January 26, 2009
Retirement Plan 401(k) has been specifically hit by the current economic downturn. Over the past few decades, 401 created wealth by replacing traditional corporate pensions. But the shift to 401s shifted risks from the employers to the employees and under the current crisis, this has led to employees losing retirement money.
If you have a 401(k) retirement plan at work, you don’t need us to tell you that you’ve taken a hit in the past year. The really bad news is that the damage to your retirement security is likely worse than what the numbers say on your statement.
Many Americans didn’t have enough savings coming into the downturn. And employers are increasingly cutting back or suspending their 401(k) match. FedEx, Eastman Kodak, Motorola, General Motors and Ford, among others, have announced such moves.
There’s also no guarantee that today’s battered 401(k)’s will rebound powerfully. People close to retirement don’t have time for a do-over. Even for those still far from retirement, there’s no telling how stocks will perform in the future.
They could post impressive gains, especially in the near term, from their current low levels. But they could also struggle. The last 25 years was a time of low inflation rates and low interest rates, which boosted stock prices. Going forward, inflation and interest rates have nowhere to go but up, which would be bad for stocks.
It wasn’t supposed to be this way. Over the last several decades, businesses and government used matching contributions and tax breaks to encourage the proliferation of 401(k)’s. They lauded them as a way to harness the market to create wealth and increasingly viewed them as replacements for traditional corporate pensions.
In 1983, 62 percent of workers with retirement coverage had a traditional pension only, while a mere 12 percent had 401(k)’s. Today, approximately 20 percent have a traditional pension and about two-thirds have only 401(k)’s.
The shift to 401(k)’s also shifted investing risks and responsibilities from employers to employees, but as long as participants generally made money and recovered losses quickly, the risks seemed reasonable. Now many Americans are inevitably having second thoughts.
So far, the cumulative wipe-out of household retirement savings totals about $2 trillion, and no one believes that the downturn is anywhere near over. As a result, participants in 401(k)’s are in greater danger than ever of coming up short in retirement.
That grim reality calls for an expanded approach by policy makers to retirement issues. Traditionally — and correctly — an important focus has been on lower-income Americans who lack the means to save and tend to work for employers who do not offer retirement plans.
During the campaign, President Obama supported a better savers’ tax credit to encourage savings among lower-income Americans. He also supported universal I.R.A.’s, which would make a 401(k)-like account available to all workers. Those good ideas should be pursued. There are also good ideas for improving 401(k)’s that deserve attention, such as helping people manage their retirement withdrawals so that the money lasts a lifetime.
The wipeout in 401(k)’s has made it clear that it is not enough to get more people to save more. There needs to be a better way to reasonably ensure that a lifetime of savings can’t be undone by forces beyond one’s control. The Center for Retirement Research at Boston College, a leader in retirement policy, is advocating a new savings account — in addition to Social Security and 401(k)’s — that would enable risks to be shared among workers, retirees and the government.
After decades of promoting and improving 401(k)’s, in which employees bear substantial risk, that’s a new and difficult reality for policy makers to grapple with. The sooner Mr. Obama puts his team on the issue — his budget director, Peter Orszag, is one of the nation’s top retirement experts — the better.
More
Information on US Social Security Issues
More Information on US Private Pension Issues
More Information on Trade Unions and Pension Issues
