some risks can be ensured away. And one of them is longevity risk, the risk that you'll outlive your savings. A pension takes care of a longevity risk, it guarantees you a check as long as you live. A 401K depends on how you spend it, whether you run out of money too soon, or whether you have saved too much. It makes it the responsibility of every single participant take care of that longevity risk. So some people will naturally save too much, some people will save too little because no one knows how long they'll live. If a risk can be ensured away, it ought to be done.
>> Eric, thank you so much for joining us.
>> My pleasure.
>> For more on how you can learn how to better manage your retirement, go to Eric's blog, Financial Independence, on MoneyWatch.com.
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