Rep. Miller pegs 401(k)s as high stakes crap shoot

In the first of a series of hearings exploring the shortcomings of the nation's retirement system, House Education and Labor Committee Chairman Rep. George Miller, D-Calif., referred to America's 401(k) plans as little more than a "high stakes crap shoot," citing deep flaws have existed in the nation's retirement system even when the market was performing well.

"We are realizing that Wall Street's guarantees of predictable benefits and peace of mind throughout retirement was nothing more than a hallow promise," Miller said in his opening statement. "While 401(k)s are a fact of life, this committee has found that these plans in their current form do not and will not provide sufficient retirement security for the vast majority of Americans.That is why in the short term, we must preserve and strengthen 401(k)s. Hidden fees and conflicts of interest must be rooted out. And, 401(k)s need to be run in the interest of account holders, not the financial services industry."

Miller also defended Social Security, saying the program "has never looked better," and questioned the fairness of Wall Street firms, which he claimed impose hidden and excessive fees. Miller was joined by other critics, including John Bogle, founder of fund manager Vanguard Group, who, according to Bloomberg echoed Miller's remarks saying, "'the 401(k) plan is an idea whose time has come' yet 'our existing defined contribution system is failing investors' because of high fees, low levels of saving, excess flexibility that permits cashing out and too much borrowing and inappropriate asset allocation.' Bogle recommended a single defined contribution plan with annuities from low-cost providers. The single system would be overseen by an independent Federal Retirement Board to protect the interests of plan participants."

Dean Baker, co-director of the Center for Economic and Policy Research proposed a government-managed system that would provide a modest rate of return for employees, according to Bloomberg. He said it would build on Social Security and allow workers a voluntary default contribution of at least 3 percent of their salaries. Alicia Munell, director for the Center for Retirement Research at Boston College said Social Security has "shined during the crisis."

"The financial crisis - and its impact in the real economy - has highlighted the fragility of 401(k) plans as the sole supplement to Social Security," Munell said.

"In the short-term, Congress must address ways to improve defined contribution plans. The 401(k) needs to be more transparent, fair, and operated on behalf of the account holder, not Wall Street firms," Miller continued.

Washington criticism has not deterred 401(k) investors from preserving their contributions. Throughout 2008, according to the Investment Company Institute, only 3 percent of plan participants stopped contributing to their retirement plan, and 3.7 percent of participants took withdrawals from their accounts.

For more information revisit "401(k) investors stay the course" in Boomer Market Advisor's February issue.

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