Can Congress Fix the 401(k)?

At a time when Congress can’t seem to agree on much, lawmakers are acknowledging that the main retirement savings vehicle, the 401(k), needs some fixing. Before you get too excited, the changes being considered are more like touch ups, rather than a complete renovation.

Early conversations include: requiring plan sponsors to let participants know how much their total savings would translate into monthly income; the addition of annuities as investment vehicles inside 401(k)s; a repeal of the age limit on IRA contributions; the ability to use taxable stipends or fellowship payments to fund traditional or Roth IRA accounts; a more liberal approach to pooled 401(k) plans, which would help more small businesses offer retirement benefits to their employees; and the option to use a portion of a tax refund to fund retirement.

While none of these ideas represents a game-changer for retirement savers, it would be the first major enhancement since 2006. But if lawmakers wanted to seek a more radical approach, they would consult with Teresa Ghilarducci and Tony James, co-authors of Rescuing Retirement: A Plan to Guarantee Retirement Security for All Americans, who claim that "The U.S. experiment with 401(k)s and IRAs, launched in the early 1980s, has failed miserably to deliver on its promises."

Ghilarducci, a labor economist and leading expert in retirement security, and James, Executive Vice Chairman of the investment firm Blackstone Group, have a detailed, well-researched and more extreme recommendation for rescuing the U.S. retirement system. It starts with a concept called a “Guaranteed Retirement Account” (“GRA”), which would be offered to every worker, "from Uber drivers to CEOs."

The GRA would be portable, whether you work for a number of different companies or for yourself – and each individual would control his or her account. It would be funded by a minimum 3 percent of salary, half contributed by the worker and half by the employer. All workers would be free to make additional GRA contributions up to the current 401(k) limits of $18,500 ($24,500, if over the age of 50). The GRA plan would provide tax credits to those earning under the median income level and would also put limitations on retirement plans for wealthier earners.

Perhaps the most interesting part of the GRA is that it fixes some of the big problems that are prevalent in current plans, the biggest of which is that right now, saving for retirement is voluntary. The GRA would mandate retirement savings for everyone, including those who work part-time or are self-employed.

Additionally, it would prohibit participants from tapping their funds, even in the case of hardship. This may seem mean-spirited, but the authors argue that those who have traditional pensions can’t access their funds early either. This component of the GRA would prevent retirement “leakages” that occur due to hardship withdrawals; cash outs or lump sum distributions after an employee leaves a job; or loans against 401(k) assets, which deplete plan holdings over time.

The GRA would bring down the cost of investing by pooling savings and allowing workers to choose a professional manager. Acknowledging that this might seem like a Wall Street boondoggle, the authors say that anyone managing these accounts would have to be federally licensed and would be regulated as a fiduciary. Finally, the plan would include a turn-key way to annuitize retirement savings for life, which would supplement Social Security retirement income. One last note: this hybrid defined contribution/benefit plan would be deficit neutral.

If it all sounds too good to be true, I encourage you to check out the book. I was a cynic, but after reading it and interviewing Ghilarducci and James for my podcast, I’m a convert.