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.
The two academics lament the 401(k)’s “distributional effect.” That is to say, most benefits flow to the wealthy — “households in the top fifth of all earners.”
Counters Harvey: “Basic to understanding economics is that wealthy people save more than their poorer counterparts! The 401(k) will not change that. If I make $10,000 a year, I’m not going to have as big a 401(k) plan as if I make $10 million. Duh.”
How about this idea the professors float: imposing on high-income tax payers a “modest” one-time excise tax on 401(k) and IRA contributions and withdrawals?
“You’re not creating any new money by taxing. If you tax folks in one area, they’re going to move their money into another area,” Harvey says. “The rich will just move it offshore, for example. They’re going to take the path of least resistance and go somewhere else. They won’t just sit there and pay a ridiculous tax.”
To reduce participant expenses, the professors have this idea: keeping the 401(k) while “expanding access” for all to the low-cost, tax-deferred Thrift Savings Plan (TSP), already available to federal government employees.
Ted Benna, who famously created the first 401(k) plan in 1979, called the TSP “one thing to consider” in an Aug. 28 interview with ThinkAdvisor. It would, he said, “put the private sector in competition with the government.”
Essentially, the professors’ TSP suggestion means that the federal government would “take over the control of everyone’s retirement,” Harvey says. “The old pension plans were generally controlled by the employers. The 401(k) is controlled by the individual. [Birdthistle and Hemel] are proposing to [have] a separate Social Security system.”
Inasmuch as the professors believe the 401(k) as it stands is not a “viable” option, Harvey sees it as “not a reasonable option.”
Benna envisions certain saving-for-retirement changes that he argues would benefit employees most, as he indicated in the earlier ThinkAdvisor interview.
First, “requiring all employers with a [certain] minimum number of employees to offer a payroll-deduction retirement program and to use auto-enrollment for signing up employees.”
Further, he proposes a “mandate that [workers] keep [their savings] locked up for retirement either in the employees’ next 401(k), an IRA or other plan.”
Does the “Father of 401(k)s” think those changes are likely to be made? Says Benna: “Only if someone introduced a piece of legislation that had a chance of passing through Congress and getting signed by the president.”
(This story has been corrected to reflect that only Birdthistle, not Hemel, was emailed a request for comment and did not respond.)
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