Remarks by Karen Friedman at the 2013 NAPA/ASPPA 401(k) SUMMIT (March 3, 2013)

Remarks by Karen Friedman at the 2013 NAPA/ASPPA 401(k) SUMMIT (March 3, 2013)


Karen Friedman participated in a panel discussion on the strengths and weaknesses of 401(k) plans at a conference sponsored by the National Association of Plan Advisors and the American Society of Pension Professionals and Actuaries. Below are her remarks.

Are 401(k) Plans a Failed Experiment?

What are the weaknesses of 401(k) plans?

Brian, thank you for inviting me and it’s great to come to the NAPA/ASPPA conference.

This is an amazing group. I didn’t even know that this many actuaries and pension professionals existed in the whole country. When I heard there were 1200 of you, I was thinking that you really need to create a reality TV show, “Actuaries Gone Wild, Las Vegas.”  I heard there’s a scout here.

Brian asked about the weaknesses of 401(k) plans. Let’s put it this way…When I got to Caesar’s Palace, I had $100,000 in my 401(k) account. But, darn it, I blew it all last night on the roulette table. So there goes my retirement money.

Of course I’m only kidding.

But this story illustrates what we believe is one of the biggest weaknesses of 401(k) plans. No matter how you play the game, 401(k) plans are a gamble.

From our perspective, 401(k)s work well as a supplemental plan for many people, but they are failing millions of people as a primary retirement plan.


The fact is, 401(k) plans put all the risks and responsibilities on individuals. They have to decide:

  • Whether to participate.
  • How much to contribute. At time when millions of folks are struggling to stay afloat, pay the health care bills, housing costs, cover the kids’ education – they are going to be hard-pressed to put away sufficient money into a retirement account. According to government statistics only five percent of those participating in 401(K) plans put away the maximum contribution.
  • How to invest the money. Most people are not money managers and really have no idea how to invest – or even have the desire to invest. While defaults into life-cycle and similar investment vehicles address some of these issues, we worry that there are substantial differences in lifestyle fund allocations (some are still heavily equity-oriented at later ages and others are not). No matter what we know, we may misjudge the markets or invest wrong. Some people will put some of their money into life-cycle funds but invest in other funds that end up distorting the idea behind life-cycle funds. Many such funds also add a new layer of fees.

Regardless of how much education we provide, we feel that people would be better off if 401(k)s could be pooled and professionally invested, which relieves the employees of the burden of investment management and have been shown to reduce fees and improve returns.

Then folks have to resist taking out the money before retirement: even if they do put in money, too many Americans may be forced to pull out that money, if there’s a health care crisis, to save the house from foreclosure, to pay for a kid’s education, or for other potential crises. A recent report from HelloWallet, a company that sells personal financing technology to employers, says that people withdrew $70 billion from their 401(k) plans for non-retirement needs in 2010. The “leakage” represents a significant share of 401(k) assets. By comparison, the report says, employees contributed about $175 billion to their 401(k) accounts in 2010, while employers contributed about $120 billion in matching contributions.

Another problem with “leakage” is that when people take the money out and don’t pay it back they’re hit with a tax bill and a penalty tax – which hurts the lower-paid, most of whom can’t afford the penalties. And we also worry that workers who want that money before retirement age are able to withdraw without their spouse’s permission.

Finally, even if people do everything right, contribute adequate amounts, and make the right investments, they still have to make the money last.

I’ll make two final points:

  1. While policymakers are dealing with the budget deficit, there also is a massive retirement income deficit in this country. According to the Center for Retirement Research at Boston College, the Retirement Income deficit is $6.6 trillion. That’s the gap between what people have saved today and what they would needed to have saved to achieve a basic level of adequacy in retirement.
  2. According to 2010 data, half of all households that had 401(k) plans had less than $44,000 in their retirement accounts and, for those approaching retirement, the median account balance was just about $100,000. That makes a dent in the Retirement Income Deficit – but not enough of one.

So those are some of the weaknesses and now I’m looking forward to talking about how we can all work together to make the system better!

What are the strengths of 401(k) plans?

Where all of us agree is that people aren’t saving enough for retirement, and retirement savings are good. And I expect that everyone in this room wants to get more people to save. That is a strength of 401(k)s: because they are aimed at retirement savings.

They work well for some people as primary retirement vehicles if they can afford to contribute large amounts, and we think it’s great if employers match a portion of that amount. If folks make the right decisions and can make the money last, 401(k)s work.

We also think that payroll deduction features, while not a panacea, certainly help toward these goals by increasing participation (if people don’t take out the money later), as long as people invest intelligently, though default funds or otherwise.

One thing that some employees really like about 401(k) plans is that they can be portable and they are easy to understand. People see their balances and they can watch the money grow (or not), so they know what they have.

We also believe that 401(k)s that offer an annuity option can help tie in the money – if people choose that option. But here is the tension:  people who conceptualize their benefits as a dollar amount sometimes face a psychological barrier in converting their account balance into an annuity.

What the Center has long said is what we need are new plan types that take the best of 401(k)s and merge them with defined benefit plans and I’ll get to that later.

How do we improve 401(k)s and other plans?

First I’ll start by talking briefly about ways of making 401(k)s better especially for lower-income earners.

Right now, 401(k) tax subsidies help high-earners the most. Even if we don’t agree on how much the system reduces federal revenue and thus costs taxpayers, we can agree on a basic fact: low-income workers need more help to save.

That’s why we think there should be a refundable Savers’ Credit. That basically means, if someone doesn’t make enough to pay taxes (and hence take advantage of the substantial tax subsidies that plans enjoy), the government should make a contribution into the worker’s account – to encourage worker contributions through a refundable credit.

To make money last, we need to expand options for annuitization within the plan [You say we think standardization and safe harbors would substantially eliminate fiduciary exposure.]

There should be spousal consent before money is withdrawn before retirement.

Let’s keep the current Department of Labor rules on electronic disclosure to ensure that everyone gets their fee disclosure in ways that they are most comfortable with.

We should try to figure out ways to better discourage pre-retirement withdrawals from 401(k) plans and perhaps lock in employer matches and Saver’s Credit contributions.

What the Center really wants is to examine ways of creating new types of plans – to combine the best parts of DB plans and 401(k) plans. We believe that everyone should be covered by plans that are secure and adequate.

To get there, we believe:

  • Employers and employees should both contribute.
  • Assets should be pooled and professionally invested.
  • Money should be locked in and paid out only as lifetime benefits.

You heard Senator Harkin’s proposal and we think it’s a great plan. The PRC has a similar plan called Retirement Security Funds, which require

  • New kinds of pooled single-purpose funds;
  • Employees and employers both contribute with a reverse match (backwards 401(k));
  • Shared longevity and investment risk.

Finally, the Center is now working with ASPPA to expand coverage through state efforts to create savings platforms for employees of employers who currently lack access to employer-sponsored plans.

Massachusetts passed such a plan for employees of nonprofits. The California Secure Choice Retirement Savings Trust Act was signed into law in September 2012, and we are working with ASPPA to get it implemented.

The California plan lays the groundwork for a new state-administered retirement savings plan for private-sector workers who are not covered by other plans. It is based on the automatic IRA, with pooled investments and professional management. Employees contribute three percent of wages, unless they opt out. All employers, over time, must remit employee contributions to plan, unless employer already sponsors another plan. It is a modest benefit guaranteed by private underwriters.

A retirement investment clearinghouse will publicize the private-sector arrangement. It will provide competition for the private sector (such as a need for third-party administrators); and with a mandate, private institutions can compete for business. Implementation of this plan is contingent on a feasibility study. The plan would be managed separately from retirement system for public employees.

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