Posted on 06 May 2011
By Mark Miller
It may feel like as though 401(k)s have been around forever, but they’ve actually only been around for the past several decades. Until the 401(k) came along, if you had a workplace retirement plan it came in the form of a traditional defined benefit pension.
The 401(k) actually got started as a loophole in tax law that gave taxpayers a break on deferred income. Its name is taken from a section of the Internal Revenue code that made the accounts possible. But plan sponsors soon realized the 401(k) language provided the basis to offer voluntary workplace savings plans using a pretax payroll deduction. Shifting to defined contribution (DC) retirement benefits would allow employers to lose the cost, risk and administrative hassle associated with defined benefit (DB) plans.
The rest is history. The 401(k) took off, and DB pension coverage shrunk plunged.
How’s that working out for you? Probably not so well. The annual Retirement Confidence Survey from the Employee Benefit Research Institute finds that Americans’ confidence in their ability to afford a comfortable retirement has hit a new low. The percentage of workers who say they are “not at all confident” about having enough money for a comfortable retirement grew from 22 percent in 2010 to 27 percent, the highest level measured in the study’s 21-year-history.
But mourning the decline of private sector defined benefit pensions won’t bring them back. So a group of industry professionals convened a working group, the Retirement 20/20 Initiative, to brainstorm ways to get defined contributions to look — and behave — a bit more like defined benefit plans by generating reliable income streams in retirement. The group includes actuaries, economists, employers, participant advocates, investment experts and academics researchers.
Learn about some of the best ideas to emerge from Retirement 20/20 in my column this week at Reuters Prism Money.