Rethinking the 401(k)
TEXT OF INTERVIEW
Tess Vigeland: Around, oh… September, 401(k) account balances became a national obsession. Millions of us have watched the money we invested for retirement evaporate as the markets went over a cliff. The S&P 500 is at its lowest level since 1997. The Dow has lost almost half its value in just over a year. These private accounts were never meant to be the backbone of our retirement system; they were designed as an add-on for wealthy executives. But over the past 20 years or so they’ve become the default with very little government regulation. And now 401(k)s are getting a tough — and some say overdue — second look.
Mark Iwry is a principal of the Retirement Security Project at the Brookings Institution. Thanks for joining us.
Mark Iwry: Pleasure to be with you.
Vigeland: Why is this the time to reform the 401(k) system — if it is?
Iwry: This is the time to reform the 401(k) system, but I would emphasize not to replace it. We need to step back and recognize that the 401(k) is a saving vehicle, not an investment strategy; it can accommodate aggressive or conservative investments. When the market was rewarding, naturally the emphasis has been on people not missing out — not excluding the average American from the potential growth that would provide a more adequate retirement. Now, with the events of the last few months, naturally the concern has shifted more to protecting the average American from the risk of catastrophic losses in their retirement savings.
Vigeland: Is there really any retirement system that would be safe when it’s pegged to the stock market?
Iwry: Well, in the tradition pension system, as in the 401(k), if one wants to invest in a conservative way, there can be a guarantee of a particular return with a minimum risk of loss. The key is not really what type of plan — the key is what type of investment.
Vigeland: But with the old pension system you were guaranteed — you knew exactly what you were going to have.
Iwry: When you look beneath the surface it’s not really that one of them guarantees an adequate retirement and the other one doesn’t. Ultimately both of them are investing in the market. The traditional defined benefit plans now, for example, that have lost asset values in this current market, are in need of immediate help from Congress so that employers will be willing to continue them. But without any particular help, we would see employees in those plans being exposed to the risk that the employer will simply stop the plan — will freeze it.
Vigeland: So what ideas do you see gaining traction in Congress and also in the incoming administration?
Iwry: Let me mention two in particular. Number one, the tax system is not structured in a way that benefits the majority of Americans. The higher our tax bracket, the greater the benefit, the greater the incentive to save. The lower the tax bracket, the less our financial incentive. That’s obviously a very backward structure and the answer is a credit; if you add a credit, let’s say at the rate of 50 percent the amount they save up to some modest amount, you’re really giving people a meaningful financial incentive to save for the first time. A second key initiative that I think will get traction is the automatic IRA. We are in a position to be able to reform the 401(k) in a way that effectively extends the essentials of the 401(k) to 78 million working Americans, employers that are not ready to sponsor a 401(k) or a defined benefit plan would simply let employees save the employees own money by payroll deposit into an IRA. The employee would automatically be enrolled. They could opt out if they wanted to. The employer would not incur any out of pocket cost, but would be a go-between forwarding the employee’s money to the IRA.
Vigeland: Mark Iwry is with the Retirement Security Project and a senior fellow at the Brookings Institution. Thanks so much.
Iwry: Good to be with you.
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