The Investment Company Institute, the trade group for mutual fund companies, released a survey about 401(k)s Friday that suggested the nation's de facto retirement plan was working just fine, thank you very much. The survey's title, "Enduring Confidence in the 401(k) System," left little doubt as to where the survey takers stood on the effectiveness of the plans, and indeed, the poll's results suggested that 401(k)s enjoy a level of support that would make Kim Jong Il proud: Some 91 percent of respondents with 401(k) plans had a very or somewhat favorable opinion of them. And in a not-too-subtle warning to the Obama Administration, which has been exploring 401(k) reforms that include annuitization, the survey reports that 97 percent of participants support the idea that "Retirees should be able to make their own decisions about how to manage their own retirement assets and income."
Oh, please.The ICI's self-serving survey does not mean that 401(k)s have been fine all along. It does not prove that any attempt to make them more adequate or equitable or safer would be political suicide. Let's look.
- First, consider the source. The ICI is a lobbying organization designed, like all such organizations, to preserve the status quo for its members. How are important are 401(k)s to mutual fund companies? Funds hold more than half of the roughly 3.5 trillion in 401(k)s, and more than two-thirds of first-time fund buyers get their fund through a 401(k). For an instance of the ICI's knee-jerk opposition to a challenge to the 401(k) system, check out the ICI press office's response to an earlier post about 401(k) plans (and then check out Nathan Hale's response to the response, Time for Intellectual Honesty from the ICI).
- The survey doesn't change the fact that 401(k)s alone aren't adequate. It's hard to call the 401(k) system a success when it has so clearly left Americans unprepared for retirement. According to the Fed Survey of Consumer Finances, the average balance for someone approaching retirement in 2007 was just $78,000; that's enough to produce a reliable retirement income of a whopping $3,100 a year. According to the Center for Retirement Research, more than half of American workers are "at risk"-projected to be unable to maintain their current standard of living in retirement, even if they worked until age 65 and took out a reverse mortgage on their home. It doesn't matter what the survey says: The inadequacy of the current retirement system speaks for itself.
- The survey ignores the built-in problems with the 401(k) system. The results of any defined contribution retirement plan like a 401(k) depends heavily on when you withdraw money. That means you can earn the same money, save just as much, for just as long as your neighbor-and if you reached retirement at the end of 2008 and he reached it at the end of 2007, he'd be going on cruises and you'd be eating catfood. A national retirement system should not set up a "retirement timing lottery" that rewards some citizens and penalizes others because of their age. By the way, the phrase "retirement lottery" isn't mine. It was used at a conference last year by Bob Reynolds, President and CEO of Putnam Investments, a large mutual fund and 401(k) provider. Not even all the ICI's members agree with the lobby's hidebound views on 401(k) reform.
- The survey questions were leading How much should you read into a finding that most retirees agree that they "should be able to make their own decisions about their income and retirement assets?" About as much as you should read into a survey that discovered that retirees were overwhelmingly in favor of not having their grandchildren fed to alligators. The ICI apparently intended to imply that retirees prefer defined contribution plans to pension-style annuities. If so, the survey flies in the face of research that suggests retirees are happiest (and most secure) when they get a portion of their income in a steady guaranteed stream. And it is a flat contradiction of seniors" overwhelming rejection of the replacement of Social Security-the ultimate pension-style annuity-with a privatized 401(k)-like plan. Imagine if the question had read, "Lifetime guaranteed Social Security checks should be replaced by a savings plan that leaves retirees to make their own investing decisions, and if they get it wrong, they go broke."
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