Not one to simply “bash” the 401(k), and to his credit, Morningstar’s John Rekenthaler, who recently opined that the 401(k) had outlived its usefulness,[i] now offers an alternative that he considers to be a superior alternative, something he titles “the New American Retirement Plan.” Despite the shortfalls his previous column attributed to the 401(k), this proposal in most of its elements seems relatively modest, at least structurally. It’s (basically – in 25 words or less), a national DC plan for all employers, probably with mandatory employee contributions, no requirement for employer contributions, and tighter restrictions on withdrawals.[ii]
Make no mistake, though – the devil, and there’s mischief aplenty here – lies in the details.
Rekenthaler’s basic premise – one that he describes not only as “the first,” but the “most important” step – is to “jettison the employer’s responsibilities,” noting that “expecting companies to sponsor retirement plans is like demanding that a dog dance; it may comply, but neither well nor happily. Companies run businesses. That is what they are created to do.”
I get it. How much simpler would business be if you, as an employer, didn’t have to worry about the cost, aggravation, and yes – liability – associated with providing benefits? But let’s set aside for a moment the impact that benefits clearly have, in terms of not only job choice, but job retention.[iii] Let’s turn our attention to a program already in existence that, as Rekenthaler suggests, “jettisons” the employer’s responsibilities. Specifically, let’s consider for a moment the OregonSaves program – the longest running, and arguably quite successful – state-run programs for private sector workers. Two years in, and admittedly absorbing a part of the workforce – smaller businesses – that is perhaps lower paid, and less tenured – that program has a participation rate of approximately 70%, and an average deferral of 5.5%.
Now, that’s 70% better than the participation rate of those individuals previously, and that 5.5% saved is almost certainly an improvement from the 0% these workers were likely setting aside from retirement before the advent of the program. Those results, however, pale in comparison with those reported in the 62nd annual Plan Sponsor Council of America (PSCA) 401(k) survey. We’re talking record high contribution rates of 12.2% (5.2% of that from employers, by the way) and opt-out rates of generally less than 5%, compared to the 27% or so in the state-run program.
And yet while Rekenthaler’s initial premise regarding the 401(k)’s “expiration” claims the current system has failed to deliver on its promise, here there’s not even an attempt to quantify what this “new” approach would produce in terms of retirement income adequacy, nor any notion of what level of mandatory employee contributions might be required to offset the loss of employer contributions. Could an unmandated employee contribution-only account produce “enough?”
Rekenthaler leaves open for “discussion” whether employee participation should, in fact, be mandatory, or mandatory only up to a certain level, and whether there should be a voluntary employer match or not. But adequacy of retirement funding isn’t even mentioned.
Despite the concerns raised (and acknowledged in a subsequent post) regarding the adequacy of the current system, he seems content to put forth a program he considers to be superior in design, apparently assuming it would also produce superior, if not sufficient, results – leaving it to the rest of us to work out – and presumably live with – the details.
Indeed, with as many opportunities for misuse, abuse, and underuse as the current voluntary system contains, it’s nothing short of amazing just how successful it has been in helping provide, in conjunction with Social Security and personal savings, the prospects for a financially secure retirement, nurtured by select tax incentives and bounded in by nondiscrimination rules and eligibility tests.
Sure, there’s still room for improvements in the current system – but mostly it seems to me that the problem with the current system seems to be that there’s not “enough” of it. As for the wisdom of cutting the support of employers from the current system – well, that seems to me like cutting off your nose to spite your face…
- Nevin E. Adams, JD
[i]His
columns are generally thoughtful and thought-provoking, his
perspectives rational and well-reasoned, his commentary nearly always
not only interesting, but entertaining. But on this one – well, let’s
just say we disagree.
[ii]As
for leakage – well, Rekenthaler’s solution there is a simple one:
“Forget tax penalties; they do not sufficiently deter foolishness.
Instead, ban early withdrawals outright. After all, retirement-plan
investors receive a benefit from the government for deferring taxes. It
is only fair that they give something back.” Only consider for a moment –
if you knew as a matter of course when the money was being
automatically deducted from your paycheck that you would never again be
able to access it for anything pre-retirement – how might that affect your opt-out decision? (My guess is you’d hold back some, if not all.)
[iii]Not
to mention the widespread availability and applicability of Social
Security, which, though technically an insurance, not an account-based
program, ostensibly already has many of the attributes Rekenthaler
prizes, while drawing 12.4% of all wages up through $137.700/year.
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