October 14, 2008

THE FALLACY OF THE 401(K)

Marie Cocco, Washington Post - Despite the hype, the data on 401(k)s have never -- ever -- shown that these accounts were creating a mass of workers who would be able to retire with security, let alone luxury.

The 401(k)s didn't expand the proportion of the work force with pension coverage, notwithstanding claims that shifting to accounts that required workers to contribute would make employers more willing to offer the benefit. Less than half of workers have any type of pension coverage from their current employer at all, according to the Center for Retirement Research at Boston College.

For those who do have retirement accounts, the bottom line has long been grim. In 2004, the last year for which data are available, the median balance in IRA and 401(k) retirement accounts was $35,000, according to the Federal Reserve. For those nearest to retirement -- households headed by someone between 55 and 64 -- the median balance in 2004 was $60,000. That's enough to generate about $400 a month in retirement income, according to the research center. . .

More recently, even companies with healthy, traditional pension systems have frozen those plans (effectively abandoning their pledges to longtime workers) and replaced them with 401(k)s. Why? "Shifting from a defined-benefit plan to a 401(k) plan will reduce required employer contributions from 7 to 8 percent of payrolls to the 3 percent employer match," Munnell and a team of researchers wrote in a 2006 paper.

This was never about empowering workers to reap the rewards of financing their own retirement. It was about reducing corporate costs.

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