Interesting cover article in TIME magazine this week titled, “Why it’s time to retire the 401(k).”
Article author Stephen Gandel says “the 401(k) is a lousy idea, a financial flop, a rotten repository for our retirement reserves.” He goes on to argue the accounts prove most dangerous to those closest to retirement, due to 401(k) growth being driven primarily by contributions in early years, but becoming more market-exposed and sensitive to market drops the longer you hold it.
There are plenty of frightening statistics – the average 401(k) has a balance of just $45,519; 46% of all 401(k) accounts have less than $10,000; the median investor in 401(k)s and similar accounts lost 29.2% in 2008 and the five-year return was -0.5%; 44% of all Americans are in danger of going broke in their postwork years; just to name a few.
The article talks about how most people would be better off if traditional pension plans had not been abandoned in favor of 401(k) plans. It mentions that in 1983, more than 60% or workers were covered by traditional pensions. By 2007 that dropped to 17%. In that same time, 401(k)s have grown from less than 15% of workers having the plans to 63% utilizing them by 2007.
While corporate America has no interest in reverting back to pension plans, the article did bring forth three prospective alternatives to the traditional 401(k). One is the Automatic 401(k), where a system of defaults prompts people to save more and invest more wisely. The second is a “Guaranteed Retirement Account,” a government plan to ensure that workers receive 26% of pay in retirement on top of Social Security, with workers paying in 5% per year. Finally mentioned is “Retirement Insurance,” where policies offered by private insurers pay for nearly 30% of retirement.
My eye of course is drawn to this third option. Instead of putting 6% of a worker’s salary into a 401(k) or some other investment account, each pay period the worker would send 6% of his check to a retirement insurance provider. “The policy would work similarly to a traditional pension in that it would provide a guaranteed monthly check equal to about a quarter of your final pay, from when you quit working until you die,” the article states. “…the policy would be portable. Contribute for 30 years and you would be guaranteed income in retirement, no matter how many employers you worked for.”
Hmmm. After all the recent debate about a “public option” being included in health care reform, chances of a government-run system to replace the 401(k) is a distant longshot at best. But with opinion polls consistently showing that a majority of people would be willing to give up the flexibility of a 401(k) for a guaranteed return, this “Retirement Insurance” idea could well gain favor with a working population that is right now terrified of their financial prospects in retirement.