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Guest Editorial Now That We're "Legalizing" Stocks in 401k Plans, Let's Legalize Unlimited Catch-Up ContributionsBy Jane White, President of the Retirement Solutions LLC and a former financial journalist. She can be reached via email at Jane@retirement-solutions.us. The Retirement Solutions Foundation is a non-partisan organization dedicated to educating the public about saving for retirement. One of the problems with ERISA is it doesn't require employers to tell 401k participants how much to contribute-unlike old-fashioned pensions, which have "minimum funding standards"--and where to put the money. One of the reasons why more companies haven't embraced auto-enrollment is that while ERISA says 401k money has to be invested "prudently," it doesn't define "prudent" (except to endorse diversification) when the obvious definition should be investing mostly in stocks for participants with at least a 20-year time horizon. To make matters worse, some attorneys advising these employers have defined "prudent" as "investments that won't lose money," such as guaranteed investment contracts, which are guaranteed NOT to earn sufficient investment returns to create adequate nest eggs. Now employers can do right by their employees. The most obvious beneficial effect of auto-enrollment is that it will "recruit" the 25% of employees who never join the company plan, who are typically the lower-paid employees. However, the more significant but unpublicized effect is that it will finally apply the law of compound interest for the 75% of us who are well paid but are destined for retirement poverty because we typically wait until our 40s to start contributing to our accounts. Now the procrastinators will be "enlisted" in the plan as soon as they join the workforce so that they will benefit from 40-plus years of compound interest rather than 20 or less. Unfortunately, neither bill will turn back the compound-interest clock for us well-paid Boomers who are headed for retirement hell unless we can do some brute-force catching up. While auto-enrollment will go a long way toward creating retirement security for Gen Xers and Yers it's a too-little-too-late solution for Boomers. Unfortunately, Congress sends a misleading message to Boomers that they can recoup lost time through the measly $4,000-plus "catch-up" contributions to 401k accounts for people over 50. What's more, a feature of the Bingaman bill that gradually increases an employee's contribution each year "until it reaches at least 10% of the employee's compensation" ignores the rules of compound interest, since "the minimum funding standard" for someone who waits until age 45 to start contributing to an account is more like 25% of that person's compensation, not 10%. In reality, in order to truly "catch up" most Boomers will either need to work a second job, postpone retirement until they are in their 70s or 80s, or convince their stay-at-home spouses to go back to work. For that reason, Congress needs to remove the ridiculously low ceiling on catch-up contributions and instead allow an unlimited amount to be socked away in tax advantaged accounts--whether it's a bonus, tax refund, inheritance or 100% of a spouse's income. Pardon the following "condiment metaphor overload," but by implying that a few thousand dollars of catch-up contributions will cut the mustard, we are putting Boomers in a pickle that will be impossible to get out of by the time they realize they are in it. ### 401khelpcenter.com is not affiliated with the author of this article nor responsible for its content. The opinions expressed here are those of the author and do not necessarily reflect the positions of 401khelpcenter.com. This article is for informational and educational purposes only and doesn't constitute legal, tax or investment advise. | ||||
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