401(k)s Are Flawed Investment Strategy
This op-ed from the New York Times, written by two experts on retirement funds and money managing, claims IRAs and 401(k)s are flawed programs for a retirement fund. The authors make a strong case that defined benefit pensions are superior—and even come up with their own plan that’s similar to the DB pension program.
A Smarter Plan to Make Retirement Savings Last
By Teresa Ghilarducci and Hamilton E. JamesLAST month, President Obama inaugurated yet another way to encourage Americans to save for retirement. In the new myRA accounts, workers can save up to $15,000 in a low-fee investment plan that, like a government savings bond, guarantees the principal. The accounts are a small step toward helping households save, but they are not an effective solution to the coming retirement crisis.
Starting in 2020, the numbers of very low-income elderly will rise sharply as the retired population soars to almost 56 million. More middle-class working Americans will be poor or near poor after they reach the age of 65. Most currently have inadequate 401(k)-type accounts or no retirement account at all. For good reason, voters tell pollsters that their top economic concern is retirement security.
We need a bolder plan, which we are calling the guaranteed retirement account (G.R.A.). Under our proposal, all workers and employers will have to make regular payments into a G.R.A., which builds until retirement age, then pays out a supplemental stream of income until that person and his or her beneficiary die.
The current system — a mix of 401(k)s and individual retirement accounts (I.R.A.s) — is broken. These plans are individually directed, voluntary and leaky. Just over half of workers don’t have access to a workplace retirement plan. According to the National Institute on Retirement Security, Americans between the ages of 40 and 55 have retirement savings of $14,500, when they will need between 20 and 30 times that amount. Many people take money out before they retire. And the wealthy tend to pay lower fees and get higher subsidies for their savings.
A bigger flaw is the way these plans hinder wise investing. Individualized retirement accounts are effectively restricted to short-term liquid stocks and bonds because they are designed to allow people to withdraw their money before retirement. So employees are paying for liquidity they don’t need and achieving subpar results. Traditional pension plans consistently perform better because they are diversified in long- and short-term investments.
In our plan, the more than 95 million workers without a pension plan would each have his or her own G.R.A. managed by an independent federal agency. Workers and employers would each contribute a mandatory minimum of 1.5 percent of the salary or contract. The current tax deduction for retirement savings would be converted to a $600 refundable tax credit to pay for the contributions of households below median income.
Workers could not withdraw money early, even for emergencies — and they won’t like that. But allowing exceptions creates a slippery slope.
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