The 401(k) savings plan is “facing a midlife crisis” because it has been “ineffective at helping most American workers save for retirement,” argue Professor William Birdthistle of Chicago-Kent College of Law and Daniel Hemel, assistant professor at the University of Chicago Law School, in a Time magazine opinion piece on Nov. 2.
“That’s ludicrous! It’s a pathetically incorrect article,” contends Louis Harvey, president and CEO of Dalbar, a leading Boston-based financial services market research company.
“The $5 trillion-plus in 401(k) plans right now is the largest pool of retirement assets in the country,” Harvey notes. “They’re saying this doesn’t exist? Give me a break! Are these guys thinking about what they’re saying — or just spurting?”
On the occasion of 401(k)’s 40th anniversary, Birdthistle and Hemel are calling for Congress to “reconsider” Internal Revenue Code Section 401(k), which became effective on Jan. 1, 1980.
“If we’re serious about ensuring retirement security for American workers, then the status quo is not a viable option,” the professors contend.
They cite high costs to plan participants, lost revenue to the government, access to plans only by a limited number of workers and the uneven distribution of assets that favors the wealthy, plus other objections.
“The whole issue of the government losing revenue is bogus,” Harvey maintains. “The government was losing money on the old corporate pension plans as well. No matter how you look at it, whether it’s a defined benefit plan or a defined contribution plan, it’s a revenue loss to the government.”
Harvey continues, “Missing completely [from the article] is the larger problem of employees spending too much and saving too little.”
Yes, costs to participants are high, Harvey acknowledges. But the basis for that are rules under the Employee Retirement Income Security Act and regulations that require administrative labor and a massive amount of paperwork.
“The fundamental big issue the [professors] are not addressing is that it’s vastly expensive simply to support a 401(k) plan. There are a lot of ways to redo this,” Harvey says, “but it would need ‘uncomplicating’ the rules.”
Harvey proposes one way: raising participant fees via a one-time cost that would “pay for itself in a couple of years. In the long run, it would probably mean lower costs,” he says.
The professors maintain that the government’s revenue loss stems from the incentive for employees to save more, Harvey notes.
But “without the 401(k), the government would be creating an enormous liability to fund the retirement of millions and millions of people,” Harvey says. “That would put a huge burden on the subsidy systems: people would rely on the government if they didn’t have their own funding.”
An email to Birdthistle requesting a comment for this article wasn’t answered.