) -- Americans with 401(k) retirement plans lost about $1 trillion in the stock-market crash. There was no hiding -- few mutual funds were spared.
The latest bear market, following a tumultuous three-year decline earlier in the decade, has hobbled investors, setting back many to where they were more than 10 years ago. As a result, 401(k) plans' inherent deficiencies were exposed, prompting lawsuits, government reviews and proposals for a new way to save for retirement. The 50% rise in the S&P 500 Index over the past few months has hardly helped.
Since they were established in 1978, 401(k)'s have grown in popularity and prominence. But the three-decade honeymoon seems to be over. On top of investment declines, there was plenty of insult to add to the injury.
Companies began slashing matching contributions, which once soothed the sting of lost pensions. Participants realized that, on paper, they had control over investment options, but were handcuffed by what was available and their own lack of financial literacy. Exorbitant fees mopped up tens of thousands of dollars of a lifetime of saving.
What gets lost in all of this is that 401(k)'s were never intended to be a primary retirement vehicle. So what now?
In Washington, the Obama administration is proposing to improve retirement plans by making sure more people participate. The president is calling for automatic enrollments for companies with 401(k) plans. Any business with 10 or more employees that doesn't offer a plan would be required to automatically deduct contributions into an IRA account.
There are more radical plans being bandied about. Teresa Ghilarducci, an economics professor at The New School for Social Research in New York, created a stir with her proposal that the whole system be eliminated and the estimated $80 billion a year in tax breaks the government pays be used to kick-start new "universal" plans. The plans would invest in Treasury bonds indexed at 3% over the rate of inflation and offer a structured annuity payout.
Not everyone is ready to give up on the 401(k). Michael Doshier, vice president of marketing for
Workplace Investing Group, defends them while acknowledging they're in need of a "tune-up."
"The basic framework is solid," he says. "The 401(k) is vital and viable, but there are clearly some things that we could fix."
He praises the system for being resilient enough to withstand even the recent gut punch of a powerful recession and still be able to provide retirees with the 50% to 85% income replacement they need.
He said Boston-based Fidelity recently surveyed 1 million customers who, over five years, continued to make contributions. Even with the recent downturn, the average account balance managed to show a 35% increase.
"It is the power of staying the course and dollar-cost averaging and the compounding," he says. "The drop we've seen in those five years is the largest we've seen since the Great Depression. But it doesn't feel too bad if you think about it from that perspective."
Efforts to rein in fees are a priority for the reform-minded. Under some scenarios, a 2.5% fee structure reduces gains by as much as 80%.
Federal law requires employers to evaluate 401(k) providers to ensure that fees are reasonable. But there are no guidelines that define what a "reasonable" fee is.
Speeding the call for fee oversight is both an ongoing Congressional review and a growing number of lawsuits filed against companies whose employees don't feel they exercised adequate oversight. Among those that have been sued are
"The retirement-plan industry has been artful at evading that for a long time, and they have been very strong lobbyists in trying to prevent any rules going into effect that would actually disclose to people the same information they would get if they purchased the same product in an IRA," says David B. Loeper, chief executive of Wealthcare Capital Management and author of
Stop the 401(k) Rip-Off!
. "If you are paying an extra 1% to 1.5% in fees, the product vendors can make more off your lifetime of savings than you do."
Loeper laid out an example of the toll that fees can take. Consider a 45-year-old who has accumulated $50,000 in a retirement plan, has a balanced allocation and is contributing $15,000 a year. Paying an extra 1% in fees would require four more years of work to make up the difference and reduce annual retirement income by $8,500 a year.
Pamela Perun, who consults on retirement income policy issues for the Aspen Initiative's Initiative on Financial Security, sees the need for both a 401(k) overhaul and a system to supplement it.
"What is the role of 401(k)'s going to be going forward?" she says. "Everybody should have access to one, not just the people whose employers decide to sponsor them. The important thing is not the form of the plan, so much as how do we make sure that people -- primarily low- and moderate-income people -- arrive at retirement with a decent amount of assets that will carry them through the rest of their lives."
Perun helped craft legislation that would create a universal savings plan for Americans. It would be similar to one that has been in use in England for the past five years.
The proposal is contained in legislation that Sen. Blanche Lincoln (D-Arkansas) plans to file next month. At birth, every American child would be provided with a $500 contribution for a new investment fund structured for an 18-year investment horizon. Up to $2,000 could be contributed annually by the child or on behalf of the child, and low- and moderate-income families would be encouraged to save through matching contributions provided by the government. Account funds would be locked up until the child reaches age 18.
-- Reported by Joe Mont in Boston.