Save Your 401 (k) Before the Feds Replace it With the GRA
By Pamela Villarreal, OpEd Contributor
- 11/20/08
At a recent hearing before the House Committee on Labor and Education, several experts testified about the effect of the financial crisis on these defined-contribution retirement plans, all but sounding the death knell for 401(k) plans.
Certainly, the balance sheets of those invested heavily in equities have taken a hit — although these paper losses are not cast in stone unless they are cashed out or transferred to another type of investment.
And most certainly, some who may have considered retiring in the next few years will want to work longer to recoup a portion of their nest eggs. But should 401(k) plans be subject to drastic rules changes that make them unrecognizable or virtually nonexistent?
Teresa Ghilarducci of the New School for Social Research has proposed a plan to let workers trade their current 401(k) plans in for a Guaranteed Retirement Account (GRA). This type of plan would pay a monthly amount at retirement, similar to an inflation-indexed annuity, at a guaranteed three percent real rate of return.
Moreover, every worker would continue to contribute a mandatory five percent of his earnings into a GRA (the employer would contribute half), with the government depositing $600 a year, inflation-indexed, into the account of every worker.
Ghilarducci notes that the plan has many advantages: First, for those who are worried about fairness, the GRA plan, says Ghilarducci, would be fair. Since the current tax-deferred set-up of 401(k) plans benefits higher-income workers (uh…of course it does, since they pay most of the taxes), the GRA would eliminate the 401(k) tax subsidy to the “rich” in place of the $600 tax credit given to every worker.
Another advantage, according to Ghilarducci, is that the accounts are pre-funded since workers are saving their own money.
The National Center for Policy Analysis, the organization for which I work, has long supported allowing workers to invest a portion of their payroll taxes into personal accounts and allowing them to select from a limited number of investment choices.
But, unlike some mandatory savings plans, GRAs are not personal, per se, as they do not allow individuals to pick from a limited array of funds like the federal Thrift Savings Plan (TSP) does. The money would instead be pooled and invested by the government as it sees fit.
Moreover, a GRA is no less immune to problems than a 401(k) plan. Although a guaranteed three percent real rate of return sounds good on the surface, in the fine print the government would have the right to reduce the guaranteed rate of return during economic down times and allow workers to access their funds during those times.
Even though the fund would be managed by an independent body (similar to the TSP), it could still be subject to political manipulation. Congress has numerous times attempted to require the TSP to invest in various funds of dubious value.
Finally, giving up on 401(k) plans because of a temporary market downtown is patently silly. Senator Barack Obama has also announced that as part of his tax plan, he proposes allowing 401(k) plan holders to obtain hardship withdrawals for this year and 2009 without the 10 percent penalty that is normally imposed.
While there is no doubt that hardship cases exist for some individuals and such a withdrawal may be necessary, politicians should not attempt to water down 401(k) retirement plans further.
In essence, instead of strengthening 401(k) plans which have served most workers quite well, the fear-based solution is to gut them to the point where they become unattractive to retirement savers and employers, leaving people even more unprepared for retirement and relying on government entitlements.
Pamela Villarreal, is a senior policy analyst at the National Center for Policy Analysis.
14 Comments
Reader Comments:
POSTED Nov 20, 2008
401Kadvisor: "Well put and scary that this has been seriously considered."POSTED Nov 21, 2008
Ronald E. King: "I for one do not wish the government to take any more control over my 401K. I have worked many years to obtain the money that I have now. They have too many restriction on the 401K now. I would for one, like to be able to take out my funds whenever i wisht and put into CD etc, but that is not allowed now, why government control."POSTED Nov 21, 2008
rino hunter: "Check the story in the OP today on how Argentina just did this very thing. The benevolent feds just want to "protect" your 401K from the evil market. They will "guarantee" returns and will ensure you have a retirement income. Who can be against that???"POSTED Nov 21, 2008
Mary Jane Pranger: "Hey, This is the start of a socialistic society. Obama is the devil in disguise. He is an abomination."POSTED Nov 22, 2008
yarassouloulah sy: "thanks america"POSTED Nov 22, 2008
yarassouloulah sy: "thanks america"POSTED Nov 22, 2008
Joseph: "note to self"POSTED Nov 24, 2008
joe229: "read the fine print folks...they (the fed) could change your "guaranteed" rate of return when times get tough....that's no guarantee to me. Leave my 401k alone where it is. I have some control and would prefer it stays that way. The fed is involved in enough stuff without jumping all over our 401k's"POSTED Nov 24, 2008
DAM: "The "government" has already proved they are incompetent with money....the mortgage crisis, bailouts etc. and now you want to trust them with more? Thanks to Barney Frank and his crew we are in the situation today. NO THANKS. What's YOUR SIGN?"POSTED Nov 24, 2008
Jake: "While some may like the idea of the government coming in and taking care of them I don't think that is really a very good solution. When a country as big and complex as America takes over someones retirement account it very well may get used on something else that our leaders consider a higher priority. People need to be more proactive in saving for their own retirements and take responsibility for their own financial futures. Don't count on someone else doing it for you."POSTED Nov 24, 2008
Scared American: "This is just another example of the socialist policies of the current Democrats and their power grab. Look at their mismanagement of the Social Security funds we had to contribute!"POSTED Nov 24, 2008
bg: "I want my 401k taken over by the Government. Cause they have done such a great job in managing social security, medicare, and balancing the budget."POSTED Nov 26, 2008
me: "scary that a "reporter" would be a fear monger...a shill for the right"POSTED Nov 26, 2008
wilfred: "Well said by bg, I want the government to take my money and pay for all kind of entitlements, bailouts and wars with overhead but no teeth. We are already paying for SS and not enough they want my 401, great. I take 10% penalty before I sign up for this."