Now that Time Magazine and the New York Times have joined CBS MoneyWatch at beating up on the 401(k), it's only fair to ask what the country ought to have instead. The traditional pension that worked out fine in the Mad Men era turned out to be too static for a modern mobile workforce. So jilting the 401(k) to return to the old-fashioned pension, like going back to your spouse after a fling, is not an option. You need something that combines features of both.
There are actually a number of proposals that try to do that. One of the more intriguing is the New Benefit Platform for Life Security, proposed by a trade group of retirement plan administrators called the Erisa Industry Committee. It has all the portability of a 401(k). But like a pension, it absorbs financial market risk so you don't have to.
The NBP is built around a network of private benefit administrators, which are financial institutions that compete to manage your retirement savings. Your employer is no longer responsible for running a retirement plan on your behalf; in fact, your employer doesn't have anything to do with the NBP, unless it chooses to contribute to your account as a perk. Instead, you set up the account with the administrator you choose, and you can keep the same administrator when you change employers, get laid off, retire or whatever.
You have the option of setting up the NBP like a pension -- so that everything you save converts at retirement to income you can't outlive. It's up to the benefit administrator to make sure you get that income, come boom or come bust. That way, you're not at risk of having your life savings gutted just before you retire, a fate that befell millions of baby boomers who had been counting on their 401(k)s.
So the NBP is sort of like an IRA, in that it's a retirement plan that you set up for yourself. Except that, unlike an IRA, you're not limited to $5,000 a year of savings. You can put enough money into it to fund a decent standard of living. And it's sort of like a traditional insurance company annuity, too, in that you put in cash and get back a promise of guaranteed monthly checks for life in the future.
Now, to be sure, guaranteed income sounds great in the wake of the Great Crash of 2008. But that's also the weakness of this plan: The guarantee is only as good as the benefits administrator's ability to make good on it. We're talking here about a guarantee that you have to believe in over the course of your whole career and lifespan in retirement -- a period that could easily stretch 70 years all told. Who would you trust over that length of time? Fidelity? Citigroup? AIG?
With the 401(k), we have a system that sets up some generations to retire broke and others to retire rich, based entirely on whether the last years of their career fall during a boom or a bust. I don't think that's a good plan. I think we need to move to a system that spreads the risk of booms and busts over a whole population -- and that's what the NBP does. But no system is perfect, and none can make risk go away. The only question is who bears the risk: You alone (the 401(k) way)? Your company alone (the old-fashioned pension)? Or some larger population of workers and financial institutions? The first two didn't work. So why not try the third?
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