House 401(k) Hearing: 4 Ways to Fix the Retirement System

Miller calls current 401(k) plans a high stakes crap shoot

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The House Education and Labor Committee held a hearing today to examine the shortcomings of the U.S. retirement system. The two-and-a-half hour discussion largely highlighted the weaknesses of the current 401(k) retirement savings system. “For too many Americans, 401(k) plans have become little more than a high stakes crap shoot. If you didn’t take your retirement savings out of the market before the crash, you are likely to take years to recoup your losses, if at all,” said Chairman George Miller, a California Democrat, in an opening statement. “As a result, we are realizing that Wall Street’s guarantees of predictable benefits and peace of mind throughout retirement was nothing more than a hallow promise.”

Four invited retirement experts also offered their ideas to fix the retirement system. Excerpts:

John Bogle, founder of Vanguard Group:

“I envision the creation of an independent Federal Retirement Board to oversee both the employer-sponsors and the plan providers, assuring that the interests of plan participants are the first priority. This new system would remain in the private sector (as today), with asset managers and record keepers competing in costs and in services.”

Dean Baker, co-director of the Center for Economic and Policy Research:

Allow “workers the option to contribute to a government run pension system that would provide a modest guaranteed rate of return. The system would be a universal system like Social Security, however it would be voluntary. To try to maintain high rates of enrollment, there can be a default contribution from all workers of 3 percent, up to a modest level, such as $1,000 a year. Workers could be allowed to contribute some additional amount, for example an additional $1,000 per year, that would also earn them the same guaranteed rate of return. The system should also be structured to encourage workers to take their payouts in the form of annuities, except in the case of life threatening illness. For example, a nationwide system could easily offer free annuitization, while charging a modest penalty, perhaps 10 percent, to workers who take their money out of the account in a lump sum… At a 3 percent rate of return, a worker who saved $1,000 a year for 35 years would be able to get an annuity of $4,200 a year at age 65… This can be done at no cost to taxpayers, simply by having the government assume market risk by averaging returns over time.”

Paul Schott Stevens, president and CEO of the Investment Company Institute:

“Congress should not mandate specific investment options or distribution methods or attempt to regulate exposure to investment risk. Nor should Congress undermine the ability of plans to pay for services using asset-based fees…Congress should reject attempts to scrap or undermine the existing system or fundamentally alter its structure.”

Alicia Munnell, director of Boston College’s Center for Retirement Research:

“We also need to consider a new tier of retirement income… The goal of this additional tier would be to replace about 20 percent of pre-retirement income. To accomplish the goal, participation should be mandatory, participants should have no access to money before retirement, and benefits should be paid as annuities. The system should be funded and reside as much as possible in the private sector.”

Tell us, what do you think of these ideas to fix the 401(k) retirement system?