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You might switch to a 401 (k) Plan B

Workers' retirement accounts are shrinking dramatically -- and calls for an overhaul are growing louder.

November 16, 2008|Jim Puzzanghera | Puzzanghera is a Times staff writer.

WASHINGTON — For nearly three decades, working Americans have been part of a huge experiment with their future well-being: Old-fashioned pensions that guaranteed specific retirement benefits have given way to old-age benefits that depend on personal investing in the financial markets.

But now, with those markets in crisis and the value of workers' investments plunging, a bundle of ideas for modifying the system or replacing it entirely -- ideas shunted aside when the stock market was soaring -- are about to get a careful new look.

For one thing, Democrats have campaigned on the promise of a better deal for middle-class Americans. Also, many workers are aghast at the sudden discovery that their retirement years may be a lot less golden than they expected.

Even for people who have faithfully participated in the new retirement plans, which depend on annual savings and investment in 401(k) and similar accounts, much if not all of what they gained in the stock market over the last 10 years has been wiped out.

For The Record
Los Angeles Times Tuesday, November 18, 2008 Home Edition Main News Part A Page 2 National Desk 1 inches; 24 words Type of Material: Correction
Retirement savings: An article in Sunday's Section A about calls for change in the 401(k) system misspelled the Nobel Prize as the Noble Prize.

So far this year, the average worker's 401(k) account balance has dropped between 21% and 27%, depending on the worker's age and time with his or her employer, according to the Employee Benefit Research Institute.

That's a potentially disastrous turn of events, because the key to making the savings plans work is the hoped-for gains from long-term investing, not just the amount workers set aside.

The present system is further called into question by the fact that millions of Americans have not had such plans available to them or have not participated for other reasons, including stagnant incomes that made saving difficult or impossible.

"The current 401(k) system has not turned out to be as secure as we want it to be," said Rep. George Miller (D-Martinez), chairman of the House Education and Labor Committee. "It has not provided the returns that we want it to. And it's not provided the level of savings that we want it to. It's kind of failing on a number of fronts.

"Should there be a serious reassessment? Absolutely," he said.

Miller's committee already has held two hearings on the effects of the financial crisis on retirement savings plans. At one, a professor from New York's New School for Social Research called for creating government-backed retirement savings accounts that would offer a guaranteed, inflation-adjusted 3% return. The government would contribute to the accounts using money gained by eliminating the annual tax breaks for 401(k) savings -- about $80 billion.

The idea has not been embraced by key lawmakers, perhaps in part because abolishing the tax break on 401(k) savings could reduce participation.

But the fact that the idea received a serious hearing before Congress is a measure of how much the crisis has shaken confidence in the 401(k) approach.

"In July, my plan was looked on at best as a noble idea . . . but completely unrealistic," said the plan's author, Teresa Ghilarducci, a professor of economic policy analysis at the New School and a longtime critic of 401(k) plans. "I was viewed as thinking out of the box, and now I'm in the box."

Other ideas for overhauling the 401(k) system are being advanced. UC Berkeley political scientist Jacob Hacker, author of "The Great Risk Shift," has proposed a variation of guaranteed government retirement accounts.

And the Aspen Institute's Initiative on Financial Security last year proposed several changes, including individual retirement accounts that have a government contribution match for lower-income workers and guaranteed annuities to supplement Social Security.

U.S. corporations used to offer pensions known as defined-benefit programs because employers promised to pay specified benefits, usually based on workers' earnings and years of service.

The predominant system today is known as a defined-contribution plan. Workers agree to have specified amounts deducted from their pay and put into investment accounts such as 401(k)s. As incentive to participate, the workers receive tax breaks.

At retirement, workers commonly take the total in their account and buy an annuity. The bigger the sum in the account, the bigger the worker's monthly stipend.

Until recently, employers usually contributed to workers' accounts as well. Many now cap their contributions or have stopped contributing entirely.

The transition to the defined-contribution system occurred largely over the last two decades, with relatively little public debate. In 1983, 62% of workers with employer-sponsored retirement plans had a defined-benefit plan, according to Boston College's Center for Retirement Research. By 2004, only 20% of such workers had defined-benefit pensions.

And the proportion of workers who relied solely on 401(k) plans rose to 63%, from 12%.

The transformation allowed people to benefit if they made smart investment decisions or if the markets soared.

But it put retirement income at risk when the economy turned bad.

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