Calls grow to overhaul 401(k) retirement plans

[spindrifter]

By Jim Puzzanghera, Los Angeles Times Staff Writer
7:03 PM PST, November 15, 2008

Reporting from Washington -- For nearly three decades, working Americans have been part of a huge experiment with their future well-being: Old-fashioned pensions that guaranteed specific retirement benefits have given way to old-age benefitsthat depend on personal investing in the financial markets.

But now, with those markets in crisis and the value of workers' investments plunging, a bundle of ideas for modifying the system or replacing it entirely -- ideas shunted aside when the stock market was soaring -- are about to get a careful new look.

<snip>

So far this year, the average worker's 401(k) account balance has dropped between 21% and 27%, depending on the worker's age and time with his or her employer, according to the Employee Benefit Research Institute.

<snip>

The transition to the new system <401(k) from defined benefit system>occurred largely over the last two decades, with relatively little public debate. In 1983, 62% of workers with employer-sponsored retirement plans had a defined-benefit plan, according to Boston College's Center for Retirement Research. By 2004, only 20% of such workers had defined-benefit pensions. And the proportion of workers who relied solely on 401(k) plans rose to 63% from 12%.

<more>

http://www.latimes.com/business/la-fi-retire16-2008nov16,0,2937536.story

+++++
There is some interesting info re various proposals for changing the way most people save for retirement.

[Eric J in MN]

1. Just because stocks went down doesn't mean we need to change the 401K system.

Stocks will go back up.

We have Social Security as the guaranteed part of retirement.

[SharonAnn]

3. Funny, this same approach has failed miserably in Chile, though the banks and

financial managers made many millions off the scheme. High fees, don't you know?

It looked good in Chile at first, then it cratered.

[Eric J in MN]

4. I'm not saying to change Social Security.

I'm saying to keep Social Security and 401Ks as they are.

[Gormy Cuss]

6. No, change is needed because 401(K)s are a poor substitute for defined benefit pensions.

If you have enough excess cash to fund your contributions, work for employers who match contributions with real money rather than stock and you have a diverse portfolio of investment vehicles, and you have the wherewithal to manage the rollover accounts for 30 years or so, 401(K) can be better but for everyone else a defined benefit pension or similar hands-off fund was better.

[hughee99]

7. I agree...

Even with the current dip in the market, my 401K investments are still up at a rate of about 7% annually. Even in this, the worst of times, a "promise" of 4-5% return annually is not appealing. I put "promise" in quotes, because if this is government controlled, there's no guarantee when I retire (or at some point before then) they won't decide to change the rules again and I won't get my $$ back at the promised rate of return. If I die before my retirement, or shortly after, I do not trust the government to make sure my account is FULLY paid out to my beneficiaries.

[tech3149]

14. I sort of agree with you

I've got 4 retirement accounts and 3 have taken a pretty good hit over the last year. I'm pretty sure that by the time I need it, it will be worth what I put into it. I spread out the investments to hedge my bets, but I've been lazy keeping up with things. I only wish I could have had a matching contribution from my employer. I had the good fortune and poor judgment to walk away from that situation to let my ex take a job in Manhattan when I had no interest in working Long Island or Staten Island. I'm glad I can can live on a 0 income budget, I wish that most of the readers could do the same.

[IndianaGreen]

2. I foresee employers giving up matching 401k contributions

This entire deal sucks big time!

[Robbien]

5. What the article says is that instead of employers kicking in, they want the gov't to do so.

Each recommendation it gives is a little different, but yes in all of them the employer is to be off the hook for any participation.

[RC]

8. My 401K has cratered twice. Once right after 9/11 and then now.

I don't have enough time between now and retirement for it to recover.
Thanks bu$h, maybe I can get food money by being a greeter at Wally-World.

[TwixVoy]

11. That is because you don't know how to invest

not because 401ks are not good.

The problem with a 401k is that it assumes people will manage the money responsibly. If you do NOT have enough time for your stocks to recover then you should NOT be invested in stocks. Frankly your 401k should have been largely in BONDS at this point in your life.

The closer you get to retirement the more money you should have in bonds. There are NO exceptions to this rule. Having your retirement in high risk investments (stocks) when you are 10-15 years away from retirement is foolish.

In march last year I moved all of my investments to bonds. My 401k is UP 3% for the year. I have taken ZERO loss from this economy. I warned people I knew to do the same last year. No one listened, and now they've lost a ton.

[RC]

19. Well good on you.

You must be young. Some of us don't have the luxury of sticking our retirement money in the equivalent of mattress just in case.

[lakeguy]

21. if you are about to retire you should not have a large portion

of you savings in stocks or volatile 401k funds. most should be in the equivalent of a mattress fund otherwise you are taking on too much risk (gambling) with your retirement without the necessary time to recover from a large loss.

[RC]

22. They were not in volatile stocks. They were set up outside the US in stable stocks with a history of

long term stable growth. The crash here in the US only plateaued the investments. I was doing much better than most. All I lost was the growth factor here. It was when the rest of the world was dragged under that I took the hit. I am well diversified.

Edited to add I do know how to invest and I trust my broker. He has done very well for me.

[spindrifter]

9. I would like to see something

protect people who have saved all their working lives and then lose huge chunks because the stock market tanks right before they retire--maybe guaranteeing no loss greater than 15% if a person is retiring that year.

[Omaha Steve]

10. This drop comes just as us....

baby boomer's start retiring. I'm 52 in Jan. I have to work until I'm at least 62. As long as I feel good, I'll keep working. I don't want to retire so I can become a stock clerk at the local hardware. We are lucky. Marta has two retirements (both sound) and a 401k. I have a retirement and a 503 (self funded). But we have taken a big hit starting last November.

As the baby boomer's retire, it will help create new jobs to replace those that still have a job. Plus the medical field will expand to care for us as we age.

[doc03]

12. The 401K is just fine with me the way it is, in our

401k we have about 20 different investment choices. If someone is worried about risk they can invest in a more conservative fund. If you put your money into a risky aggressive growth fund and lose money when the market turns down that's their own fault. The Defined Benefit Pension Plan is dead few American companies today offer them they are too expensive to fund and manage. Myself I had two (guaranteed) Defined Benefit Plans both went under and were dumped on the PBGC and I will just get a fraction of their (guaranteed) Defined Benefit when I retire and the way things are going the PBGC could very well go under and I could end up with nothing. I wish I would have been able to get into a 401k back in 1966 when I first started working even with the stock markets ups and downs I would still be way better off with the 401k. Besides this idea just comes from a couple polititians and if they try and mess with the 401k and make it another govenment program they will be stopped in their tracks. That's the trouble with anything the government gets their hands in like the 401k they always want to start tinkering with it and change the rules.

[Omaha Steve]

13. By change they mean mandated contributions by your employer, etc...

Companies claim they already pay Social Security. They want to do everything as cheap as they can. At least let them kick in 5-10% of your income.

[doc03]

15. My employer offered to

match us 50% up to 6% a few years ago. That's if we deposit 6% they would kick in 3%. Our Union
forbid them to do it. We had a Defined Benefit Plan and the Union wanted to keep us dependant on that plan instead. The Union took us out on strike while the company was in Chapter 11 for 101 days (the longest strike in USWA history at the time) to save the DB Plan it ended up being dumped on the PBGC. At that time they started a new DC Plan. Then a few years later we went on strike again for 10 1/2 months (again the longest strike in USWA history at the time) for another DB Plan (we won?). Then five years later the company got in trouble again and they froze that plan and we got another DC Plan. Then earlier this year the company offered to buy out our old DB Plan for in my case less than 50% of its value. In my case they offered me about $105,000 and said I could purchase an annuity that would pay around $600 a month or leave the money in the DB Plan and get $1317 a month when I turn 62 in 1 1/2 years. I chose to leave the money in the DB Plan it looked like a no brainer to me. So here we are about 6 months later with the stock market meltdown I look for the employer top dump that DB Plan on the PBGC. Now with the economy in tank and the Big 3 and many others possibly dumping their plans on the PBGC I look for it to go under too. So in my case I am sure I could have done much better on my oun in a 401 k or the DC Plan the company offered years ago..

[exboyfil]

17. Wish I had been Defined Contribution all the way as well

I have had two resets in my Defined Benefit pension with my first two employers. The first one was because I was terminated after six years. The second was because my employer went from a DB to DC after four years. I got very little in both cases (that money is now sitting in TIPS in my IRA). I am now vested in my third DB in my career which will give me approximately 25% of my final salary when I retire in 2030 at 67 (assuming it stays in existence that long and my assumptions about inflation/wage growth are correct). My employer, as part of profit sharing, matches 3 to 1 my first 2% of 401(k) contributions and 1 to 1 for the next 4% (for a total of 10%). I am very appreciative of this amount.

DB plans from employers are a thing of the past. Employers have no better way to predict future market conditions than their employees. Without control of printing presses it is very difficult to guarantee a future retirement return. Retirement funds in DBs are invested, in part, in the equity markets to try to achieve more than a 3% real rate of return. I think DB promises are deceptive and are made on actuarially unsound principles. They have a tendency to blow up later. This is the case in both the private and public sector.

401(k) plans have some glaring weaknesses. First of all the mutual fund choices in basic plans are very limited, and you cannot hold individual treasury securities in these plans. My company does not offer an inflation protected bond fund in its basic offerings. I like TIPS, but be prepared to get around a 3% real rate of return from their use. In addition, I am not sure of the macroeconomic impact of extensive use of inflation indexed Treasury securities in pension plans. I would have to expect that the real rate of return would be driven down (just like what I think is happening with stocks over time as more dollars from retirement chase equities).

An improvement to 401(k)s would be to allow access to TIPS. Also I would like to see default choices for stock/bond mix that reflect a more conservative approach. The only way that you could override the default choice would be to pass a financial test so that you understand the risk return curves. No way that individuals who were retiring in 10 years or less should have been more than 25% in stocks during this latest downturn. I am 45, and I lost 15% because I had a balanced portfolio that was on the conservative side. In past years I have made lots of money by investing in equities (S&P 500 fund).

At this stage in my career I would not have a problem if the Feds decided to drop 401(k) deductibility. For me the deductibility probably will cost me more money down the line when SS is taxed when I retire. I do tend to disagree with economists who claim that deductibility does not influence savings rates. I know that, because of deductibility, I decided early in my career to put aside 15% of my income in 401(k)s. I have since switched to HSAs and 529s for my savings beyond my 401(k) match. I would have a real problem if they elect to change the plan rules for the money already in the 401(k) or IRA. The Feds will get their hands on the taxable portion of the money when I retire. I have to suspect that needs testing will drive my SS payments way down by then (kind of makes me look like a fool for saving in my career). I usually run a couple of different scenarios (one with SS and one without SS).

[doc03]

18. I remember a conversation me and a friend had about the

401k years ago. We came to the conclusion by the time we reach retirement age and started using the money from our 401k we would be penalized for our saving. I believe that even more today, for instance everyone in our company was offered a 401k plan about 20 years ago. The majority of the people here never contributed so we figure what will end up happening is those who saved are going to be penalized in taxes to support the ones who didn't. The whole idea of the 401k was you could contribute to it tax free then when you retire your income would be less and you would pay a lower tax rate. We all know that isn't going to happen with the deficits Bush has run up.
It looks like the Roth IRA would be the way to go today, but at 60 I don't think it would do me much good since you have to hold the money in it at least 5 years, I think. I was checking out I Bonds at the bank the other day they are currently paying 5.64% I believe, they look pretty attractive today too.

[wartrace]

20. Companies DO contribute to social security.

They pay the exact amount you do to your social security account, somewhere around 7%.

[still_one]

16. The big problem with many 401K plans is many don't provide an option to buy treasuries

CDs, or other plan instruments that are 100% insured by the government