The Case Against the 401(k): A New Approach to Retirement Savings

Episode 192 of the Investopedia Express with Caleb Silver on June 17, 2024, featured Professor Teresa Ghilarducci, a labor economist and retirement expert at The New School for Social Research. Professor Ghilarducci has been a vocal critic of the 401(k) retirement savings plan, arguing that it was never intended to be the primary retirement savings vehicle for most American workers. She believes that the 401(k) primarily benefits high earners and is plagued by misaligned incentives. In the episode, she makes the case for a new government-sponsored retirement savings account that she believes is more equitable and provides a better pathway for workers to ensure they do not run out of money in retirement.

The Problems with the 401(k)

Professor Ghilarducci’s main argument against the 401(k) is that it disproportionately benefits high-income earners. The tax advantages and employer matching contributions associated with 401(k) plans provide the greatest benefits to those who are already well-off. Additionally, many lower-income workers do not have access to employer-sponsored 401(k) plans, further exacerbating wealth inequality.

Furthermore, Professor Ghilarducci points out that the 401(k) system is inherently flawed in that it places the burden of retirement savings entirely on the individual. This can be particularly challenging for lower-income workers who may struggle to save for retirement while also covering basic living expenses.

A New Approach to Retirement Savings

Professor Ghilarducci advocates for the creation of a new government-sponsored retirement savings account that would be available to all workers, regardless of income level. This account would be funded through a combination of employer and employee contributions, similar to the current 401(k) system. However, Professor Ghilarducci’s proposed account would have a number of key differences that she believes would make it more equitable and effective.

One of the key features of Professor Ghilarducci’s proposed retirement savings account is that it would be portable, meaning that workers could take their savings with them if they change jobs. This would help to address one of the major drawbacks of the current 401(k) system, which often leaves workers with fragmented retirement savings accounts as they move from job to job.

Additionally, Professor Ghilarducci’s proposed account would include a guaranteed minimum return on investment, providing workers with greater financial security in retirement. This feature would help to mitigate the risk of market fluctuations and ensure that workers do not run out of money in their later years.

Market Update

On a different note, the episode also touched on the current state of the stock market, which continues to reach new record highs. Despite this, experts believe that the current bull market is relatively tame compared to previous periods of market growth. Investors are advised to proceed with caution and consider diversifying their portfolios to protect against potential market downturns.

Conclusion

Professor Teresa Ghilarducci’s arguments against the 401(k) system raise important questions about the current state of retirement savings in America. By highlighting the inequities and shortcomings of the 401(k), she has sparked a conversation about how we can better support workers in saving for retirement. While her proposed government-sponsored retirement savings account may face challenges in implementation, it offers a promising alternative to the current system.

For more information on this topic, you can listen to Episode 192 of the Investopedia Express podcast with Caleb Silver. You can find the episode on Apple Podcasts, Spotify, or PlayerFM.

Sources:

• The New School for Social Research – Teresa Ghilarducci
• Economic Innovation Group – Wealth Building Program