A better way to save for retirement?

Declaring the nation’s private-sector retirement system “broken,” the Center for American Progress is adding its voice to the growing call for a new kind of investment vehicle to shore up retirement security for workers.

CAP, a liberal think tank closely associated with the Obama White House, called the current system, which relies increasingly on worker-directed individual retirement accounts and 401(k)s,“unnecessarily costly and needlessly risky.” That cost and risk, the center said, could be reduced by adopting retirement plans that combine elements from both traditional pensions — those fast-disappearing benefits that provide retirees a fixed payment for life — and defined-contribution plans such as 401(k)s.

Such a system would feature regular lifetime payments for retirees and professional management of investments, such as a pension. And, like 401(k)s, the plan would offer portability for workers, who are changing jobs more often than ever. It also would promise predictable expenses for employers, who have been abandoning traditional pensions for decades because of what they consider excessive cost.

An analysis of the proposal found that if workers made regular lifetime payments into a pooled, professionally managed fund, they would be much better off than if they funneled the same money into a 401(k), which is the dominant retirement savings vehicle for workers in the private sector.

“We can build a better mousetrap here,” said David Madland, director of the American Worker Project at CAP. “You are seeing a lot of people starting to think along these lines, but we have not seen the hard numbers to support the idea.”

The problem of eroding retirement security is gaining increasing attention from lawmakers and others, although policy responses are moving slowly.

In California, lawmakers have passed a bill similar to the center’s proposal that would create a statewide retirement fund for private-sector workers who lack such coverage beyond Social Security. That plan, which would require employers with at least five employees to automatically deduct 3 percent of workers’ pay to place into tax-deferred investments with a guaranteed minimum return backed by insurance, is nearing the end of a feasibility study.

President Obama has proposed automatically enrolling workers with no retirement coverage into individual retirement accounts, but the idea has not moved forward. Also, Sens. Tom Harkin (D-Iowa) and Mike Enzi (R-Wyo.) are working on a bill that would create a federal plan similar to the California initiative.

Meanwhile, legislators in Connecticut, Maryland, Oregon and Washington have considered similar measures.

All of the plans seek to resurrect the idea of some type of fixed payment for retirees to supplement Social Security. But critics say fixed payments are often incompatible with the kind of flexibility that workers seem to like in 401(k)s.

“We are interested in ways to pool and limit fiduciary risk,” said Edward Ferrigno, a vice president at the Plan Sponsor Council of America, a nonprofit that represents firms that offer 401(k)-type benefit plans. “But the question is: How do you do it?”

He argued that CAP researchers overstate the investment cost associated with 401(k)s, which he said decreases dramatically for workers at large employers because of economies of scale. Also, he said, the study understates the share of workers with 401(k)s by including very young and part-time workers in its calculation.

At the same time, he said, 401(k)s work well for people who can save consistently. But others say saving is difficult for workers who are struggling with flat wages and are often confused by the investment landscape.

CAP said the plan it envisions would help shield workers from common mistakes, such as having investment portfolios that are not sufficiently diverse. Meanwhile, the large pool helps insulate workers nearing retirement from swings in the investment market.

As the first generation of people who primarily rely on 401(k)-type retirement savings plans nears the end of their working lives, the well-known pitfalls of the system are becoming clearer. Although some workers have saved significant sums in 401(k)s, more have not, the report notes.

To begin with, the center’s report said, less than half of private-sector workers have a retirement plan at work. Workers approaching retirement age who do have 401(k)s have saved enough on average to provide just $575 in monthly benefits.

Meanwhile, with health-care costs continuing their long, upward climb and policymakers calling for reductions in Social Security benefits, current workers face the real prospect of downward mobility in retirement.

“The bottom line is that the current 401(k) system is so inefficient and risky that there are many ways to dramatically improve outcomes for participants that would lower both the costs and risks that workers and retirees face,” the report said.

Michael A. Fletcher is a national economics correspondent, writing about unemployment, state and municipal debt, the evolving job market and the auto industry.
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