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Monday, November 23, 2015

Misery loves company, but is that good public policy?

We’ve asked before why the proponents of defined contribution plans, such as 401(k)s, so eagerly want to dismantle defined benefit plans for public employees given the problems we’re seeing with 401(k)s. 

It’s always instructive to refresh our data on just how 401(k)s have failed, even though it can be depressing. 

Here’s some facts and figures about retirement unpreparedness and 401(k)s that were compiled by Bailey Childers, the executive director of the National Public Pension Coalition:
  • The gulf between what Americans have saved and what they actually need to retire is startling. We have only about half of what we need, or $6.8 trillion versus $14 trillion
  • 92% of American household are financially unprepared for retirement, according to the National Institute on Retirement Security.
  • Studies show that the structure of 401(k)s are failing low-income and middle class workers. They don’t contribute like they should, while only people with annual incomes in six-figures contribute adequately, according to the Economic Policy Institute.
  • Individual accounts like 401(k)s yield lower returns in comparison to group accounts because individuals take fewer investment risks as they get closer to retirement to ensure their savings aren’t decimated by a sharp market downturn right before they need them.
  • Group accounts like defined benefit pensions continuously add younger members who can assume greater risks so funds can always be invested in a manner that is likely to yield higher returns in the long term.
These are just some reasons why 401(k)s have failed the American worker. They should not be a policy option for at least one sector which has not been subjected to their havoc.