There's no longer any debate over whether working Americans are
accumulating enough savings and employer contributions,
supplemented by Social Security, to live comfortably in retirement.
Indisputably, they are not, and the matter is getting critical.
As a result, the debate has shifted to whether today's 401(k)
and 403(b) plans should be reformed, or be replaced or supplemented
with something entirely new, such as the proposed
government-sponsored Guaranteed Retirement Accounts conceived by
economist Teresa Ghilarducci, the USA Retirement Fund idea of Sen.
Tom Harkin (D-Iowa) or something else.
Each of these new plans has its merits. But, for a variety of
reasons, I don't see any realistic prospect of a brand-new system,
especially one with heavy federal involvement during an era of
Washington will have its hands full devising big changes in
Medicare and small changes in Social Security to keep them
financially viable and help rein in the overall budget deficit.
Given today's legislative paralysis, that's about all we can expect
of Capitol Hill and the White House. In any event, the
financial-services industry, fearing it would be cut out of a
replacement plan for 401(k)s, would use its political clout to
Sweeping changes. Fortunately, scrapping the present system
isn't necessary. Reform would be enough--as long as it's a bold
overhaul, not just tinkering around the edges. Two years ago, I
laid out a blueprint for such a plan in this column (see
401(k)s for Everyone
Coverage. Every employer in America, regardless of size, would
be required to offer a 401(k) or 403(b) account to all employees,
full- or part-time.
Funding. Both the employer and employee would be required to
make a tax-free contribution to the account--ideally, at least 3%
each for younger employees (6% total), rising with age to a
Investments. Asset choices--now too numerous and confusing to
many employees--would be narrowed to include mostly low-cost index
funds (stocks and bonds) and exchange-traded funds. Employees would
receive advice on an appropriate asset allocation for their
situation, or they could choose a default mix, such as the one long
recommended by Vanguard founder John Bogle: The percentage of bonds
in an account would equal the employee's age, with the rest in
domestic and foreign blue-chip stock index funds.
Management. Members of the financial-services industry would
continue to manage these accounts, but there would be caps on
Withdrawals. To deal with a troubling situation that arose
during the Great Recession--that is, employees raiding their 401(k)
accounts for living expenses--no loans or early withdrawals would
be permitted before age 65, except in the case of permanent
disability. (Yes, my plan would ban the kind of home down payment
.) In retirement, a 401(k) balance would be paid out gradually
according to life-expectancy tables, like an annuity. Unlike an
annuity, however, whatever was left at death would become part of
the retiree's estate.
When I first proposed this sweeping overhaul, I predicted that
"some libertarians will argue that mandatory retirement saving,
like mandatory health insurance, would be an imposition on their
personal freedom." And that's exactly what I heard from some of our
They're right. But I believe this imposition would pale in
comparison to the huge financial burden that nonsavers and
short-sighted employers--in a purely voluntary retirement
system--will surely impose many years from now on a compassionate