Tuesday, November 11, 2008

Will the Election Impact 401(k)s?

Reuters had a smart story today about whether Democratic wins in the election yesterday will lead to tinkering with 401(k)s. The theory is that we've all become far too dependent on 401(k)s--and by we I mean both the fund industry and individual investors. The market crash makes even more clear what we already knew: people aren't saving enough for retirement.

Reuters writer Jason Szep speculates that Democrats may try to tinker with 401(k)s to get people to save more. I agree: they might and they should.

But Szep then suggests that they would consider a more radical plan devised by Teresa Ghilarducci, an economist at the New School. The idea is to give workers a tax credit if they invested their money in an account managed by the Social Security administration in risky assets that guarantees three percent above inflation. The plan is a pretty good one. It offers the best of privatizing Social Security: we'd get market returns. But I don't think the guarantees make it all that attractive. I'd rather see the Social Security administration be allowed to invest some portion of our money in the market rather than loaning it out to government agencies.

The plan seems like a bridge between 401(k)s and Social Security--one that would jeopardize the fund industry. But I also think it's really unlikely. Far more likely is the Democrats find some way to get more people to put more money in 401ks. And maybe they'd put on some automatic defaults to the plans and limits on fees. That would be bad for some industry players, but great for the industry as a whole and even better for investors. I would love to see plans that automatically enrolled workers in low-cost lifecycle funds than invested only in index funds. readmorerajput harendrasingh

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