Improving the 401(k) System during Tough Times

Policy measures to improve and expand the 401(k) account program are being proposed at a time when investor confidence in the system is plummeting.

According to a just-released study sponsored by Barclay’s Global Investors, one in three 401(k) participants say they are delaying looking at their statement as a result of the economic meltdown. In fact, investors, on average, have suffered a 28% drop in their retirement savings because of the ongoing economic turmoil. But, that plunge is “unlikely to spell the end of the 401(k) investment as we know it,” said Kristi Mitchem, Head of Defined Contribution for Barclay’s Global Investors, during the firm’s 2009 Retirement Breakfast Briefing on Tuesday. Auto-enrollment and increasing the default savings rate in the plans to 6% would help investors save enough for retirement, Mitchem said.

But investors are wary as volatile markets have wreaked havoc on their retirement savings.

“It’s not surprising that confidence is down,” said Warren Cormier of Boston Research Group, which conducted the survey in March of 1,000 active participants in 401(k) plans. “Only one in six 401(k) participants are confident they’ll have enough to live comfortably in retirement.”

Among those who lost assets and are worried that they many never be able to retire, 41% plan to delay retirement, another 58% plan to work until they die and 19% have no idea how to recover their losses, the study found.

The idea that some investors plan to rebuild their retirement funds by working longer is troubling, said Cormier. “It may not be an option for them.” There may not be a job for that older worker or he or she may be forced into retirement because of illness, he pointed out.

But of those who were confident that they could have a comfortable retirement, 55% said they would recover their losses by saving more, with only 16% of that group saying they would remain in the workforce longer. In addition, 36% of that group said they hoped to rebuild their retirement savings by making better investment choices, with 30% saying they would invest more aggressively.

Of those who were “somewhat confident” that they would make ends meet in retirement, 53% said they would save more to recoup losses while 30% of that group said they would make better investment choices. Another 20% said they would invest more aggressively.

However, 90% of investors polled said they would be interested in a 401(k) plan option that would allow them a way to secure a guaranteed monthly retirement income.

On the policy end of the 401(k) debate, Rep. Robert E. Andrews (D-NJ) said that four proposed changes could profoundly improve the system.

Andrews, who is chairman of the House Subcommittee on Health, Employment, Labor and Pensions, said the first proposed change would be to have qualified, independent investment advice.

The second change would be legislation promoting unbundled fee disclosure, the congressman said. “How much are you paying those who are managing your money and what are you getting for that service?” he said.

Andrews also said he strongly favors the inclusion of a more conservative product option in 401(k) plans such as safer, fixed annuitized product. “As few as one-third of defined contribution plans offer an option like that now,” he said.

Finally, Andrews said there is a proposal to expand the defined contribution-like system to the 71 million Americans who don’t have a pension. It would have an opt-out function and would be voluntary, he said.

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