Clearly, the 401(k) plan doesn’t help most Americans save for retirement because “most people have nothing or very little” in their 401(k) accounts, Daniel Hemel, an assistant professor at the University of Chicago Law School, argues in an interview with ThinkAdvisor.
Hemel contends that since 401(k)s have failed to advance broad-based retirement saving, and given the nation’s rapidly aging population, there is an urgent need to rethink the plan.
One major issue is 401(k)s’ high annual fees, which erode the very reserves employees are trying to build.
What’s Hemel’s solution? A public option in the form of the Thrift Savings Plan, currently offered to members of Congress and other federal employees. Its fees total only 3 basis points per year.
As a way to expand “access to low-cost, tax-deferred savings vehicles,” the TSP is what William Birdthistle, a professor at Chicago-Kent College of Law, and Hemel proposed in a Time magazine opinion piece on Nov. 2.
Indeed, the two sounded an alarm that the 40-year-old Section 401(k) tax code provision is “facing something of a midlife crisis.”
Birdthistle, author of “Empire of the Fund: The Way we Save Now” (Oxford University Press 2016), researches investment funds, executive compensation and corporate governance.
Hemel’s areas of research are taxation, nonprofit organizations, administrative law and federal courts.
In a ThinkAdvisor interview with this reporter published on Nov. 29, Louis Harvey, president and CEO of Dalbar, a leading Boston-based financial services market research company, challenged the professors’ view of the 401(k) and disputed the accuracy of their article.
Hemel insists that “the facts we put forward in the op-ed are incontrovertible. One could disagree with it, but it wasn’t factually wrong.”
ThinkAdvisor recently interviewed Hemel by phone to learn more about why the 401(k) has been what the two academics call “ineffective” and what they’re recommending to remedy the situation.
Here are excerpts from our conversation:
THINKADVISOR: Professor Birdthistle and you write that Section 401(k) is “facing something of a midlife crisis.” Why is that? And how urgently does something need to be done about it?
DANIEL HEMEL: It’s a midlife crisis in the sense that it’s not accomplishing what we, as a society, should want it to accomplish. How urgent is it? We have a fast-aging population. So, yes, it’s urgent that we deal with this. It’s been urgent for a while. Do I think that Section 401(k) will be repealed tomorrow? No. That’s not the claim we’re making.
The 401(k) is “ineffective at helping most American workers save for retirement,” you write. On what do you and Professor Birdthistle base that statement?
Most people have nothing or very little in their 401(k)s. So Section 401(k) can’t have done all that much. Section 401(k) does help rich people save for retirement. It doesn’t help most Americans save for retirement. The U.S. Department of Treasury’s Office of Tax Analysis data show that most Americans don’t benefit from Section 401(k). That’s factually true.
You write also that the 401(k) is inefficient. “In particular… high administrative and management fees are eating up too much of Americans’ nest eggs.” How much are employees paying in fees?
We cite a  study that says the average fee is 97 basis points. There’s no reason why people should be paying close to 100 basis points.
What could be done to lower fees?