A dramatic overhaul of the 401(k) regime by lawmakers is unlikely in the near future, but there’s plenty of room for improvement to the employer-sponsored retirement system.
Those were key themes struck by speakers Monday, November 2, at the West Coast Defined Contribution Conference in San Francisco hosted by Pensions & Investments magazine. Pensions & Investments is a sister publication of Workforce Management.
Employers who sponsor 401(k) plans ought to do more to help participants realistically prepare for retirement, and special attention is needed to close gaps between minority employees and white employees, speakers said. But calls to take steps such as replacing 401(k)s with a guaranteed public retirement system have not caught fire in Washington, said keynote speaker James Delaplane, partner at law firm Davis & Harman.
“I don’t see radical reforms in the cards,” Delaplane told conference attendees.
Within the past year or so, a major overhaul of the 401(k) system has seemed quite possible.
The tax-advantaged accounts are a way for employers to offer a retirement fringe benefit without the liabilities of defined-benefit pensions. A key selling point to employees has been the portability of 401(k)s, and they have emerged as a crucial retirement vehicle for Americans in recent decades.
But the drastic stock market drop of 2008 has raised pointed questions about 401(k)s. These include whether they enable a secure retirement for Americans, whether they aid higher-income employees unfairly and whether fees associated with the accounts are reasonable.
Last month, Time magazine ran a cover story titled “Why It’s Time to Retire the 401(k).”
But such calls have not won over the bulk of Democratic lawmakers or President Barack Obama, Delaplane said at the conference. The answers on issues such as 401(k) fees are coming from regulators like the U.S. Department of Labor, not from Congress, he said.
“That probably means less disruption to your plans,” Delaplane said.
Still, many within the industry aren’t satisfied with the 401(k) system.
A pressing concern is low retirement savings by African-American and Hispanic employees, said Mellody Hobson, president of investment firm Ariel Investments. Hobson, who provides financial advice for ABC’s Good Morning America, reiterated the findings of a study released earlier this year showing that just 66 percent of African-Americans participate in 401(k) plans, compared with 77 percent of whites.
The study, which involved nearly 3 million employees in 57 large companies in the U.S., also found that the average 401(k) account balance for employees earning $30,000 to $59,999 was about $21,200 for African-Americans, compared with about $35,600 for whites.
Among the steps Hobson suggested to address the gap were greater attention by corporations to racial differences in 401(k) plan behavior and updated 401(k) marketing materials. African-Americans, she said, are more likely to see retirement as a chance to start a new career than to take off traveling, but plan materials often focus on images of a couple strolling along a beach.
She also called for more financial education in the school system. That’s something that can help all Americans who increasingly rely on 401(k)s for their retirement security, Hobson argued.
“We are handing people the keys to their financial future,” she said, “and they have no driver’s ed.”