WSJ: The 401(k) of the Future

[rusty charly]

Late Thursday night, Congress passed a pension-reform bill that will transform significant aspects of how these plans can operate. Named for the section of the tax law that created them, 401(k) plans let workers sock away part of their paycheck tax-free until retirement. The problem is, too many people are making bad decisions, such as leaving their money parked in low-yielding investments instead of more suitable choices.

Worse yet, millions of workers choose not to participate in a 401(k) plan at all, putting their own retirement at risk.

The new rules aim to change much of that. Most significant, it will become easier for companies to automatically enroll their employees in a plan and will also empower companies to automatically increase the amount of money deducted from employees' paychecks.

Meanwhile, the Labor Department, which regulates the plans, is on track to let employers automatically put their employees' money into riskier, but higher-yielding, stock and bond funds rather than low-yielding money-market funds that have long been the default option.

[ClintonTyree]

1. Do you have a link for this information?

I haven't read up on this yet and the devil is always in the details. I'd like to understand this fully. Thanks! :hi:

[rusty charly]

6. the WSJ article is subscrip only

He and Frank Rossi, the president of Local 404 of the IBT in Springfield, opposed the amendment in the 907-page bill because they said that it allowed the possibility of forcing veteran workers to have to choose between a cut in their retirement benefit or working years beyond what they had planned. Karen Ferguson, an attorney with the Washington, D.C.-based Pension Rights Center, said that the "red zone" provision puts at risk the full retirement benefits for "older, longer-service rank-and-file workers." The bill in general and the red zone in particular were supported by other labor unions and the business industry.

Local Teamsters and their International Brotherhood opposed the "red zone" language in the bill. It would allow management and labor to open negotiated retirement benefits in cases where funding for the pension dips below 65 percent. But Roos and Ferguson countered that existing laws allow pension trustees to adjust benefits in financially unhealthy pensions.

"All of the key players in the Senate knew that these cuts are wrong, wrong, wrong, but in the end they must have concluded that they simply could not say no to an extraordinarily powerful business-labor juggernaut determined to allow companies to reduce their pension liabilities at the expense of long-time workers," said Ferguson yesterday. "Although the business-labor coalition claimed that these cuts are necessary to save underfunded multi-employer plans from collapse, they never were able to document this claim."

http://www.masslive.com/chicopeeholyoke/republican/index.ssf?/base/news-5/115476456429920.xml&coll=1

She added that the ultimate vote of 93-5 was "one more triumph of bad politics over good policy."

[ClintonTyree]

12. Thanks for the additional info.......

I'll google the rest.

[Warren Stupidity]

2. I smell greed corruption and graft.

Automatic garnishing of wages and forcing money out of SAFE money market funds into RISKY wall street investments, Hmmmm.... who benefits?

[AnneD]

17. Having been a long time small investor.....

I smell a rat. On the Stock Watch thread case after case of corruption has been documented. And they want us to trust THEM with our retirement? It is a Ponzi scheme at best and Russian Roulette at the worst. And what about having profits eaten up by management fees?

I guess since they couldn't jack us for Social Security, this was the next best thing. Thank God I have a good pension and SS back up. My 403b has always been just extra to make my life a bit comfortable in my old age. I have been hit hard by the crash in 2000-2001 and have never really recovered all. Thank goodness I was not close to retirement. I had friends at Enron that will never recover or be able to retire. Retirement should not be subject to the whims of the market.

[rfranklin]

3. Yep, this is a way to gain control of employee retirement funds without...

any responsbility for the payout (if there is anything left after Wall Street does its magic.)

This is a first step toward fleecing Social Security funds (which they have already spent by the way.)

[wakeme2008]

4. Let's see if I understand,, your company could FORCE you to

give 10% of your income to buy company stock "for your retirement"


:grr:

[acmejack]

5. I've had experience with that "plan"

Lost out both times...

[rusty charly]

7. yup

[rusty charly]

8. Here are some features likely to become common.

Automatic enrollment: At companies offering a traditional pension, employees are generally automatically enrolled. But 401(k) plans typically require new employees to sign up, which can be a tough sell for younger or lower-paid workers. There are 12.1 million people in the U.S. eligible for workplace retirement plans who don't participate, according to the nonprofit, nonpartisan Employee Benefit Research Institute.

In fact, many states bar companies from taking money out of an employee's paycheck without written consent. It is a leftover law from the bad old days when unscrupulous employers would force employees to buy things like food or clothing from a company-owned store at extortionist prices, says Fred Reish, an attorney specializing in retirement-plan law.

The pension-reform bill changes that, allowing automatic enrollment. Employees can opt out of the plan, but retirement experts say that once people are in a plan, they are likely to stay put simply out of inertia. The idea, says Christopher Jones of investment-advisory firm Financial Engines, is to "flip inertia from being a force of evil into a force of good."

With automatic enrollment, participation in 401(k) plans could jump from 66% of eligible employees to about 92%, according to estimates done by EBRI and the mutual-fund industry's trade group, the Investment Company Institute.

[rusty charly]

9. Automatic increases:

To address the problem of employees not saving enough for retirement, the new law makes it easier for companies to automatically increase the percentage of an employee's salary that is directed to the plan.

The new rules don't expand the amount of money one can put into a 401(k). However, they do encourage companies to meet certain minimum requirements for matching employer contributions as part of the automatic increases.

In fact, the new law prods companies (but doesn't require them) to meet certain minimum step-ups going from a 3% deferral the first year to 4% the second year and up to 6% the fourth year. In addition, companies are encouraged to meet certain minimum requirements when matching the automatic deductions with additional employer contributions.

This savings step-up can have a major impact. Say a 32-year-old making $30,000 a year joins a 401(k) for the first time. If 3% of the person's salary is placed into a blend of stock and bond funds with a 1.5% match from the employer, at age 67 the portfolio would be worth $117,300, according to calculations prepared by Vanguard Group. But with the minimum automatic increase contained in the pension bill and a higher employer match, that portfolio would be valued at $238,300 at age 67, Vanguard says.

[NotGivingUp]

13. Vanguard is full of shit! I was with them for about 8 years, and I never

could figure out why that even when the market was doing good, I was losing money!

[sendero]

15. It isn't just Vanguard..

... as mutual fund companies go, they are one of the better ones.

Its the "conventional wisdom" of financial planners, investment advisors and the like. They will tell you with a straight face that "over the long term the stock market will do better than risk-free investments".

Well, isn't that special. For folks who jumped into the market at the beginning of the decade, after six years they are not even close to being even. And when you are talking about the stock market of a failing economy, the idea that over the "long term" (and what is the long term, 50 fucking years?) you will be ahead - well all I can say is "past performance is no guarantee of future results".

This is an end-run around the failed idea of SS privatization. If they cannot force you to put your SS in the risky, rigged stock market, they want to force you to put your 401K there.

More than likely this is just a "default" not an absolute - i.e. people who are paying attention will be able to put their money wherever they want. Unfortunately, way too many Americans just go with the flow, paying no attention to their 401K.

[AnneD]

18. I remember when they first introduced 401's

Most companies gave a good matching contribution in order to coax people out of/away from their pensions. Over time, the matching contributions have shriveled up to next to nothing. The same thing will happen with this, mark my words.

And as I mentioned....your profits will be eaten up by fees. Also, the more you have taken out pretax, the less income it shows you have earned and the lower your Social Security. Granted, I don't plan to live on SS, but the really poor and lower middle class will not be able to set aside a decent enough 401 to partially fund retirement, let alone totally fund retirement.

We are being asked to hand over our retirement to snake oil salesmen. I chose to take a little extra and invest in the market, but it is money that I can afford to lose. This set up gives you no choice.

[TheFarseer]

19. Excellent point about smaller SS payments

when you show less income by contributing to a 401k. What are SS payments based on? Is it your last few years salary or salary over your lifetime or something else?

[rusty charly]

10. Default investments:

Currently, the default investment in a 401(k) plan is usually a low-yielding money-market account. The problem with that is a surprisingly large number of people never move their money out of that account and into higher-yielding stock or bond investments they need to provide adequate retirement savings.

As a result, the Labor Department is readying proposed regulations that would let employers default their workers into broadly diversified investments. These multi-asset investments include several different types of funds: "age-based funds," in which a portfolio of other mutual funds is tailored to a particular expected retirement date; "risk-based portfolios" of funds (such as "conservative" or "aggressive"); "balanced funds," which are a blend of stocks and bonds; and "managed accounts," which are portfolios customized to consider not just a person's age and risk-tolerance, but also other investments.

[rusty charly]

11. Advice:

The most controversial aspect of the 401(k) plan makeover is the provision letting companies offer specific investment advice. Under the rules, specific investment recommendations can be given if they are based on a computer model that must be certified as bias-free by an independent third party. "

[valerief]

14. I'd be socking more away if it weren't for the price of fuel killing me.

How do you invest money you don't have?

[Greyhound]

16. When can we just admit that this whole scheme is just a trillion dollar

giveaway to Wall Street investment firms to prop up a market that should have collapsed in the 80's.

Now we have employers making the decisions and forcing participation, guess what they will decide? There are many companies out there that have artificially inflated their stock price by making their employees purchase what would otherwise be nearly worthless shares.

[antigop]

20. A good book to read: The Great 401(k) Hoax

I highly recommend it.

[AnneD]

21. I second it as a good read.

picked it up at Half Price books. Worth double the original price. A thought provoking keep your eye on your investment book.