March 11, 2009

Workers stay committed to 401(k) system

Working Americans are still committed to the 401(k) system, says Investment Company Institute President and CEO Paul Schott Stevens.

Updated data from October through the end of 2008 shows 401(k) participant activity was "in line with historical norms," according to ICI. Only 3.7 percent of DC plan participants stopped contributing to their accounts in 2008. Most participants maintained their asset allocations; 14.4 percent changed the asset allocation of their account balances, and 12.4 percent changed their contribution mix.

During the course of 2008, 3.9 percent of DC plan participants took any withdrawals, with 1.3 percent taking hardship withdrawals (up from 1.2 percent through October). In addition, 15.3 percent of participants had loans outstanding at year-end, according to ICI.

But the effort to improve America's 401(k) system anchors on policymakers as workers advocate groups press for plans with less investment risk.

"They don't provide enough protection against investment risk or against the risk of outliving one's assets in retirement," Steve Abrecht, director of benefits and capital stewardship for the Service Employees International Union tells BusinessWeek, referring to the vulnerability of 401(k)s.

Meanwhile analysts are weighing the idea of the simplified, universal IRA proposed in President Obama's budget outlined last month. While the idea of an automatic enrollment plan implies greater benefits for lower income workers who might otherwise not have the option of a retirement savings plan, getting a rally - especially from small business employers - behind the idea is complicated at best.

"The problem ... is that nobody wants to deal with the transition costs or complexities of turning a bunch of different types of savings accounts into just one ... each type of account has its own constituency, with various providers insisting that they know their particular 401(k) or 403(b) or 529 market. They want to preserve the comfy status quo," writes Ron Lieber for the New York Times, paraphrasing the remarks of Bill Sweetnam, Jr., principal with the Groom Law Group in Washington and former benefits tax counsel for the Treasury Department under the Bush Administration.

"Meanwhile, those of us with the temerity to move from job to job every so often end up with a jumble of accounts. It seems churlish to complain about the unintended consequences of having had the discipline to save in the first place, I know. And policy makers seem to understand that the alphabet soup of savings plans is confusing, even if it is a high-class problem," Lieber continues.

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