Fixing—Not Nixing—the 401(k)

November 01, 2013 ( - Since its introduction nearly 30 years ago, the 401(k) has evolved from a perk for high-paid executives to an essential benefit to finance the retirement of the middle class.

In fact, 70% of participants surveyed by Schwab indicated they are relying on their 401(k) as their main or only source of retirement income aside from Social Security.

With the future of Social Security in question and fewer employers offering pensions to long-time employees, the 401(k) plays an increasingly critical role in retirement plans across the country. Over the last several years, however, the employer-sponsored retirement plan has come under fire from critics who say it is an inadequate standalone plan for retirees. Some are calling for the 401(k) to be eliminated altogether, while others are advocating for eliminating one of its greatest benefits: its tax-deductible eligibility.

These criticisms assume that there are alternatives to the 401(k) (none are apparent)—and they ignore solutions that could be implemented within the existing system.

The most realistic solution for the nation’s troubled retirement system is fixing the 401(k). Reform should focus on expanded access to 401(k) plans for all employees; shared responsibility among employer, government and employee; simplified investment decision-making through professional asset allocation; and providing a stream of income at retirement.

To that end, here are a few common sense reforms that could make a dramatic difference in the long-term well-being of our retirement system and our retirees.

Even more fee transparency - Investments. The new 401(k) fee disclosure rules were a good first step. Employers and participants now need to focus on reducing investment costs, which represent 84% of a plan's fees. Unnecessarily high fees will eat away at the value of retirement savings over time.

401(k)s for all. “It's time to make the 401(k) mandatory, with every employer offering a plan, and both employer and employee required to contribute.” These are not the words of a radical politician, but of Knight Kiplinger, editor in chief of Kiplinger's Personal Finance magazine. Kiplinger’s call for action should be taken up by leaders of all stripes and rules put in place to require businesses to offer a retirement plan. Without such a mandate for employers to offer some form of retirement savings, the nation’s retirement savings will likely continue to linger beneath the amount that is needed. According to a recent Government Accountability Office study, only 14% of small businesses with fewer than 100 employees sponsor a retirement plan.

Mandatory enrollment for all employees. Automatic enrollment is becoming a popular feature of 401(k) plans, particularly among larger employers. A recent survey of plan sponsors conductedby the American Benefits Institute found that 56% of 401(k) plans include automatic enrollment. While the number is encouraging, it still leaves 44% of the workforce fending for themselves. Leaving the enrollment decision to the employee creates an unnecessary barrier to saving. Eliminate the barrier, and more workers can immediately begin contributing to a retirement plan.

Mandatory employer contributions. Retirement plans, like health care, should be considered a cost of doing business. A mandated minimum contribution from employers, combined with universal enrollment, would allow millions of Americans to grow a nest egg for retirement.

Professional management of investments. The 401(k) has opened the door to broad investment choice, but many workers feel confused, not empowered, by the options. According to Schwab, over half of retirees (52%) find explanations of 401(k) investments more confusing than health care benefit explanations (48%). Professionally managed investments would help put retirees at ease, leaving the intricate details of investing to the experts best equipped to make decisions. In fact, 83% of participants indicated they wanted professional management, and according to a study by Aon Hewitt, participants who received help with their portfolios outperformed those who did not receive help 87% of the time.

Meeting the need for reliable retirement income. With people living longer, retirement dollars need to last longer. The industry needs to produce a better solution for those wanting to annuitize their retirement nest egg. Unfortunately, the only offerings today for participants are insurance products laden with unnecessary fees.


Throughout the 401(k) industry, there are continuing efforts to merge the best features of traditional defined benefit and defined contribution plans to create an investment option that guarantees income for life. More needs to be done in this area to meet growing needs for reliable retirement income. Although this seems to be a new trend in the industry, solutions are emerging that could make a lifetime of difference for retirees and their families.

Americans undoubtedly need to save more for retirement. Sensible changes focused on reducing costs, expanding access to 401(k) plans, and boosting savings can make the 401(k) an even better plan for retirement and put retirees on the path to success.

Tom Gonnella is executive vice president of Lincoln Trust Co., a provider of 401(k) plans.  

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.