Forbes has an article in their latest edition that speaks to the strengths and weaknesses of the US retirement industry. I think that a real strength for plan participants in the retirement industry is a traditional pension plan that provides a monthly benefit no matter what is happening to markets. When discussing the strengths for 401(k) plans the Forbes writer highlights the fact that “these plans have enabled millions of workers to accumulate savings to supplement Social Security and any pension or annuity benefits that they receive”. Okay, but that’s not a lot to hang one’s hat on.
Under weaknesses they highlighted the fact that only about 50% of workers have access to a 401(k) plan and plans often fail to help participants convert retirement savings into a monthly income stream (annuity). That’s it? Those are the main deficiencies? How about the fact that plan participants must fund these accounts, then manage, and lastly disburse this benefit. What about the fact that a majority of Americans are now living paycheck to paycheck and can’t possibly afford to make contributions into a retirement account. This Covid-19 crisis is certainly highlighting this sorry state of affairs.
Furthermore, Corporate America is already announcing the elimination of their company match into these programs, which reduces by about 50% the annual contribution made into these accounts. This is a similar action that we witnessed following the Great Financial Crisis that ended in April 2009. In addition, Federal Reserve action to dramatically lower rates during the last 10+ years is forcing many plan participants and recent retirees to assume more risk in an attempt to preserve their retirement corpus. As a result, many participants went into this latest severe market downturn invested in less liquid, equity-like products as opposed to being in investment grade fixed income instruments that paid a decent yield and that which would provide some income to help reduce the call on principal.
Furthermore, we now have emergency actions by Congress that will allow plan participants to withdraw from 401(k) plans penalty-free up to $100,000. There are clearly many emergency situations being faced by members of our society, but permitting these withdrawals is only taking from Peter to pay Paul, and will certainly jeopardize their long-term financial security. It further highlights that these plans are nothing more than glorified savings accounts. We need to reinstate pension plans as the true retirement vehicle. Defined contribution plans are great as supplemental income funds, but they shouldn’t be anyone’s primary retirement vehicle. Asking untrained individuals to handle this responsibility is just poor policy.