Reinventing Retirement Income in America
Table of Contents
- Executive Summary
- The Importance of Retirement Income
- Determinants of Retirement Income
- The Change in Retirement Pension Plans
- The Performance of 401(k) Plans
- Explaining the Poor Investment Returns
- Other Causes of Low Returns
- The Threat of Future Liability
- Goals for an Effective Retirement System
- Building a Better Retirement System
- About the Authors
Today, millions of working Americans participate in the fastest-growing pool of retirement assets ever created, defined contribution retirement plans. These plans allow workers to save for retirement in accounts invested in corporate equities (stocks) and bonds. Contributions, interest, dividends and growth may compound tax free until distribution in retirement. The principal form of these accounts is 401(k) plans sponsored by firms for their employees. In recent years, these accounts have grown with such speed and popularity that they are displacing traditional defined benefit pension plans.1
Introduced in the United States in 1978, defined contribution plans now have assets exceeding $2 trillion. Assets of 401(k) plans far outweigh the assets in Individual Retirement Accounts (IRAs) and Roth IRAs.
Unlike IRAs, 401(k) plans were not created on purpose. Instead, they grew from a loophole in the Revenue Act of 1978.2 Since then, amendments to the Employee Retirement Income Security Act of 1974 (ERISA), regulations promulgated by the Internal Revenue Service and the Department of Labor and court decisions have created a framework for defined contribution plans that works - but not as well as we would like, particularly for lower-wage employees.
"If designed properly, defined contribution retirement plans offer the best hope for a comfortable retirement for most workers."
In 2000, for the first time, the average 401(k) account lost money, shocking many account holders and raising questions about the investment approaches of both participants and plan sponsors. However, if designed properly, defined contribution retirement plans continue to offer the best hope of a comfortable retirement for the most workers. As we will show, design improvements can increase the participation rate of workers, improve returns on investments and reduce market risk.
This paper discusses how to establish more vigorous and secure retirement income for Americans through the free enterprise system. First, we look at recent trends that have had both financial and political consequences for our nation's retirement system. Second, we expose a potentially fatal flaw in the 401(k) market in the United States - one that must be corrected to improve overall retirement security. Finally, we offer common-sense recommendations that are politically and economically achievable. We believe these changes will reinvent retirement income in America.