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Death of the 401(k) - Misplaced Blame?

by Eric

It seems that many are wondering whether the 25-year run of the tax-deferred retirement savings vehicle known as the 401(k) is over. I believe that 401(k)s are here to stay, but need to be viewed and used in the proper light.

In a recent "60 Minutes" appearance, Rep. George Miller lambasted 401(k) plans as being opaque and rife for excessive fees. They can be. To the financial novice, these plans are complex and confusing. Certainly, more scrutiny is needed to insure that investors understand what they hold and are paying a fair price. This scrutiny will benefit investors, as more transparency will demystify retirement investing and lower fees will enhance returns. Of course, fee cuts will come out of the pockets of asset managers, but those asset managers with reasonable fees and transparent communication will survive this added attention just fine.

Separately, others are saying that losses in 401(k) accounts since the market meltdown proves that 401(k)s have failed as an instrument. This line of thinking strikes me as absurd, akin to my blaming the hammer when I slam my thumb. The tool has not failed. If anything has failed, we as users have. As Alicia Munnell points out in a fantastic piece here, 401(k)s were designed as a supplementary retirement savings vehicle. In addition, they were primarily designed (arising in the early '80s, when Baby Boomers were in their twenties and thirties) to be a tax-deferred accumulation vehicle.

That many sit today with insufficient savings to generate retirement income is more a testament to low savings rates, inappropriate expectations, and user error than to faults of the tool itself. With the additional transparency and fee pressure suggested by Rep. Miller, the 401(k) will still be here to stay as a perfectly good accumulation vehicle. However, they are not the sole solution to investors' needs. Higher personal responsibility and savings rates, and products geared towards retirement income generation, the transition from accumulation to decumulation, and risk reduction are needed to supplement 401(k) savings for many Americans.