Thursday, August 13, 2009
With apologies to LL Cool J for the title of this post, CNNMoney has a report entitled: 401(k) Contributios Make a Comeback:
Boston-based Fidelity Investments, which manages retirement savings plans for 11.2 million workers, said participants decreasing contributions had outnumbered those raising them for the previous three quarters -- a period during which all the major stock indexes hit multi-year lows. The vast majority of workers did not alter their contributions in the quarter.
Two points. With the automatic enrollment features of the Pension Protection Act of 2006, this is not a surprise. The PPA automatically opts workers into their employers' 401(k) plans. If a worker does not want to contribute to their individual pension account, they have to affirmatively opt out. The laws of inertia and the laws-of-not-knowing-what-in-the-world-is-going-on, tell us that not only will more workers be enrolled in these 401(k) plans, but they will be putting more money in also. Why? Because Qualified Default Investment Alternatives (QDIA) that their employers put them into for 401(k) purposes assure that people who would otherwise not participate or participate at a low level will do so at a higher level if they don't indicate any preference. This is because these QDIA default investments not only diversify their investments, but also contribute a higher perecentage of income into these accounts.
Second point. 401(k) are here and here to stay and that is not necessarily a good thing. Unlike defined benefit accounts which have the ability to weather recessionary storms because of their formulaic, actuarial nature, defined contribution plans, like 401(k)s, even when properly diversified, can be walloped in an economy like this one. Any one notice that the older workers down the hall who told you they were retiring are not retiring so fast? I have heard some people have lost 30% to 50% of the value of their 401(k)s in the last two to three years. What will happen when almost everyone has these accounts? Social security does not make up the difference, people, even if solvent.
Solution: government insurance program, Pension Guaranty Benefit Corporation, set up to insure defined benefit plans, should be expanded to provide some safety net for these omnipresent 401(k)s. If some action like this is not taken soon, the future for retirement security in this country`is bleak.