401(k)s Still Fall Short As A Retirement Strategy
Most American workers were woefully unprepared for retirement before the financial crisis struck. The stock market crash that followed made things even worse.
"The financial crisis certainly laid bare how inadequate our retirement savings system is," says Alicia Munnell, the director of the Center for Retirement Research at Boston College. She points out that one-third of all workers will likely end up depending on Social Security for all of their retirement income.
That's partly because only about half the U.S. workforce is covered by some type of employer-sponsored retirement plan. And most of those are 401(k) plans, which usually require employees to contribute and make investment decisions.
Low Balances In Retirement Funds
Even before the financial crisis, the average balance in 401(k)s for workers nearing retirement was just $78,000. After the market plunged, that average was reduced to about $56,000, according to Munnell's calculations. That's just not enough for a comfortable retirement, says Roger W. Ferguson Jr., president and chief executive officer of TIAA-CREF, the financial services company that offers retirement plans for employees in the academic, medical and nonprofit fields.
"Many families, at this stage, are short $250,000 from what they're going to need," Ferguson says.
To help meet the challenge, President Obama wants to require businesses that don't offer pensions or retirement savings plans to automatically enroll their workers in Individual Retirement Accounts (IRAs). The plan would also provide tax credits to partially match the workers' contributions.
Mandated Retirement Savings?
In recent years, the limits on contributions to IRAs and 401(k)s have been raised. In addition, the government has encouraged businesses that do offer 401(k) programs to enroll workers automatically, unless the workers specifically decline. Ferguson says it's a good first step. But Munnell believes these initiatives aren't enough.
"I also think we need a whole new tier of retirement income, both for those people who have to rely solely on Social Security, and for those people who have 401(k) plans," Munnell says.
She thinks it should be government-mandated savings, but she says it would likely need to be managed by the private sector to be politically palatable.
"Her critique is absolutely right," says John Bogle, who founded the Vanguard Group, one of the nation's largest mutual fund companies.
Bogle says the government would have to set the structure of any new program and ensure that the fees charged by fund managers are reasonable. Retirement money managers should have a fiduciary responsibility and a legal requirement to act in the investor's best interests, he says, adding that this is something in short supply today. Bogle also says that it shouldn't be easy to withdraw funds from retirement savings.
Planning For The Future With More Education
TIAA-CREF's Ferguson is skeptical of constructing a new tier of retirement savings.
"I think it's very hard in this day and age to talk about another government mandate," Ferguson says. He believes a serious effort at education, coupled with nudging people in the right direction though automatic enrollment and automatic saving increases, could solve much of the problem.
Ferguson says many people don't realize that they need to save between 10 percent and 14 percent of their pre-retirement gross income to have a reasonable income replacement when they retire.
"If we talked much more about it, people would wake up and recognize how much they have to do," Ferguson says.
Finally, he says, more attention should be paid to getting people to convert at least part of their retirement nest egg into a guaranteed lifetime income stream so they don't outlive their retirement savings.
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