Retirement Experts: Don't Let Clickbait Headlines Sink the 401(k)

Arguments that suggest the United States should scuttle tax-advantaged retirement savings accounts in the workplace in order to “save” Social Security or use the newfound revenues for other purposes are nothing new, but retirement experts worry that the latest salvo in the long-running debate could mislead the public and result in poor policy decisions.

The anti-401(k) argument surfaced again recently in an analysis published by the American Enterprise Institute, a right-leaning policy group, in which the retirement researchers Alicia Munnell and Andrew Biggs argue the tax deferral rules for retirement savings primarily benefit the wealthy and exacerbate economic disparities. A better approach, they argue, would be to eliminate tax deferrals for 401(k)s and IRAs and direct the new revenue to shore up Social Security’s shaky finances.

This week, parts of the same argument were made in a Bloomberg opinion piece written by Allison Schrager, a columnist covering economics and a senior fellow at the Manhattan Institute, a conservative policy group.

Schrager’s piece was titled “Your 401(k) Will Be Gone in a Decade,” and in the viewpoint of PGIM DC Solutions’ David Blanchett, the simplistic headline and narrow framing of the main arguments shared in the piece “border on the absurd.”

Specifically, Blanchett said, Schrager’s proposal fails to consider the bigger picture and the potential unintended macroeconomic consequences of so fundamentally altering the retirement savings and investing landscape. What’s more, her arguments cut against the actual current of durable bipartisanship that has brought the successful expansion and improvement of the workplace retirement plan system in recent years.

“When someone first sent me this story, I thought it almost seemed like clickbait,” Blanchett told ThinkAdvisor. “I’m sorry, but to suggest in a Bloomberg column that 401(k) plans are going to disappear and that tax-advantaged savings aren’t popular, it’s almost like a stunt to get clicks. What I can tell you for sure is that, as the history of DC plans shows, people only save for retirement when they have access to a plan. … The notion in this piece that people will just turn around and go out and keep saving absent the 401(k)? That’s just not realistic.”

The Arguments Against the 401(k)

As Blanchett pointed out, Schrager’s arguments are not exactly the same as those raised in the Biggs-Munnell proposal, which involves reducing tax incentives for workplace retirement accounts without necessarily torpedoing the entire 401(k) plan system.

Schrager’s approach, as she also detailed in an interview on CNBC’s Squawk Box, would involve essentially eliminating the 401(k) plan system and then replacing it with liquid workplace savings accounts that have no tax incentives and aren’t necessarily tied to the goal of retirement.

With such accounts in hand, the argument goes, employees could choose the best way to direct their own private savings without facing potential early withdrawal penalties, and the government would get a lot of additional revenue.

For their part, Blanchett and other experts see some potential merit in the Biggs-Munnell framework — mainly because something will need to be done in the coming decade to avoid big Social Security benefit cuts — yet they do not favor the framework as the most viable solution.

Instead, many experts advocate for a more incremental reform approach that pulls multiple levers and seeks to spread the pain of tax hikes and benefit cuts as equitably and non-disruptively as possible.

What is critical to understand, Blanchett argued, is that tax advantages are one thing, and the runaway success of automatic enrollment 401(k) plans with pre-diversified investment options is another. One can tweak the tax incentives without throwing the whole system away.