Press Release

The President's Savings Proposals: Beyond the Hype and Hysteria

MADISON, NJ, February 20, 2002 -- "President Bush's savings proposals don't pass the `sniff test' because they don't address the four major retirement issues confronting Americans," according to Retirement Solutions founder and president Jane White. The problems:

• About half of Americans who work in the private sector aren't covered by any retirement plan.
• Of those who work for an employer who DOES provide a 401k plan, up to 30% never participate in the plan.
• Of those who DO save, the vast majority save "too little and too late." The typical deferral rate is 6-8% of salary, when it should be around 15%. The typical participant is 45 years old when he or she should be 35. As a result, it will require drastic measures-not simple "catch-up contributions"--to get most Americans on track:
• When people are given an opportunity to smash their retirement piggy banks, too many give into temptation. A recent study of about 170,000 people who changed jobs showed that nearly 70% "cashed out" at least part of their 401k account balances, with less than one-third rolling them over to an IRA.

"So a solution to the retirement problem should be to: convince "non-savers to save, convince savers to save more and convince everybody to keep their hands out of the cookie jar," White said.

Let's first look at the effect of the Bush plan on people who are already covered by a 401k plan at work. Most of them will redirect the portion of their account balances that isn't matched by the employer to a financial institution, where earnings build up tax-free. On its face, shifting the management of retirement assets away from employers to financial institutions seems logical. Given that the average American will hold more than six jobs during his/her career, why should any one of these employers be the steward for their savings?

On the other hand, 21st century workers have grown comfortable having the employer oversee their retirement savings; only about 4% of them contribute to a non-rollover IRA. What's more, employers play a vital role in looking out for the best interests of their workers-a role that simply needs strengthening, not abandoning. For example, conscientious employers traditionally scrutinize their 401k mutual fund offerings to ensure that they feature a long-term track record of beating a benchmark index as well as charging low fees--most mutual funds fail this test--an exercise that many Americans may be unwilling or unable to perform. More importantly, employers can make sure participants get investment education that advises them to "stay the course" rather than switching into "safe" investments when the market tanks-the opposite message currently delivered by many of the major players in the financial community.

Now let's look at the President's proposal's effect on the people not covered by a plan, which are mostly small businesses: in a nutshell, it relaxes the "non-discrimination" rules so that higher-paid employees can contribute a higher percentage of salary as long as the lower-paid contribute at least 6%. But the distinction between higher and lower paid is bogus; neither group contributes at a sufficient rate to retire comfortably. What's more, no company-large or small-is currently required to match participant contributions except in special circumstances, without which it's virtually impossible to amass an adequate nest egg. Bottom line: more small employers may wind up offering the plans but won't necessarily contribute anything to workers' accounts.

So what carrot-and-stick technique would be more effective at solving the retirement savings dilemma?

• Here's a "carrot" idea: Remove the ceiling on the amounts that can be socked away each year-the current $12,000 limit is ridiculously low-IF employers deposit $1,000 in every new employee's account as a savings incentive AND make a minimum 50% match on contributions for at least 6% of income--9% if the employer doesn't also have a defined benefit pension plan.
• Here's a "stick" idea: Rather than "punish" people who tap into their 401k plans with taxes and penalties simply prohibit cash-outs, period, until age 591/2.

"Bottom line," says White, "America's retirement system may be broken, but let's fix it--not replace it."

About Retirement Solutions Foundation, Inc.

Retirement Solutions Foundation, based in Madison New Jersey, is a 501c3 non-profit organization whose mission is to increase savings and boost participation in 401k retirement plans. A member of the National Retirement Planning Coalition, Retirement Solutions Foundation's long term goals include educating students about the importance of saving and the fundamentals of investing and helping retirees keep what they've already saved.

Click here to contact Jane White about this issue.

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