The New York Times weighed in on the debate over 401(k) plans this morning. There are a number of ideas that sound just peachy in the la-la land that the Editors must believe exists. But there's little in the piece that helps advance feasible retirement solutions here in the real world.
The debate over 401(k) reform has heated up in the aftermath of the financial crisis. Perhaps nowhere was pain felt more acutely and immediately than in 401(k) accounts, which are down approximately 25% from the peak levels of 2007.
With retirement savings depleted, many participants are demoralized and scared. In an April report, AARP said that 30% of retirement plan participants have stopped contributing money into their accounts. Even Congress is getting into the act, suggesting that improved fee disclosure would improve the health of 401(k) plans. Both lawmakers and the NYT are missing the point in addressing the American retirement problem.
The advent of 401(k)s saw a massive risk transfer from corporations to employees. But as pensions disappeared, nobody said, "Hey, instead of your boss paying into a guaranteed retirement plan, the risk of making contributions and managing your retirement money is entirely on you."
And until the bottom fell out of the market, ignorance was bliss. It helped that 401(k) plans took off at the beginning of a massive bull market. Even as markets hiccuped in 1987 and 1990, they rebounded within a year, masking the larger risks that participants were bearing and diminishing their respect for prudence.
Let's not forget that 401(k)s were designed to supplement pensions, not replace them. But with participants happy with their investment results, companies seized the opportunity to reduce costs and dumped the long-term liability of employee pensions once and for all.
Everyone was winning, until they weren't. With billions of retirement savings wiped out in this downturn, how can we kick-start retirement in America?
Many participants aren't educated in basic financial concepts. It's why regulators spend millions of dollars a year on investor education programs. But they didn't go far enough. Congress should stop dithering about 401(k) fee disclosure and instead require plan sponsors to provide ongoing "Personal Finance 101" to workers. Like anti-harassment or fire safety training, this should be mandatory and delivered by a third party, not the fund company that administers the plan.
Education can't solve everything, but it can increase awareness and management of risk. It also would help address some of the problems raised by the NYT editorial, like allocation decisions and contribution levels.
MoneyWatch.com's Editor-in-Chief thinks that we should scrap 401(k) plans. I think that's unlikely to occur. So, if we accept that the plans are here to stay, at least for a while, that means that workers must act as their own financial doctors -- diagnose their problems by measuring risk tolerance, prescribe medication by choosing the right investments and stay fit by applying basic discipline.
Some may never learn-telling dieters to eat less and exercise more doesn't mean they'll lose weight, and financial education doesn't mean that everyone will become a savvy investor. Fee transparency is useful, but a long-term education initiative would help Americans save more money and rest easier when the next downturn arrives.
Image by Flickr User Joe Shlabotnik, cc 2.0
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