SURVEY SAYS: 40th Anniversary of the 401(k)

Though the proposal for 401(k) plans wasn’t passed until 1980, this year marks the 40th anniversary of the introduction of these plans.

Last week, I asked NewsDash readers, “Do you think 401(k) plans are sufficient for employees to obtain retirement security? Also, what changes to 401(k) plan laws and regulations do you think have helped them be more effective at helping employees obtain retirement security?”

Nearly half (48.6%) of responding readers work in a plan sponsor role. Nearly three in ten (29.7%) are TPAs/recordkeepers/investment managers, 16.2% are advisers/consultants, 2.7% are CPAs and 2.7% are attorneys.

Nearly half (48.6%) said whether 401(k) plans are sufficient for employees to obtain retirement security depends on how employees use them. Thirty-five percent said 401(k)s are not sufficient for employees to obtain retirement security, and 16.2% said they are.

The top-ranked changes to 401(k) plan laws and regulations respondents reported have helped 401(k)s be more effective at helping employees obtain retirement security are increasing contribution limits and establishment of indexed increases each year (78.4%), followed by addition of catch-up contributions for participants age 50 and older (73%) and sanctioning of automatic enrollment subject to certain requirements (67.6%).

Other options ranked as follows:

• ability to offer Roth after-tax accounts and Roth conversions (51.3%);
• establishment of eligible rollover to another qualified plan (35.1%);
• establishment of protections from bankruptcy of retirement plan assets (35.1%);
• establishment of qualified default investment alternatives (QDIAs) (29.7%);
• stricter rules for hardship withdrawals (24.3%);
• more stringent vesting on employer contributions (18.9%);
• establishment of exemptions allowing advice to participants if certain requirements are met (18.9%);
• establishment of rules for plan sponsors to disclose plan fees to participants (13.5%);
• establishment of rules for providers to disclose fees to plan sponsors (10.8%);
• requirement to provide quarterly benefits statements to defined contribution plan participants (8.1%); and
• new non-discrimination safe harbors and new definition of highly-compensated employees (5.4%).

In verbatim comments, several responding readers said defined benefit plans are still needed (though one reader strongly disagreed), with one touting the cash balance plan design. Others expanded on why “it depends” in their responses to whether 401(k)s are sufficient, suggesting plan sponsors need to also contribute, employees need to start saving early and education about investing is insufficient or confusing for plan participants. Editor’s Choice goes to the reader who said: “The most efficient way to provide retirement income is still the defined benefit plan. We should stop the regulatory persecution of DB plans.”

A big thank you to everyone who participated in the survey!

Verbatim

I am a great believer in 401(k) plans. My employer contributes up to 15% of salary plus bonus for each employee and the employee can also contribute through deferral. Many of our employees have a wonderful retirement because of our 401(k) plan. I think the addition of the ROTH portion of the plan through deferrals is one of the best changes made to our 401(k) plan. (I just wish it existed earlier in my career.) Also, our company works with a wonderful investment firm, who, although conservative in their portfolio, has shown steady gains through the years, averaging 8-9% in a 25 year stretch.

401(k) plans certainly can help employees prepare for retirement, but they require levels of discipline and knowledge that many employees simply lack. Like many aspects of American life, individuals are assigned responsibility for tasks that they lack the time, knowledge, experience, and discipline to successfully complete. Some people say the alternative is a paternalistic culture that penalizes individual initiative…but many people are currently penalized by a culture that imposes challenges they are not prepared to meet.

They are good if employers and employees contribute to them

Most employers have 401(k) plans. For a secure retirement for their employees, employers should also have a defined benefit plan. Individuals need to have a monthly income at retirement. But unfortunately, most employers do not have defined benefit plans due to the annual required contributions–but that is what is needed to assist Employee’s in their retirement! Thank you.

The most efficient way to provide retirement income is still the defined benefit plan. We should stop the regulatory persecution of DB plans.

THESE PLANS ARE GREAT IF EMPLOYEES ARE GIVEN ENOUGH INFORMATION SO THEY CAN BEGIN SAVINGS AS SOON AS POSSIBLE.

Relying on a 401(k) plan for retirement is like living in the Soviet Union – it fails but you don’t know there’s anything better and you keep hoping it will work. A 401(k) account is a usable tool for capital accumulation, but a well-run and properly funded DB plan is the answer for long-term employees. Private and public employers recently have started moving toward the DB cash balance plan design, which utilizes professional investing and annuitization of the cash balance account on retirement, resulting in a healthier balance of risk and reward for both employers and employees.

In my 20 plus years of 401(k) administration, I have found that it’s still difficult for employees to understand investment strategies. And it’s not their fault. Expecting the average American to understand the detail is expecting too much. Even investment advice is suspect. How do we expect the average American to understand and make the right decisions? Kind of goofy when you think about it.

If employees were required to contribute to a 401(k) plan, of just 1%, very early on in their career, increasing the percentage as they get older, they should be able to amass quite a bit of money for retirement.

The biggest problem with 401(k)s is that participation is voluntary. Much of America lives at or above their means and do not prioritize saving for retirement over lifestyles. What ever happened to the old notion of living beneath your means and saving for a rainy day or prioritize retirement savings and only live on the rest of what you earn?

In 1980, 401(k)s were to assist employees in supplementing benefits from Social Security and pensions. With pensions mostly gone, the burden shifted to personal savings leaving many lower income individuals with less money through employment (if they save) and less money upon retirement either way.

401(k) plans are a win-win for employers and employees. The employees can watch their balance grow over the years (especially if they start at a young age) and since they are portable, they can move to a new employer fairly easily. The employers are able to budget for their annual costs must better than for a defined benefit plan.

While a lower wage earner is able to save a significant amount in a 401(k) plan, higher wage earners are often better able to utilize the plans, since not as much of their income may be necessary to cover every day needs.

401(k) plans began the cost-shifting of providing an employee’s retirement from the employer to employee. At the time, and since, a corresponding increase in wages did not take place resulting in simply a savings for the employer. Depending on where you were on the retirement age scale at the time of 401(k) final regs (published late 1980s – not a lot of activity among smaller employers until then) you were screwed. The ‘true’ first 401(k) retirees (40+ years of work since 1990) are coming up. Current literature seems to indicate society has a large potential of retirees unable to provide for themselves unless there are substantive changes on the expense side.

Individuals are not capable of fully bearing the investment risk within the 401(k) paradigm. We’ve seen this multiple times within the last twenty years. It’s time to acknowledge this and work to find ways to share investment risk between employees and employers.

Eliminate discrimination testing. It seems to serve no purpose. Limiting the HCEs to 2% more than the NHCEs doesn’t seem to do anything. It doesn’t make them adopt a SHM if they already can’t afford it. And it doesn’t make the NHCEs contribute more.

The tool is there and works but, only for those who have the discipline to use it for themselves. Sufficient contribution levels, complete rollovers at job transition, etc.

They are a great way for employees to plan for their retirement but if an individual doesn’t start early, it will not be enough for retirement.

I answered “yes” to the question about could 401(k)s be enough, even though we all know that the real answer is, “it depends” – not just on how they are used, but on what your definition of “enough” is. It is, of course, a question that no one ever seems to ask about DB plans, though the same factors apply. Was a DB plan “enough” when median tenure has been something on the order of 5 years and 10-year cliff vesting applied? Clearly not. But while 401(k)s are always judged on their actual delivery, DB plans are evaluated only on what they MIGHT deliver – if properly used (and funded). Thank god for the 401(k), because without it, who knows what the 60% of private sector workers who never had access to a DB plan would do…

NOTE: Responses reflect the opinions of individual readers and not necessarily the stance of Strategic Insight or its affiliates.