What Next for Retirement Plans?

Edward Zelinsky, the professor Jim Gust mentions in the preceding post, authored The Origins of the Ownership Society: How the Defined Contribution Paradigm Changed America. The ownership society seeks to help people build wealth through 401(k) plans, HSAs, etc. (The Ownership Society is not to be confused with the late and unlamented Buyership Society, which encouraged people to buy homes on credit, then borrow again on any increase in value.)

Events have not been kind to 401(k) plans of late. Critics have attacked the expense of some plans. High annual fees and expenses virtually insure subpar investment results. Reportedly, some wealth managers advise their executive clients to invest no more in their 401(k)s than is matched by the employer.

In the last 15 months participants in 401(k) plans have lost an estimated $2 trillion. Also, the recession threatens 401(k) matching funds. Reportedly, 20% of participants in some plans have stopped adding new money, either for lack of employer matches or because they feel stocks are too cheap to be worth buying.

Meanwhile, some of the last traditional pension plans – at GM, for instance – are dying.

Do we need a new approach to building financial independence at retirement? Roger W. Ferguson Jr., a former Vice Chairman of the Federal Reserve and CEO of TIAA-CREF, thinks so. He proposes combining the best of traditional pensions and new savings vehicles. Features would include automatic enrollment, unbiased investment advice for every participant and a requirement that participants put at least some of their money into a low-cost annuity at retirement.

Could it work?

Here's an alternative, heretical thought. Consider these excerpts from Amazon's description of The Origins of the Ownership Society:

We save for retirement, health care and educational savings through IRAs, 401(k) accounts, 529 programs, FSAs, HRAs, HSAs and other individual accounts which did not exist a generation ago. In its own way, the emergence of these accounts has been a revolution…. The Origins of the Ownership Society describes the defined contribution revolution, its causes, and implications. For lawyers, the book provides useful insights into the network of individual accounts which are now central features of the U.S. income tax….

Nobody but a tax lawyer understands all the variations, limits and withdrawal requirements of all those accounts. Why not keep our current tax-favored treatment of dividends, capital gains and interest on state and local bonds, then let everybody save and invest, simply and economically, for whatever purposes they desire?

No rules, no regs, no restrictions!