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Teresa Ghilarducci: The 401(k) Retirement System Has Failed
Tweet Share on Facebook January 30, 2009 Comment (23)Americans lost over $1 trillion in their 401(k)s in 2008. Ouch! Evidence, says Teresa Ghilarducci, a New School for Social Research economist, that America needs to radically alter how workers save. She proposes eliminating the tax breaks for 401(k)s and replacing them with guaranteed retirement accounts. Under Ghilarducci's plan, outlined in her book When I'm Sixty-Four: The Plot Against Pensions and the Plan to Save Them, all workers who don't have a traditional pension would be required to contribute 2.5 percent of their income to a government account with a 2.5 percent employer match. A 3 percent return above inflation would be guaranteed by the government. U.S. News asked Ghilarducci about her controversial retirement plans. Excerpts:
What's wrong with the 401(k) retirement system?
The biggest problem with the 401(k) retirement system is the people who need them the most don't get the biggest benefit from the government subsidy. The people who get the biggest subsidy are in the highest tax bracket. The biggest problem with 401(k)s in general is that the contributions into the 401(k) are voluntary on the part of the employee. Sometimes, the employee gets help from the employer match, but it's not guaranteed. Because the employee puts the money in it, employees think of it as a savings account for hardships and for retirement. Because of the ability to take money out before you retire, it's not enough when you retire. The employee also has to make investment decisions. Most workers are not well suited to make those decisions. And they can't spread the risk over time. Basically, a pooled fund can pool it over many life spans, but a worker has only an individual time span to plan for. There is also market risk, and there is very little they can do to hedge against that risk.
If 401(k)s are serving investors so badly, why do people like them?
What they wrongly say is that the stock market does better than the government would. But your 401(k) is not in the stock market. Your 401(k) is in mutual funds, and you have to pay a fee for that. Because of fees and because of common mistakes that people make in managing their own money, the average returns have been about 3 percent without an inflation adjustment. They also see high-profile plans being terminated. When there are no other better options that are available, it's the best they have.
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Senior Unemployment Rate Hits 31-Year High
Tweet Share on Facebook January 30, 2009 Comment (4)Older and more tenured workers used to enjoy more job security than younger and newer employees. Companies invested time and money in their career employees and had a lot to loose by laying them off. But that edge may be disappearing during this recession.
The unemployment rate for adults age 65 and older reached 5.1 percent in December 2008, a 31-year high, according to Bureau of Labor Statistics. While that’s lower than the overall unemployment rate, which hovered at 7.2 percent in December, many retirement researchers think that the unemployment rate among older adults will continue to climb because Americans will need to work during the traditional retirement years. Last month 326,000 adults age 65 and older were unemployed, 60 percent more than in November 2007, the last month before the current recession began.
Fewer older Americans can afford to retire now than during past recessions, according to Richard Johnson, a principal research associate at the Urban Institute. The share of seniors age 65 to 69 working or looking for work was 29.7 percent in 2007, up from 20.2 percent in 1982. Workers without traditional employer-sponsored pensions and retiree health plans often need to work until they qualify for Social Security and Medicare. And there are valuable increases in Social Security check amounts for each year a worker delays claiming. Plus, the stock market lost 41 percent of its value between September 30, 2007 and December 31, 2008, including a $2.8 trillion drop in retirement account balances. This further intensifies pressures on seniors to work longer, especially workers who have only a 401(k) or IRA retirement plan. (During the 1981–82 recession, the S&P 500 index fell by only 6 percent.)
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3 Ways the Stimulus Package Would Help Laid-Off Workers
Tweet Share on Facebook January 29, 2009 Comment (86)Thousands of Americans lost their jobs this week. Major U.S. companies announced the elimination of at least 70,000 jobs, adding to the more than 2.6 million jobs the economy has lost over the past year. The U.S. House of Representatives passed a bill yesterday that would create new jobs and help some of those who lost them find and pay for health insurance. Here are 3 ways the new legislation could help recently laid-off workers.
Partially subsidized COBRA coverage. Employers are currently required to offer COBRA continuation health coverage for up to 18 months when you leave your job. But former employees must pay the entire cost of the insurance plus a 2 percent administrative fee. Many workers eligible for COBRA never take advantage of this health coverage through their former employer because the premium cost is too high. The American Recovery and Reinvestment Act says that workers who lost or lose their job between September 1, 2008 and December 31, 2009 as a result of the economic downturn would be eligible to receive a 65 percent subsidy towards their COBRA premium for up to 12 months. The Congressional Budget Office estimates that this package will help over 8.5 million people keep health care coverage for themselves and their families.
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Rate Your 401(k)
Tweet Share on Facebook January 29, 2009 Comment (5)Have you ever wondered how your 401(k)’s company match, fees, and investment choices compare to those offered by other employers? Now there’s a place where you can dish all the juicy financial details online. BrightScope Inc., an independent data analysis firm, launched the nation’s first online 401k rating system today.
The BrightScope ratings calculate how quickly each 401(k) plan will propel the average participant to retirement including factors such as the company match, fees, investment quality, and vesting schedules. Each 401(k) plan is then compared to peer companies that are roughly the same size and industry. “The rating ties directly to a person’s ability to retire in dignity,” says Matthew Hutcheson, an independent pension fiduciary with a minority interest in the company. “The lower the rating, the longer that participant is going to have to work to have the retirement security that perhaps a person in one of the peer groups with a higher rating would enjoy.”
Companies with 401k plans currently ranked among the nation’s best are Avis Budget Group, Inc., Bank of New York Mellon, Nucor Corporation, Southwest Airlines Company, and Saudi Arabian Oil Company. “Participants contributing to these plans have a high likelihood of having a secure retirement,” the company says.
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John Updike Never Planned to Retire
Tweet Share on Facebook January 27, 2009 Comment (3)Writer John Updike died on Tuesday of lung cancer at age 76. But the Pulitzer Prize winning author never planned to retire. He found writing too enjoyable to even consider giving it up. Updike’s most recent book, The Widows of Eastwick, was published in October 2008. It is a sequel to his 1984 novel, The Witches of Eastwick, which was also made into a 1987 film.
Updike told the Kansas City Star earlier this month:
“I don’t know what I’d do with my mornings if I didn’t write in them. There are pleasures to writing — you kind of get out a lot of your bad secretions. You can purge yourself of them through writing. And there’s still some market for what I have to say. On the other hand, I notice some signs of mental deterioration. My memory isn’t as good; I can’t think of words. I might forget what one character’s eyes are. Maybe each novel might be the last — but no, I’m not quite ready yet. There’s still the illusion that I’m still learning this curious trade, for which there’s very little coherent instruction. I never once believed in writing schools; this is very much an amateurish endeavor, so that the chance of growing in it is still there for a 76-year-old.”
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The 4 Pension Plans with the Steepest Losses
Tweet Share on Facebook January 27, 2009 Comment (1)If you thought your 401(k) statement was painful to look at, your pension plan (if you’re lucky enough to still have one) is probably doing even worse. The 200 largest U.S. pension plans collectively dropped 16.5 percent during the year that ended September 30, according to a survey of large plan sponsors by Pensions & Investments released yesterday. More than 30 of the 200 largest U.S. pension plans experienced asset declines of 20 percent or more, the worst drop recorded in the 20 year history of the survey.
These 4 pension plans suffered the steepest losses.
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U.S. Supreme Court: Ex-Wife Gets Deceased Dupont Co. Employee’s Pension
Tweet Share on Facebook January 27, 2009 Comment (1)The U.S. Supreme Court said yesterday that DuPont Co. was correct to pay a deceased employee's retirement benefits to his ex-wife, even after she had renounced her rights to the pension during divorce proceedings.
When William Kennedy married he designed his wife, Liv Kennedy, as the beneficiary to his pension and named no contingent beneficiary. She waived her rights to the retirement money in their divorce decree when the couple divorced 22 years later. But William Kennedy never changed his beneficiary on the retirement account.
After William Kennedy died in 2001, his daughter, Kari Kennedy, sued DuPont to recover her father's $402,000 pension. DuPont said that to comply with federal pension law it had to follow William Kennedy's instructions on the original form and pay the pension benefits to his ex-wife. The Supreme Court agreed with DuPont in an unanimous ruling.
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Sprint Nextel Cuts 401(k) Match, Home Depot Employees Still Get One
Tweet Share on Facebook January 26, 2009 Comment (1)Sprint Nextel Corp. announced the elimination of approximately 8,000 positions today. But even the employees who manage to keep their jobs won’t be unscathed. The third-largest wireless provider in the country will suspend its employee 401(k) match for 2009, extend a 2008 salary freeze through 2009, and ax its tuition reimbursement program for this year.
Home Depot, which will also downsize 7,000 jobs, however, will still contribute to the retirement plans of employees who make the cut. Although the home improvement retailer is initiating a salary freeze among all officers, it will continue to offer merit increases to non-officer associates. Earned bonuses and the existing 401(k) match will continue to be provided to all associates, including officers.
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Enjoying Simple Pleasures in Retirement
Tweet Share on Facebook January 26, 2009 Comment (3)During our careers, work, household chores, and family or community commitments compete for our time. While doing each of these activities our minds often race ahead to the next, prioritizing what will be accomplished and what can be put off until tomorrow.
After a lifetime of tight scheduling, multi-tasking, and speeding down the highway to her next appointment, Joan Mountford, a retired English teacher in Deerfield, N.H., has discovered how to slow life down. She writes in the Concord (N.H.) Monitor about her 7 years of retirement, 8 hours of sleep a night, and her quest "to live deliberately", as Henry David Thoreau did by Walden Pond:
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5 Ways President Obama Plans to Change Your Retirement
Tweet Share on Facebook January 23, 2009 Comment (110)President Obama plans to strike a new Social Security and Medicare "bargain" with the American people, he told the Washington Post last week. "What we have done is kicked this can down the road. We are now at the end of the road and are not in a position to kick it any further," he said about the government’s management of costly entitlement programs. "We have to signal seriousness in this by making sure some of the hard decisions are made under my watch, not someone else's."
Here are Obama’s retirement proposals.
Income tax. The Obama administration would like to eliminate income taxes for seniors making less than $50,000 annually. The White House estimates this will provide a tax cut averaging $1,400 to 7 million seniors.
Automatic workplace pensions. Obama plans to automatically enroll employees in workplace pension plans. Employers who do not currently offer a retirement plan will be required to enroll their employees in a direct-deposit IRA account. Workers may opt-out if they choose. The White House says this program will increase the savings participation rate for low and middle-income workers from 15 percent to approximately 80 percent. Families that earn less than $75,000 would get a 50 percent match on the first $1,000 automatically deposited into their account.
