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Guest Editorial First, Do No Harm to 401k PlansBy Jane White, President of the Retirement Solutions, LLC, an advocacy organization for 401k participants that also produces educational material. She can be reached via email at jane@retirement-solutions.us. First, replacing stock investments with government bonds guarantees investment poverty. The reason why bonds are nicknamed "certificates of confiscation" is because they are a long-term investment that pays a premium that's typically lower than inflation-so you usually lose money. My study of compound real returns for 20-year holding periods from 1926 to 2000 showed that long term government bonds produced negative returns for a whopping 51 of the 55 holding periods compared to a positive returns for the S&P 500. Her proposal to have taxpayers subsidize an inflation-adjusted return on an investment that underperforms inflation makes no sense. What's more, if Ghilarducci's recommendations had taken effect the day she presented testimony Oct. 7th 401k investors would be hopping mad. After its initial slump, the Dow Jones Industrial average increased by more than 10% on Oct. 22nd. That 10% increase in the DJIA boosted these average returns to about 6.3% over 15 years and 5.9% over 40 years. What makes even less financial sense is the one-size-fits all $600 government contribution that would replace the current contribution rate of about 3% of pay. This would lower nest eggs for 95% of Americans-and the other 5% are probably poor enough that Social Security replaces most of their income at retirement. Americans aren't pension-poor because of the stock market but because of the typical employer match of 3%. Of the eight countries in the advanced world using defined contribution plans the US rate is the second lowest-even Mexico's employers have to contribute 6% of pay. My proposal for 401k reform would be to boost the employer contribution rate to 9%, which is the case in Australia. That is why most Australians are on track to accumulate at least "10 times final pay"-their salary right before retirement, a formula often used by pension actuaries in calculating defined benefit pensions. I'm glad that 401k reform is finally on the table-since the first wave of Boomers are scheduled to retire in 2011 and can't afford to. Let's hope those who provide guidance on reform will enable the plans to walk, talk and quack like real pensions. ### 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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