With the stock market nose-dive shrinking Americans' 401(k) retirement accounts, Congress plans to evaluate what changes can be made to the system, according to a report from Reuters.
Rep. George Miller, chairman of the Committee on Education and Labor, told Reuters that planned hearings will likely lead to, at minimum, a revival of reforms that were initially proposed last spring before the global financial crisis took hold. These changes include providing workers with more independent advice on how to invest the assets in their accounts, and make 401(k) fees more transparent.
Quoting a study from the non-profit, non-partisan Employee Benefit Research Institute in Washington, Reuters noted that balances in U.S. 401(k) accounts are down $573 billion since one year ago.
"The drumbeat for (the changes) is now growing, because not only did the price of stock go down, but in many cases people found out this (system) has been manipulated one way or another," Miller told Reuters.
Miller added that he was unsure whether it had been a mistake to let employers gradually shift to the 401(k) system in recent decades that has left an increasing number of workers without the fixed benefit for life that pensions pay.
Monday, January 26, 2009
Tuesday, January 20, 2009
Do 401(k) plans still make sense?
Congress has begun looking at ways to overhaul the 401(k) system. At hearings in October, the House Education and Labor Committee heard from a variety of witnesses. Some proposed setting up "universal" retirement accounts, which would cover all workers.
One such plan called for establishing accounts that would receive annual contributions from the federal government and would offer a guaranteed, but relatively low, rate of return.
Another proposed automatically investing contributions in an index fund that holds stocks and bonds, with the mix getting more conservative as workers approach retirement.
Other witnesses proposed less drastic changes, such as providing better education.
One such plan called for establishing accounts that would receive annual contributions from the federal government and would offer a guaranteed, but relatively low, rate of return.
Another proposed automatically investing contributions in an index fund that holds stocks and bonds, with the mix getting more conservative as workers approach retirement.
Other witnesses proposed less drastic changes, such as providing better education.
Tuesday, January 13, 2009
Voros: 401(k) change may create new lost generation
LOST in the news reports of job losses, foreclosures, government bailouts, bank failures and Wall Street bankruptcies is a growing trend among companies that could have more long-term damage than any of the country's recent financial problems.
In fact, it may be 10 or 20 years before we can truly assess the consequences of cash-strapped employers dropping their 401(k) matching contributions to employees.
While the move is cast as a temporary interruption of a key employee benefit that will be reconsidered annually, do not expect this spigot to be turned on anytime soon.
For many employees in a company-sponsored 401(k) plan designed to provide for retirement, a typical matching contribution is 50 cents per $1, up to 6 percent of the employee's contribution.
This built-in hedge is touted to employees as "free money'' and a key reason to join a company's 401(k) plan. The loss of that matching contribution could have unintended consequences. Seeing their own company retreat from the 401(k) model could motivate employees, especially younger ones, to do the same, especially in this bear market.
Compounding the problem, workers will save less, whether they stick to the plan or not, because the loss of the matching funds will mean they will have less money to buy stocks, which will be at historic discounts this year.
In fact, it may be 10 or 20 years before we can truly assess the consequences of cash-strapped employers dropping their 401(k) matching contributions to employees.
While the move is cast as a temporary interruption of a key employee benefit that will be reconsidered annually, do not expect this spigot to be turned on anytime soon.
For many employees in a company-sponsored 401(k) plan designed to provide for retirement, a typical matching contribution is 50 cents per $1, up to 6 percent of the employee's contribution.
This built-in hedge is touted to employees as "free money'' and a key reason to join a company's 401(k) plan. The loss of that matching contribution could have unintended consequences. Seeing their own company retreat from the 401(k) model could motivate employees, especially younger ones, to do the same, especially in this bear market.
Compounding the problem, workers will save less, whether they stick to the plan or not, because the loss of the matching funds will mean they will have less money to buy stocks, which will be at historic discounts this year.
Monday, January 12, 2009
The 401K Experiment Failed
The chatter for government take over of private 401(k)'s is getting louder...
So, how has the 1981 401K experiment worked out? It's 2009, and no one can afford to retire. Wealth is massively concentrated at the top. So maybe it didn't work out so well - for us. Pretty well for those at the top, though.
But I'm not advocating a return to corporate-funded pensions for their workers. I think we should tax corporate profits and put money into greatly expanding Social Security so everyone - not just people who work for corporations - can afford to live well when they are old. That would be the solution a democracy would choose.
(PS another problem with 401Ks and the "individual" approach is that you don't know how long you are going to live, so you don't know how much to take out each month. When "pooled" as with a pension plan or Social Security actuaries can determine how much on average to pay out. The only plan that can work mathematically is a socialized plan.)
So, how has the 1981 401K experiment worked out? It's 2009, and no one can afford to retire. Wealth is massively concentrated at the top. So maybe it didn't work out so well - for us. Pretty well for those at the top, though.
But I'm not advocating a return to corporate-funded pensions for their workers. I think we should tax corporate profits and put money into greatly expanding Social Security so everyone - not just people who work for corporations - can afford to live well when they are old. That would be the solution a democracy would choose.
(PS another problem with 401Ks and the "individual" approach is that you don't know how long you are going to live, so you don't know how much to take out each month. When "pooled" as with a pension plan or Social Security actuaries can determine how much on average to pay out. The only plan that can work mathematically is a socialized plan.)
Tuesday, January 6, 2009
Massachusetts increases taxes for small businesses
The cornerstone of most individual’s financial plan and accumulated wealth resides in their 401(k) accounts. However, the Massachusetts taxing authorities have singled out owners of small unincorporated businesses and are taxing their retirement contributions using rules that differ from everyone else.
During 2008, the Massachusetts Department of Revenue (DOR) issued a directive which disallows partners and other self employed individuals a deduction for contributions made to their 401(k) plans. This directive is a clarification of an existing Massachusetts law that had not been enforced by the DOR for years. This directive does not apply to the employees of said businesses, just the owners. This will effectively increase the taxes of an individual contributing $15,500 to their 401(k) plan by $820.
It is difficult to understand why the Massachusetts legislators have discriminated against unincorporated business owners and decided to tax their retirement accounts? Why not also tax the owners of incorporated businesses? Why not the employees? Why not tax the retirement plans of Massachusetts legislators? Effective law making would provide some level of equality in this matter and would encourage people to save for retirement, not discourage them.
Small business owners and those looking to start business need to be aware that they will see a significant increase in their Massachusetts tax burden in 2008 and in the future.
During 2008, the Massachusetts Department of Revenue (DOR) issued a directive which disallows partners and other self employed individuals a deduction for contributions made to their 401(k) plans. This directive is a clarification of an existing Massachusetts law that had not been enforced by the DOR for years. This directive does not apply to the employees of said businesses, just the owners. This will effectively increase the taxes of an individual contributing $15,500 to their 401(k) plan by $820.
It is difficult to understand why the Massachusetts legislators have discriminated against unincorporated business owners and decided to tax their retirement accounts? Why not also tax the owners of incorporated businesses? Why not the employees? Why not tax the retirement plans of Massachusetts legislators? Effective law making would provide some level of equality in this matter and would encourage people to save for retirement, not discourage them.
Small business owners and those looking to start business need to be aware that they will see a significant increase in their Massachusetts tax burden in 2008 and in the future.
Monday, January 5, 2009
Economist proposes guaranteed retirement funds for everybody
Here we go. News starting to leak out again.
"I want what members of Congress have -- for everybody else," says Teresa Ghilarducci as she describes her plan for Guaranteed Retirement Accounts.
Ghilarducci, the director of the Schwartz Center for Economic Policy Analysis at the New School for Social Research, sees her plan as a better way for Americans to save for retirement.
Her proposal would be a mandated savings program, where workers would receive a safe, steady retirement income.
She says the U.S. expects something the rest of the world doesn't.
"We expect people to save every paycheck from the very beginning of their worklife at least 5- to 10 percent, keep that money in an account their entire worklife, not withdraw it for their child's expenses, for other kinds of hardships. We require that people know how to invest it, and we require that people find the lowest fees with which to invest."
Ghilarducci says that's something hard, if not impossible, for people to do when employers control 401(k) plans.
She says the government is the only entity on the planet with a long enough perspective to guarantee a return.
"I want what members of Congress have -- for everybody else," says Teresa Ghilarducci as she describes her plan for Guaranteed Retirement Accounts.
Ghilarducci, the director of the Schwartz Center for Economic Policy Analysis at the New School for Social Research, sees her plan as a better way for Americans to save for retirement.
Her proposal would be a mandated savings program, where workers would receive a safe, steady retirement income.
She says the U.S. expects something the rest of the world doesn't.
"We expect people to save every paycheck from the very beginning of their worklife at least 5- to 10 percent, keep that money in an account their entire worklife, not withdraw it for their child's expenses, for other kinds of hardships. We require that people know how to invest it, and we require that people find the lowest fees with which to invest."
Ghilarducci says that's something hard, if not impossible, for people to do when employers control 401(k) plans.
She says the government is the only entity on the planet with a long enough perspective to guarantee a return.
Friday, January 2, 2009
The End of the 401(k) as We Know It?
For years, we have heard: save for retirement because Social Security might not be available when you need it, and even if it is, it won't be enough. So we socked away what we could all these years, and saw 20-40 percent or more of its value disappear in 2008.
Now, businesses are saying they can't afford to match contributions as they once did, and The New York Times said that the trend will have long-lasting effects:
Now, businesses are saying they can't afford to match contributions as they once did, and The New York Times said that the trend will have long-lasting effects:
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