04/19/2012 11:24 am ET Updated Jun 19, 2012

Once Again, Academics Get an F When It Comes to Retirement Math

As an advocate for 401(k) participants, the only thing more frustrating for me than not being able to get Capitol Hill to make the plans walk and talk like pensions is tackling "innumeracy" on the part of academics who portray themselves as experts, but apparently never consulted pension actuaries about how the plans actually work.

In a study recently cited on MSNBC, Alicia Munnell of Boston College's Center for Retirement Research contends that 51 percent of Americans are on track for retirement, which is ridiculously optimistic given that only 17 percent of the population is covered by a regular pension and half of Americans aren't even covered by a less-generous 401(k) plan. This relatively optimistic conclusion also contradicts Munnell's 2011 findings that the median household in their early 60s has only saved one quarter of what they need. Who are these 51 percent of Americans who are on track if the majority of aging Boomers aren't on track, given that Gen X and Y are even worse off?

What's more, Munnell blames the inadequacy on workers poor investment decisions, and not the measly employer contribution rate of 3 percent of pay to 401(k) accounts compared to 8 percent for pensions, which is why most Americans don't have at least 10 times their salary in their current and rollover accounts at retirement. Her solution? "If people work until age 70, I think the vast majority of people would be perfectly fine." A mere five more years in the workforce If they've only saved one quarter of what they need?

Then there's Theresa Ghilarducci of the New School, who thinks that the tax breaks in 401(k) plans go to the highest earners -- except that nobody under age 50 is allowed to contribute more than $17,000 a year because of "contribution limits." In the past she proposed replacing the 3 percent-of-pay matching contribution to 401(k) accounts with a one-size-fits all puny $600 annual government contribution, which would reduce retirement wealth for everybody. Her current solution? Every American should have a public sector pension because they "use the best professional managers that aren't available for retail accounts and have the bargaining power to lower fees."

If public pensions are run professionally and cost-effectively, what's behind recent calls for stricter regulation of them, not to mention litigation against the people who run them? In 2009 the SEC voted to propose curbing "pay to play" practices by barring investment firms from providing management services for two years if they contribute to politicians who have clout in awarding contracts to managers of public pension plans. In 2010 former New York State Comptroller Alan Hevesi pleaded guilty to a felony corruption charge for accepting more than $1 million in exchange for allowing his benefactor to earn more than $18 million in fees for investing $250 million of the state's pension funds. Then there's the New York unions who filed a class action suit in 2009 against an investment manager who invested their pension money with Bernie Madoff Investment Securities LLC, according to the Albany Times Union. And while not every public pension has invested in Madoff-style Ponzi schemes, too many have bet recklessly on risky stuff like commodity futures, junk bonds and hedge.

Finally, there's Boston University's Laurence Kotlikoff who not only told Fortune magazine in 2007 that Americans are saving TOO much for retirement but markets software that advises people to save less along with co-authoring a book advising future retirees to Spend 'Til the End. When contacted, Kotlikoff insisted he only thinks 20 percent of the population is saving too much, although I'd love to know who these people are.

Ironically, these three academics are among the few Americans who can afford to retire because their employers contribute at least twice as much to their version of a 401(k) account called a 403(b). As I pointed out in a previous post, Boston College contributes the equivalent of 8 percent of pay for those with fewer than 9 years of service and 10 percent for those with more and the New School contributes 7 percent for those with fewer than six years and 10 percent for those with more. Boston University's plan is even more generous--contributing 5% of an employee's base salary up to an "integration level" -- currently $35,200 -- plus 10 percent of the base salary above it. The contribution rate increases at age 45 and again at age 50: to 9 percent up to the integration level and 14 percent above it (up to a certain ceiling set by the IRS).

So once again I'm calling on all of you intellectually superior non-academics to weigh in on what's the best fix for our underfunded plans. My proposal is to boost employer contributions -- in fact, triple them for Fortune 100 companies who can afford multimillion dollar executive pay packages -- make "ownership" of employer contributions immediate, and allow workers to choose a "mutual fund for life" so you don't have to keep picking a new fund every time you change jobs.

Here's more info at my website: Got more suggestions? Please post your comments and I'll gladly incorporate good ideas into my plan, which I will forward to the appropriate Congressional committee in the hope they'll finally get off their butts.