Should the 401k Be Killed?

Teresa Ghilarducci has always had more interesting — and controversial — things to say than your average retirement-policy wonk. An economist who moved this year from the University of Notre Dame to the New School for Social Research in New York City, she has railed for years against the decline of the traditional pension. She recently wrote a book subtitled The Plot Against Pensions and the Plan to Save Them; the less contentious main title is When I'm Sixty-Four.

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Still, as she sat at the witness table on Oct. 7 at a hearing of the House Committee on Education and Labor, running through the litany of what's wrong with the 401(k) and other defined-contribution retirement plans — they have high fees, for one — Ghilarducci didn't think she was courting controversy. "I was saying things that seemed completely milquetoast," she recalls. Ghilarducci did bring up a bold proposal to replace the 401(k) with a mandatory, government-run pension plan and suggested that Congress immediately allow retirees to swap 401(k)s battered by the stock market's collapse for monthly payouts from the government. But she had floated both ideas before, to little effect. (See pictures of the global financial crisis.)

This time, all hell broke loose. Her proposal caught the attention of talk-radio juggernaut Rush Limbaugh, and over the next few weeks Limbaugh hammered on Ghilarducci's idea as a Democratic plot to kill the 401(k). "McCain has gotta tie Obama to these people," he said on the air. Republican presidential candidate John McCain did try, but only perfunctorily. It didn't help him much on Election Day.

Limbaugh has since dropped the subject, but it is far from dead. In fact, it's evolving. While Limbaugh took care to describe Ghilarducci's proposals correctly even as he castigated them, word has since spread, and warped, in some conservative circles of a purported Democratic plan to confiscate 401(k)s. Ghilarducci, who thinks existing accounts should be grandfathered under any new scheme, says she's still being swamped with email from people berating her for trying to steal their money. (That's Wall Street's job, isn't it?)

Meanwhile, Ghilarducci's long list of 401(k) deficiencies hasn't gotten any shorter, and the Democrats, who as of January will dominate Washington, may just try to do something about them.

The 401(k) gets its name from a section of the Internal Revenue Code that, a clever benefits consultant discovered in 1980, could be used to build tax-sheltered employee retirement plans. It was at first seen as a supplement to the existing system of workplace pensions, but during the 1990s the 401(k) largely replaced pensions in the private sector.

Therein lies the problem, or problems. Unlike pensions, 401(k)s are voluntary, and many workers either don't participate or don't set aside enough money to give them a shot at a comfortable retirement. Those who do save enough often bungle their investment choices. Those who choose well pay higher investment fees generally than pension funds do. Even participants in the best-run, lowest-cost retirement funds face the risk that the market will tank — as it has done this year — when they're close to retirement. At retirement comes another issue: pensions insure against the risk that you'll outlive your money, because they pay until you die; 401(k)s don't. And finally, the tax breaks built into the 401(k) — about $80 billion a year — fall mostly in the laps of high earners. (See 10 things to do with your money.)

The one big positive of the 401(k) is that it's portable, while most pensions aren't. But on balance, there's widespread agreement among those who study retirement matters that the 401(k) has so far proved a less-than-adequate replacement for disappearing corporate pensions. "It may be a good tax-free-savings system for wealthy individuals," sums up George Miller, the California Democrat who chairs the Education and Labor Committee and plans to spearhead a re-examination of the 401(k). "It may not be the best retirement-savings system for working families."

That leaves the question of just what the best retirement-savings system for working families might look like. There have been several proposals (including one by Barack Obama during the campaign) to create modestly subsidized, automatic IRAs, at least for the more than 50% of private-sector workers who don't have access even to 401(k)s. Ghilarducci wants more — a government-run plan, financed in part by the end of the 401(k) tax deduction, that would guarantee a 3% return above inflation. Don't think that's a good deal? Fine. But remember that for most Americans, the 401(k) isn't either.

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