http://www.latimes.com/news/printedition/front/la-fi-retire16-2008nov16,0,3528768.story
November 16, 2008
The Los Angeles Times
Calls grow to overhaul 401(k) retirement plans
By Jim Puzzanghera
The financial crisis, which has caused a dramatic decline in the value
of the average worker's account, has undermined confidence in the
system.
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 benefits that 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.
For one thing, Democrats have campaigned on the promise of a better
deal for middle-class Americans. Also, many workers are aghast at the
sudden discovery that their retirement years may be a lot less golden
than they expected.
Even for people who have faithfully participated in the new retirement
plans, which depend on annual savings and investment in 401(k) and
similar accounts, much if not all of what they gained in the stock
market over the last 10 years has been wiped out.
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.
That's a potentially disastrous turn of events, because the key to
making the savings plans work is the hoped-for gains from long-term
investing, not just the amount workers set aside.
The present system is further called into question by the fact that
millions of Americans have not had such plans available to them or have
not participated for other reasons, including stagnant incomes that
made saving difficult or impossible.
"The current 401(k) system has not turned out to be as secure as we
want it to be," said Rep. George Miller (D-Martinez), chairman of the
House Education and Labor Committee. "It has not provided the returns
that we want it to. And it's not provided the level of savings that we
want it to. It's kind of failing on a number of fronts.
"Should there be a serious reassessment? Absolutely," he said.
Miller's committee already has held two hearings on the effects of the
financial crisis on retirement savings plans. At one, a professor from
New York's New School for Social Research called for creating
government-backed retirement savings accounts that would offer a
guaranteed, inflation-adjusted 3% return. The government would
contribute to the accounts using money gained by eliminating the annual
tax breaks for 401(k) savings -- about $80 billion.
The idea has not been embraced by key lawmakers, perhaps in part
because abolishing the tax break on 401(k) savings could reduce
participation.
But the fact that the idea received a serious hearing before Congress
is a measure of how much the crisis has shaken confidence in the 401(k)
approach.
"In July, my plan was looked on at best as a noble idea . . . but
completely unrealistic," said the plan's author, Teresa Ghilarducci, a
professor of economic policy analysis at the New School and a longtime
critic of 401(k) plans. "I was viewed as thinking out of the box, and
now I'm in the box."
Other ideas for overhauling the 401(k) system are being advanced. UC
Berkeley political scientist Jacob Hacker, author of "The Great Risk
Shift," has proposed a variation of guaranteed government retirement
accounts.
And the Aspen Institute's Initiative on Financial Security last year
proposed several changes, including individual retirement accounts that
have a government contribution match for lower-income workers and
guaranteed annuities to supplement Social Security.
U.S. corporations used to offer pensions known as defined-benefit
programs because employers promised to pay specified benefits, usually
based on workers' earnings and years of service.
The predominant system today is known as a defined-contribution plan.
Workers agree to have specified amounts deducted from their pay and put
into investment accounts such as 401(k)s. As incentive to participate,
the workers receive tax breaks.
At retirement, workers commonly take the total in their account and buy
an annuity. The bigger the sum in the account, the bigger the worker's
monthly stipend.
Until recently, employers usually contributed to workers' accounts as
well. Many now cap their contributions or have stopped contributing
entirely.
The transition to the defined-contribution 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%.
The transformation allowed people to benefit if they made smart
investment decisions or if the markets soared.
But it put retirement income at risk when the economy turned bad.
"We suddenly found ourselves, without anyone making a purposeful
decision, in a world where the primary plan was this 401(k)," said
Alicia H. Munnell, director of the Center for Retirement Research. "In
the wake of this financial crisis, I think a consensus is emerging that
we just can't have a retirement system that exposes people to this type
of risk."
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Michael