Is the Trend Toward 401(k)s a Good Idea?
By: Source: AARP Bulletin Today Date Posted: 2003-09-03 13:42:00-04:00
Yes Let Workers Pick Their Savings Plan
By James K. Glassman
Since its invention 24 years ago, the 401(k) plan has become the most popular savings vehicle in American history. And no wonder. Employees choose the voluntary 401(k) because it gives them more say in the most personal of all financial decisions—building a retirement nest egg. We don't let an employer pick the house we live in. Why let the company decide how we'll save for retirement?
At last count, 42 million Americans participated in 401(k) "defined contribution" plans. That's a huge vote of confidence. Typically, employees choose among stock, bond and money-market mutual funds, as well as company stock, and employers match their contributions. The assets build up tax deferred.
A "defined benefit" plan promises specific pension benefits but leaves you at the mercy of a company that might not outlive you.
Detractors of 401(k) plans point to the recent stock market decline, but that's short-term thinking. Stocks are by far the best investment for the long term and are well-suited to most 401(k)s. In the worst 20-year period since 1931, the stock market returned 242 percent.
Still scared of stocks? Not a problem: With 401(k)s, risk-averse investors can choose bonds and cash; more than one-fourth of them own no stock mutual funds at all.
Opponents imply Americans can't make their own financial decisions. Yet two-thirds of families own their own homes—an investment usually larger than a 401(k). And a 2001 study by the Investment Company Institute shows the average plan participant allocates assets the way financial professionals suggest: lots of stocks when you're young, with more bonds and cash as you near retirement.
So don't pare back 401(k) plans. Liberate them by allowing more income to be tax deferred, thus boosting savings. Ultimately, the best thing about these plans is that they foster the American values of self-reliance and independence. And they are profitable to boot.
James K. Glassman is a fellow at the Washington-based American Enterprise Institute and a syndicated columnist for The Washington Post.
No Most Workers Risk Outliving Savings
By Karen Ferguson
If there is a silver lining to the Enron crisis, it is the resurgence of interest in traditional pensions. American workers now know they cannot count on 401(k) plans to ensure their well-being in retirement.
Enron's bankruptcy—and later WorldCom's collapse—highlighted the vulnerability of 401(k)s to stock market risks, particularly when employees' money is heavily invested in their company's stock. But there are other equally serious risks with 401(k)s: The typical American worker cannot afford to contribute enough, or to take the kind of gambles needed to get high investment returns or to leave the money untouched until retirement.
Traditional pensions are far from perfect: They provide too little to younger and shorter-service employees. But, unlike 401(k)s, they provide professional management of pooled, diversified investments, are guaranteed by a federal insurance program and offer lifetime monthly benefits to all covered workers, not just those who can afford to contribute.
The sad fact for most American workers is that 401(k)s will not provide adequate retirement security. The latest U.S. Census Bureau data showed that half of all private-sector employees contributing to 401(k)s had less than $12,000 in their accounts—and that was before the stock market downturn.
The challenge now is where to go from here. Having successfully shifted the risk and responsibility of retirement savings to their workers, employers are reluctant to resume those burdens. At the same time, employees don't want to give up the simplicity and portability—or tax shelter and sense of empowerment —that 401(k)s provide.
Plainly what we need are new plan designs that combine the best of existing and innovative ideas to provide secure pension coverage. Fortunately, business, labor and retiree groups are participating in a Conversation on Coverage to develop new concepts for retirement plans that all workers can depend on.
Karen Ferguson is director of the Pension Rights Center, a Washington-based consumer organization coordinating the Conversation on Coverage.
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