The following is an excerpt from America, Welcome to the Poorhouse: What You Must Do to Protect Your Financial Future and the Reform We Need
, courtesy of FT Press, imprint of Pearson. Originally published in "America, Welcome to the Poorhouse." I don't agree with everything that's written in this book (you'll be able to see pretty clearly where we differ -- on many points in this particular piece), but I thought that this excerpt would certainly get the conversaion going. Hold on to your hats!!!!!
The bad news is that currently most Americans can’t afford to retire from a 401(k) plan. The good news is that there is a new administration in the White House and President Obama seems to understand that most Americans are under severe financial stress. On January 30, 2009, he announced the initiation of a Middle Class Task Force, headed up by Vice President Joe Biden, to address the financial stress facing most Americans, with its five goals including “protecting retirement security.” We need to communicate to Vice President Biden that the task before us isn’t simply “protecting retirement security” but to boost retirement savings so that people can actually afford to retire.
The reform that we need:
401(k) Security Act: “The 9% Solution”
1. Coverage mandate. Every employer with ten or more employees who doesn’t offer a regular pension plan—or whose plan is frozen to new hires—must offer a 401(k) plan and contribute the equivalent of 9% of pay as of 2010. If the 9% contribution rate is challenging in these recessionary times, then we should take a phase-in approach similar to Australia’s: start at 5% in 2010, increasing to 7% in 2016 and 9% by 2020.
2. Employees working in companies with fewer than ten employees would be enrolled in a Universal 401(k) featuring a government contribution. A new entity, a clearinghouse akin to the Federal Thrift Savings Plan (TSP), which manages very low-cost 401(k)-style accounts for three million federal military and civilian personnel, would receive all deposits.
3. Get rid of the low ceiling on 401(k) contributions: The limits are $16,500 for those under age 50, $22,000 for those over age 50 in 2009, indexed to inflation. It makes absolutely no sense to limit how much people can contribute, especially since most of us will have to contribute more to make up for lost time. Baby Boomer Australians can sell a home or another asset and add the proceeds to their accounts; workers over age 60 can make after-tax superannuation contributions of $150,000 a year, or $450,000 over three years.
4. Disclose the necessary employee contribution “co-pay.” Participants must be informed what their contribution rate should be depending on their age when they start to save, based on the new requirements. For example, even with the implementation of the new contribution equal to 9% of salary by employers, individuals who start contributing to their accounts at age 25 need to know they should contribute an additional 4%, another 7% if they start at age 30, another 11.25% at age 35, another 17.25% at age 40, and another 42% at age 50.
5. Employer contributions must start when the employee joins the company, not after one year. Twenty percent of employers surveyed by Vanguard require eligible employees to have one year of service before the employers match contributions to “minimize compensation costs.” This practice could deprive someone who changed jobs every four years of a total of 11 years of investment returns, causing a huge hit to the nest egg.
6. All employer contributions must be in cash, not company stock. As was the case with Enron employees, a stock match carries the risk that the contribution will be worthless if the company goes out of business. While the Pension Protection Act has required employers to allow employees with company stock in the plan to gradually diversify out of it, a recent Vanguard study of its clients showed that 8% of employees had more than 80% of their account balances in company stock, revealing a lack of understanding of the risks of not diversifying.
7. All employers must offer a Roth 401(k) option and the ability to transfer current balances to a Roth account.
8. Get rid of discrimination testing: If highly paid people have waited too long to start saving, they should have the opportunity to save.
9. Prohibit access to retiree balances until retirement: At the same time we want employers to contribute more to nest eggs, we want to limit opportunities for employees to “shoot themselves in the foot” by tapping into vested balances before it’s time to retire. There should be no loans, hardship withdrawals, or ability to “cash out” when changing jobs. Nearly half of job changers surveyed by Hewitt Associates cashed out of their retirement plans rather than leaving the balances in the old plan or “rolling them over” to an IRA or new plan.
10. All plans must include an index fund option.
11. All plans must include a target fund option, which gradually shifts from stocks to fixed income investments as the participants get closer to retirement. This should also be the “default” investment if the employee prefers not to choose an investment. Otherwise a participant may make an unwise decision to have a too high allocation in stocks or fixed income investments depending on his or her investment time horizon.
12. Employers must communicate to workers that they cannot afford to retire unless they have accumulated 10 times their salary in their accounts.
13. Workers who have accumulated enough should be encouraged to invest in a managed payout account rather than an annuity.
Action Plan: First, we need to send a message to Vice President Biden, who heads up the Middle Class Task Force, that the fix that’s needed is not simply automatically enrolling Americans in 401(k) plans or IRAs. Americans must deliver the message that only if employers are forced to kick in higher contributions will most folks be able to afford to retire. Along with contacting your own congressperson, go to the contact page on the White House website (http:/ /www. whitehouse. gov/ contact/) and submit an email asking Vice President Biden to support the Security Act mandating 9% employer contributions to 401(k) accounts. Here is the URL to the page on my company’s website that describes the proposed legislation that can be cut and pasted into your email: http:/ / www. retirement-solutions. us/ 401k-nightmare. htm.
Second, contact Rep. George Miller (D-CA), who is chairman of the Health, Education and Labor Committee, which oversees pensions, to seek his support: http:/ /georgemiller. house. gov/ contactus/ 2007/ 08post_1. html.
Third, we also need to send a message to AARP that the advocacy group for retirees needs to do more for would-be retirees who are currently can’t-be retirees. When I spoke with a spokesperson for AARP about the retirement crisis, he said that AARP has not been actively involved with retirement security because there hasn’t been a hue and cry from the general population. The spokesperson said that to date they have explored “ways in which we can expand access...such as the automatic IRA. We have promoted auto-enrollment. Adequacy is a tougher nut to crack.”
Sorry, AARP, as I pointed out in the first chapter, automatically enrolling people in an inadequate savings scheme, whether an automatic IRA or a 401(k), is like giving a cancer patient aspirin instead of chemotherapy. We need to send a “hue and cry” to AARP that if Australians can “crack tough nuts,” we need to as well. Contact AARP at http:/ /www. aarp. org/ about_aarp/ contact/ a2003-01-28-contact-issuesform. html and urge them to support my Security Act.
Finally, contact a new organization called Retirement USA that supports retirement reform and is looking for input. While the organization appears to have bought into Ghilarducci’s flawed assumption that 401(k) plans are risky, it does favor considering Australia’s superannuation system. I urge you contact them at [email protected] and ask them to consider my proposed legislation.
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