Is It Time to End the 401(k)?

Is the 401(k) outdated? Shlomo Benartzi, professor emeritus at UCLA Anderson School of Management, suggests in a new op-ed for The Wall Street Journal that given today's mobile workforce, it's probably better to switch to portable accounts.

With pensions all but gone, the 401(k) has become the primary retirement savings vehicle for Americans, Benartzi writes.

While lawmakers have "worked to encourage savings in 401(k) accounts using behavioral nudges," like auto enrollment, the behavioral economist said, "it has become much less common for workers to stay with a single employer throughout their careers," and "far less has been done to help workers keep their savings on track when they change jobs."

Said Benartzi: "The problem, to put it all together, is this: The more mobile the workforce is, the more small accounts workers will have, and the more small accounts people have, the more likely they are to cash them out."

Benartzi suggests it may be "necessary to replicate the Australian model in the U.S. to deal with situations in which employers use different retirement providers. In Australia, workers remain by default with their first plan provider, even if they change jobs."

This approach, he writes, "preserves competition among providers. It also makes it easy for workers to create a lifetime savings account, though they aren't locked in. They have the option of switching plans when they switch jobs if they so desire."

Mixed Feelings

"I have mixed feelings about this," David Blanchett, managing director and head of retirement research for PGIM DC Solutions, told ThinkAdvisor Tuesday.

What Benartzi "appears to be suggesting is the method that people save at the their company for retirement transitions more into something more like what Australia does, in their superannuation system (i.e., individual more portable accounts), versus something maintained by the employer, which is the 401(k)," Blanchett said in an email.

"While it's true there are things we can improve with 401(k) plans, the system as whole is working (for those who have access to them) and is improving. Changing the system to something more portable could improve things on the margin, I think there are other things that could be far more impactful if we're seriously going to consider this type of proposal (which would be a massive undertaking)."

People need "to save more for retirement, and I think this could come from employers (also what Australia does), and we need to increase coverage," Blanchett continued. "We've seen a lot of movement on the second item, but rollouts are issue with smaller balances. One way to solve that is just not allow cash outs and increase the ease of portability when people leave a plan."

Getting rid of the 401(k) is not "a practical idea given retirement realities today," Blanchett said. "I do think can do things to improve the system, but moving to something new would likely be incredibly disruptive and smaller changes to the existing system could likely accomplish many of the key objectives of any kind of change (or new proposed solution)."

Nevin Adams agreed in a blog post for the National Association of Plan Advisors that such a change would be a huge undertaking.

"Oddly enough, the big problem he seems to be trying to address is the reset of the default deferral rate at job change but his big government 'solution' would — at best — still require some kind of massive employer-to-employer payroll data transfer — and the op-ed doesn't even acknowledge the cost or challenges in developing or administering that transfer (or what might go wrong)," Adams writes.

Benartzi "points to data that suggests that participants want tools like contribution acceleration to boost their savings — but apparently thinks individuals are unwilling or incapable of relaying that information to their next employer," Adams said.

"Ultimately, however, it's a solution in search of a problem," according to Adams.

"Defined contribution savings are already, in fact, portable — if not to a successor plan, then to an IRA — and have always been," Adams wrote. "Beyond that, automated rollovers as a distribution default is an emerging capability — via networks like the Portability Services Network that already connect a half dozen of the nation's leading recordkeepers to facilitate exactly the type of job-to-job plan transfer Benartzi seems to think only a centralized government pool could accomplish."