The New York Times editorial page added its two cents to the retirement reform debate with a piece on Sunday by Teresa Tritch. The editorial focused on the 401(k), as well it should. You can't head off the looming retirement crisis until you acknowledge that the 401(k) is part of the problem.
The 401(k) was conceived as a savings supplement to traditional pensions and Social Security. Private pensions, however, are now all but extinct, leaving the 401(k) to do the whole job of filling the income gap between what Social Security provides and what you need for a dignified retirement.
It's a job the 401(k) was never designed to do, and, not surprisingly, it has failed to do it. According to estimates from the Employee Benefits Research Institute, on June 30 the median 401(k) held by someone on the verge of retirement age was $69,000. What's that mean? At the typical financial planner's' recommended withdrawal rate of 4 percent a year, the median retiree can count on a lifetime retirement income of Social Security plus $233 a month from his 401(k). In my mind, $233 a month is all you need to know. The 401(k) isn't working.The Times cites a number of reasons.
- Workers don't save enough. A 401(k) is optional, so most 20-something workers, for example, don't contribute a dime. Even when employees do save, the median contribution rate is 6%, about half of what is needed.
- Too much money leaks out to loans or withdrawals. About 40 percent of people receiving a lump sum from their 401(k) when changing jobs take the cash and run rather than rolling it over. About a quarter of people in their 30s and 40s have an outstanding loan from their 401(k)s.
- Workers aren't good investors. Not surprisingly, 401(k) participants make the same investing mistakes as everyone else: They get too conservative when the market is down and too daring when the market is up.
- The plans create winners and losers based solely on retirement year. The Times cites a Brookings Institution study that shows that a worker who retired in 2008 after 40 years in the workforce could expect half as much money in retirement as an otherwise identical worker who retired in 1999 at the peak of the bull market. If anything, that's too mild: A T. Rowe Price study found that the year of retirement could make a four-fold difference in the size of equally responsible workers' nest eggs. Four-fold.
The Times proposes that the 401(k) get a serious overhaul, drawing on what has worked so far and, implicitly, on the experience of other countries whose retirement plans pay more attention to real people's behavior. There's nothing "la-la" about that. In my mind, the truly unrealistic idea on the table is the status quo-the notion that a wholly voluntary, self-directed supplemental savings plan can single-handedly provide for 30 years of retirement for a whole population. It's now abundantly clear that the 401(k) can't. For future generations, we ought to get serious about evolving the plan into something that has a chance of success. That's what the Times was saying. They're right.