1/12/2011 2:26 PM ET|
Time to make the 401k mandatory?
The 401k was supposed to be a retirement supplement. But now that it's the main source of old-age security, the rules need rethinking.
It's time to make the 401k mandatory, with every employer offering a plan and both employer and employee required to contribute.
When the 401k was created in 1978, it was never intended to be the main pillar of most workers' retirement security, a burden that then fell to traditional pension plans and Social Security. But that's what 401k's, as well as 403b's and similar plans, have become.
And, as now constituted, they're not up to the challenge.
An estimated 40% of all private-sector workers don't have access to any retirement plan. Of those who do, about one-quarter don't make use of it. Most who do participate are not contributing nearly enough to ensure a comfortable retirement. And most employers pay in only if their employees do first.
There are a slew of 401k reform plans out there, ranging from modest proposals for automatic employee enrollment (but undercut by the employee's right to opt out) to replacement of the 401k by a new system run by the government or a nonprofit organization. (For a useful description of the various ideas, see a study by Robert Hiltonsmith for Demos, a liberal think tank that espouses total overhaul.)
Rather than scrapping the 401k, I'd like to see it revised and extended to every worker. What I envision:
- Coverage. Every employer of any size would be required to offer a 401k plan. All workers would automatically be enrolled the day they start work.
- Funding. Workers would be required to make a pretax contribution to their account (say, 3% of their earnings), which would automatically rise with age and income toward 6% or more. Employers would be required to make a similar cash contribution. Companies and workers could both contribute more, with no limit. Employers could throw in some of their company's stock, too, as long as it's a small portion of the employer's contribution.
- Investments. The default choice would be a "life cycle" asset allocation in which bonds and cash roughly equal the employee's age (25% for a 25-year-old, and so on), with stocks (both U.S. and foreign equities) accounting for the rest. The default investments would be index mutual funds and exchange-traded funds with low management fees.
- Vesting. All funds in the 401k -- including the employer's contributions -- would belong to the employee immediately. No funds would be forfeited when an employee resigns from a job and rolls the money into a new employer's 401k plan.
- Early withdrawals. Loans and withdrawals before age 65 would not be allowed, except in the event of permanent disability. The 401k would be reserved for retirement security only, not midlife financial distress.
- Income stream. In retirement, the 401k balance would be paid out like an annuity, not in a lump sum, to improve the odds that it will last a long time. But any remainder would go to an employee's estate or a charity.
At Kiplinger, we practice what we preach. We automatically enroll all new employees in our 401k plan, and we contribute 3% of their earnings, whether they put in any of their own funds or not. Our and their contributions are instantly vested, and there are no forfeitures even if a colleague leaves us in the first year.
I'd like to see these practices and my other suggestions made universal. Some libertarians will argue that mandatory retirement saving, like mandatory health insurance, would be an imposition on their personal freedom. It sure would.
But absent a mandatory 401k system, those who don't plan for their own retirement will surely be a burden on compassionate others, whether family, friends or the government. And that's an irresponsible imposition on all of us.
Knight Kiplinger is editor-in-chief of Kiplinger's publications.
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I dont trust any system in which the government touches my money...
They stole what I paid in for SS...
The taxes I pay in are spent on wasted programs , or given to others who dont pay into the system...
My 401k savings.. is just play money for the thugs on Wall Street...
My money is best off in My pocket...I will be responsible for it...
Not some government official on the take...
Honestly, this is so far off the mark as to make me doubt anything published by Kiplinger's.
It places an unfair burden on employers, especially small employers, as there are significant expenses to setting up, maintaining, testing, and complying with all the regulations of a 401k plan. Many employers who already offer plans use vesting and matching contributions to give employees incentive to stay with the company. I work in an industry with incredible turnover, and to expect my employer to immediately enroll, and contribute to an employee's retirement, when the employee themselves don't seem too awfully concerned with it is government imposed private welfare at it's worst. We've already got idiot politicians cutting the employee's contribution to social security, while leaving the employer to pick up a larger share, at a time when everyone's crying that social security is going broke. We're not far off from means-testing social security benefits, another slap in the face to those of us providing for our own futures.
First we get forced into buying healthcare, now the 401k.....I don't like this change.
Yes, of course, force the 401k down our throats just like s/s...................but this time explain to the retards that represent us that those accounts are specifically and in writing taken as individual retirement assets and NOT AVAILABLE FOR WHAT EVER BONEHEAD "VISION"
THAT A POLITICIAN CAN IMAGINE OR TO PAY FOR HANDOUT TO NON-TAXPAYERS OR WARS THAT ONLY HELP THE WEALTHY AND HAVE NOT, SINCE WWII AIDED THE FUNDERS OF THOSE WARS IN ANY WAY INCLUDING ANY LEVEL OF INCREASED SECURITY!
America already has too many failed "mandatory" programs.
This is (hopefully) still America, offer the option and let people (who know best how to evaluate their own situations) make the choice.
The author or any socialist DOESN'T KNOW whats BEST in every situation for anyone but THEMSELVES. We aren't guaranteed anything in this life or this country. We persue happiness, it isn't mandated. There is no "American Dream", but what we make for ourselves.
"WE can't stop dipping into Social Security money, so YOU have to save harder for retirement."
Typical contemporary American politics at its finest, ladies and gentlemen. Social Security is projected to dry up completely before my 54th birthday, long before I'd even think of filing for benefits. Hell, I won't even be gray yet. Why, exactly, is that money coming out of my check every week again...?
NEW RETIREMENT PLAN: WORK TIL YOU DIE.
No thanks. When I turn 68 (which won't be until the 2050s, thank you), I'm taking my cut and moving to Panama. This country will be too screwed up to live in peacefully by the time I get old.
Mandatory health care, and now mandatory retirement accounts. What is this country coming to! I though this was the land of the free. Free to spend or save what's left of our measly paychecks. Personal liberties are being trampled on all over the place and no seems to be able to stop it. We might as well call ourselves the "United Socialist States of America". Do we really need another government program to protect us. If the government would just fix social security then this "supplemental" program would not even be necessary, and we could spend that money and get the economy going. What's next? How about bringing back the draft and requiring college drop-outs to spend 3 or 4 years in the military. This country is getting out of control!
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