Flawed 401(k) laws putting retirement at risk, expert says

Oct 27, 2008

Congress needs to reform flawed 401(k) laws that could push back retirement for millions of Americans whose savings have collapsed along with the stock market, a University of Illinois elder law expert says.

Law professor Richard L. Kaplan says 401(k) accounts were meant to supplement traditional defined-benefit pensions, but have evolved into the sole nest egg for the bulk of U.S. workers whose employers offer any kind of savings program.

The shift, he says, has left workers with the illusion of a company-funded pension when in fact it's largely their own money in investments that are generally tethered to the stock market, which has lost $8 trillion during an economic meltdown over the last year.

"People mistakenly think they have an employer pension plan and don't understand that their retirement income, other than Social Security, is in very serious jeopardy right now," said Kaplan, who wrote a 2004 article on the risks of 401(k) plans that appeared in the Arizona Law Review.

He argues that Congress should rewrite laws to allow 401(k) programs only in concert with defined-benefit pensions, even if it means more companies join the roughly half of U.S. employers that offer no retirement savings plan.

"As matters stand currently, workers are being tricked," Kaplan said. "They think they have a pension plan at work when it's really their own money and every aspect of the 401(k) program – participation, contribution level, investment allocation, withdrawal arrangement – is problematic when it's the person's only savings plan."

Even the lure of cashing in when employers offer matching contributions is "less than compelling," he said. Matches are typically small, and many employers have reduced or eliminated them in recent years. Beyond that, he says, workers who change jobs after just a few years often lose those employer contributions anyway.

"If people want to save for their retirement, they can always set up an Individual Retirement Account at virtually any financial institution, including their neighborhood bank," Kaplan said. "The dollar limit on contributions is lower for IRAs than for employer-based plans, but the vast majority of 401(k) plan contributions are within current IRA limits and thus would not be impacted by this difference."

When 401(k) laws were adopted in 1978, the new savings accounts were envisioned as part of a three-pronged plan for retirement, a supplement for monthly checks from Social Security and conventional defined-benefit plans, he said.

But as 401(k) plans were being launched, Kaplan said, employers already were veering away from defined-benefit programs because of new costs created by the Employee Retirement Income Security Act, adopted four years earlier.

The act, intended to make worker pensions more secure, also made defined-benefit plans more expensive through new regulations and insurance premiums to safeguard pension funds, he said.

Only about half of employers offer any retirement savings program and, of those, nearly 60 percent offer just a 401(k) plan, Kaplan said. Many provide little or no company contribution, a trend he says has quickened in the last few years.

"We're only now beginning to see a cohort of people on the cusp of retirement who have the bulk of their retirement funding coming from 401(k) plans," he said. "It's a relatively new phenomenon."

Because the stock market plunge has withered savings, many of those workers may have to postpone retirement and keep working, Kaplan said. That, in turn, would reduce job openings for younger workers and boost employer health insurance costs due to an older workforce.

"You might also just have more older people who are poor, which was the historical norm," Kaplan said. "Before Social Security, it was not unusual for older people to be poor or to move in with sons or daughters, not because they couldn't physically get around but because those were the people who had a significant source of income."

In his 2004 law review article, Kaplan argued that flaws with 401(k) plans made a case against efforts afoot then to privatize Social Security, which he said would create the same risks and put future retirees in further financial peril. He doubts the move will resurface any time soon in the wake of the lingering turmoil on Wall Street.

"The cause of Social Security privatization has been set back considerably," said Kaplan. His 2004 paper is available online.

Source: University of Illinois at Urbana-Champaign

Explore further: Can science eliminate extreme poverty?

add to favorites email to friend print save as pdf

Related Stories

Recommended for you

Can science eliminate extreme poverty?

Apr 16, 2014

Science has often come to the rescue when it comes to the world's big problems, be it the Green Revolution that helped avoid mass starvation or the small pox vaccine that eradicated the disease. There is ...

Japan stem cell body splashes cash on luxury furniture

Apr 14, 2014

A publicly-funded research institute in Japan, already embattled after accusing one of its own stem cell scientists of faking data, has spent tens of thousands of dollars on designer Italian furniture, reportedly to use up ...

User comments : 2

Adjust slider to filter visible comments by rank

Display comments: newest first

Rick69
3 / 5 (2) Oct 27, 2008
Right, assume we're all too stupid to think for ourselves and let the government make all the decisions for us. After all, they have done such a good job so far with their financial decision making.
Roj
not rated yet Oct 28, 2008
Last week, separate confessions from historical-deregulation enforcers Alan Greenspan and George W. both defended Gov. purchase of private-bank equity to protect the public from bad banking, and insolvent mortgage-insurance practices.

These anti-regulation champions are now forced to halt the historical-market practices they spawned, because the attorney generals are prosecuting, and congressional inquiries are getting everyone on record.

I agree the scheme was brilliant without government intervention, but the stupidity was causing a meltdown and getting caught.

The conservative "free for all" failed, because they won't learn from the most successful predators in nature, which never consume the entire food chain at once.

Now, liberal regulators exploiting this error can fill working class wallets with welfare, and fatten them up. After a period of token crack down on some corporate exploits, the trusting consumers will come around to conservative deregulation again, and be ripe once more for all kinds of liberty.

More news stories

Newlyweds, be careful what you wish for

A statistical analysis of the gift "fulfillments" at several hundred online wedding gift registries suggests that wedding guests are caught between a rock and a hard place when it comes to buying an appropriate gift for the ...

Can new understanding avert tragedy?

As a boy growing up in Syracuse, NY, Sol Hsiang ran an experiment for a school project testing whether plants grow better sprinkled with water vs orange juice. Today, 20 years later, he applies complex statistical ...

Crowd-sourcing Britain's Bronze Age

A new joint project by the British Museum and the UCL Institute of Archaeology is seeking online contributions from members of the public to enhance a major British Bronze Age archive and artefact collection.

Roman dig 'transforms understanding' of ancient port

(Phys.org) —Researchers from the universities of Cambridge and Southampton have discovered a new section of the boundary wall of the ancient Roman port of Ostia, proving the city was much larger than previously ...

Tiny power plants hold promise for nuclear energy

Small underground nuclear power plants that could be cheaper to build than their behemoth counterparts may herald the future for an energy industry under intense scrutiny since the Fukushima disaster, the ...

Hand out money with my mobile? I think I'm ready

A service is soon to launch in the UK that will enable us to transfer money to other people using just their name and mobile number. Paym is being hailed as a revolution in banking because you can pay peopl ...