I just read a sidebar article in January’s Money Magazine, titled Fixing the 401(k).
The article highlights 4 proposals from Washington as a ” response to the retirement savings crisis”:
Relaxed hardship-withdrawal rules
“President-elect Barack Obama has proposed temporarily dropping the 10% penalty for hardship withdrawals from an IRA or a 401(k) for amounts up to 15% of your plan or $10,000.”
Gee, sounds great. Now you can borrow from your 401k savings penalty free. Only one question – how does this increase the amount of money Americans have saved for retirement? It doesn’t. In fact, it actually worsens the problem!
Easing up on required distributions
“For those age 70½ or older, Obama has proposed temporarily suspending required minimum withdrawals from traditional IRAs and 401(k)s.”
OK, this at least removes the mandatory drawing down of retirement savings, thus eliminating unnecessary withdrawals. But it’s only for 2009. Most retirees of age 70 1/2 or older in 2008 have already had to withdraw money from their 401k accounts after they’ve lost 30% or more for the year! This is akin to putting a Band-Aid on a wound, and claiming to have fixed the problem, only to have the patient suffer from extreme blood loss! Or if you prefer the farm cliche’: the barn door is being closed but the horse has already bolted.
An automatic IRA
“Under this plan, designed by a nonpartisan group and endorsed by Obama, small businesses without 401(k)s would have to enroll workers in a payroll-deduction savings plan (you could opt out), but no matching contribution would be required.”
This appears to be the only one of these proposed “solutions” that actually addresses the problem! Since the worker has the option to opt out, I don’t have a problem with this solution.
A new national savings plan
“Proponents of a government-backed retirement savings account that would guarantee an inflation-adjusted return of 3% initially got little support. But recently one of its biggest backers was asked to testify on Capitol Hill – a sign that the plan is getting serious attention.”
This plan is not a plan to fix the 401(k). It is a plan to effectively end the 401(k) as a means of saving for retirement and transfer control of your retirement over to government agencies who have already proven incapable of handling such responsibility. It would provide the worker with a 3% return on his money, instead of the market return of a 401(k) plan. You can read more on why this plan should never see the light of day here.
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