Movement to Scrap 401(k)s Gains Traction

When it comes to how we spend and save, borrow and lend, nothing in this nation will ever be the same.

I can't tell you how the financial crisis will be solved, when the Dow will return to 13,000 or if home prices will recover anytime soon. But the events of the past two months make it clear our national money habits are in for big changes.

Given that reality, there's one proposal you might want to keep an eye on. A recommendation to shake up the nation's 401(k) system is gaining traction as workers and retirees gape in horror at their investment account balances.

"Four weeks ago this plan didn't have a chance," conceded its author, Teresa Ghilarducci.

Suddenly, things have changed. Ghilarducci's proposal to create what she calls Guaranteed Retirement Accounts is gaining attention in Washington as the nation grapples with the issue of retirement security in the wake of a 40-percent-plus drop in the U.S. stock market this year.

"These last three weeks people are learning their 401(k) plans can go down," said Ghilarducci, an economist at the New School for Social Research in New York.

Called to testify before Congress earlier this month, Ghilarducci's ideas are gaining wide exposure nearly a year after she published a policy paper on the subject. She followed up that paper with a book published in May, "When I'm Sixty-Four: The Plot Against Pensions and the Plan to Save Them."

Her proposal calls for knocking down the 401(k) plan system and replacing it with a government-run pension plan funded by employee contributions. Participants would be guaranteed an inflation-beating return and a lifetime stream of income.

"What people want from their pensions is guaranteed income for life," Ghilarducci said in an interview Monday.

Guaranteed Retirement Accounts

Here are the basics of her proposed Guaranteed Retirement Accounts:

• Employees would make mandatory contributions equal to at least 5 percent of their earnings. Workers could contribute higher amounts if they wish.

• Those contributions would be offset by a $600 federal tax credit each participant would receive.

• As with a 401(k) plan, workers would have individual accounts they could track. The balance of each account would depend on each worker's contributions and income level.

• The Social Security Administration would handle account management, and the Thrift Savings Plan -- a well-regarded retirement plan for federal employees -- would manage the money.

• Participants would be guaranteed a fixed rate of return that exceeds inflation by 3 percent. For instance, if inflation stood at 2 percent, the worker would earn 5 percent; if inflation reached 3.5 percent, the worker would earn 6.5 percent. Participants could receive an inflation-beating return above 3 percent if the government's investment returns were high enough.

• At retirement, participants' account balances would be converted into a lifetime stream of income that adjusts for inflation. There would be options to take partial lump sum payments, opt for lower payments in return for survivor benefits and, upon death, leave a portion of a financial account balance.

The intent of the plan is not to replace Social Security. Rather, Guaranteed Savings Accounts would supplement Social Security, Ghilarducci said.

She estimated a full-time worker retiring after 40 years could expect a benefit equal to about 25 percent of pre-retirement income. That would be on top of Social Security benefits.

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