A growing cadre of experts is declaring do-it-yourself retirement saving a failed experiment. The era that began in the 1970s with the introduction of 401(k) plans has resulted in a generation that, for the most part, has neither pensions nor savings anywhere near adequate to fund retirement. What has worked and continues to work is Social Security, and an expansion, addition or introduction of new programs similar to that one is the answer, these experts say.
One such retirement authority is Teresa Ghilarducci, a labor economist and pension fund trustee. "We are headed for a retirement crisis where tens of millions of people who were middle class as workers will be poor or near-poor adults," Ghilarducci says. "The employer-provided tier of pension support has devolved into 401(K) type accounts that earn a low rate of return, because the fees are too high, people don't save enough and they are paid out as lump sums that the market can't turn into an annuity in any reasonable way."
To repair this situation, Ghilarducci in 2007 proposed a program called the Guaranteed Retirement Account or GRA. "A GRA is an add-on account to Social Security," she explains. "You contribute to it your entire work life; it is invested in an account that will earn 5% to 6%, with a guarantee of 2%, and at the end of your working life, you will be able to withdraw it as an addition to Social Security."
The GRA proposal would require every worker to pay 2.5% into a federally- sponsored fund. Employers would contribute another 2.5% of the worker's earnings. The result would be invested conservatively by private managers picked by the government with the objective of providing at least that guaranteed minimum annual return.
Unlike the IRAs and 401(k) plans, workers would not be able to tap the funds before retirement age except in special cases such as disability. If the saver dies before reaching retirement, survivors could get the benefits.
Once a worker reaches minimum Social Security retirement age, currently age 62, the worker can start making withdrawals. Again, unlike DIY retirement plans like IRAs and 401(k)s, you couldn't take all the money as a lump sum. Instead benefits would be paid in monthly installments for as long as you live, similar to an annuity or pension. Savers could take a small part as a lump sum, in exchange for smaller monthly payments.
GRA is seen as a supplement to Social Security that, in combination, would fix Americans' inability to save adequately for retirement. Right now, workers contribute current 6.4% of earnings to Social Security and employers match that for a total of 12.8%. Adding 5% in GRA contributions comes to 17.8%. That is within the range of 15% to 20% of earnings considered necessary to save in order to be able to replace 70% or so of pre-retirement income, which is a widely accepted standard for a financially secure retirement.
While some on Wall Street like the idea, not everyone in the retirement business does. Mike Foguth, founder of Foguth Financial in Howell, Mich., is not a fan. "To put it bluntly, I think it's a bad idea," Foguth says. "It's a bad idea, because everybody's just so different about what they're looking for."