NCPA - National Center for Policy Analysis


November 21, 2008

Should 401(k) plans be subject to drastic rules changes that make them unrecognizable or virtually nonexistent?

Teresa Ghilarducci of the New School for Social Research has proposed a plan to let workers trade their current 401(k) plans in for a Guaranteed Retirement Account (GRA): 

  • This type of plan would pay a monthly amount at retirement, similar to an inflation-indexed annuity, at a guaranteed 3 percent real rate of return.
  • Every worker would continue to contribute a mandatory five percent of his earnings into a GRA (the employer would contribute half), with the government depositing $600 a year, inflation-indexed, into the account of every worker.

Ghilarducci notes that the plan has many advantages: 

  • For those who are worried about fairness, the GRA plan, would be fair.
  • Since the current tax-deferred set-up of 401(k) plans benefits higher-income workers (of course they do, since they pay most of the taxes), the GRA would eliminate the 401(k) tax subsidy to the "rich" in place of the $600 tax credit given to every worker.
  • Another advantage, according to Ghilarducci, is that the accounts are pre-funded since workers are saving their own money.

The National Center for Policy Analysis has long supported allowing workers to invest a portion of their payroll taxes into personal accounts and allowing them to select from a limited number of investment choices.  But, unlike some mandatory savings plans, GRAs are not personal, per se, as they do not allow individuals to pick from a limited array of funds like the federal Thrift Savings Plan (TSP) does.  The money would instead be pooled and invested by the government as it sees fit, explains Pamela Villarreal, a policy analyst with the NCPA.

Moreover, a GRA is no less immune to problems than a 401(k) plan, explains Villarreal:

  • Although a guaranteed 3 percent real rate of return sounds good on the surface, in the fine print the government would have the right to reduce the guaranteed rate of return during economic down times and allow workers to access their funds during those times.
  • Even though the fund would be managed by an independent body (similar to the TSP), it could still be subject to political manipulation; Congress has numerous times attempted to require the TSP to invest in various funds of dubious value.

Source: Pamela Villarreal, "Save Your 401 (k) Before the Feds Replace it With the GRA," The Examiner, November 20, 2008. 


Browse more articles on Economic Issues