We Need Your Help to Fix Your Retirement
Americans may be divided over whether the timing is right for health care reform but the bigger financial crisis facing most Americans is the lack of pension coverage. While it's outrageous that 16% of the population doesn't have health care coverage it's unthinkable that 90% of the American population in the private sector either has NO retirement plan or a 401(k) with a measly match equal to 3% of pay. Let's reward Americans for their hard work as is the case with every other "first world" country.
The buzz may be that your 401(k) savings may now only be a 201(k) because of slumping market returns but the truth is that they were ALWAYS inadequate. Why? It's the puny employer match, not the stock market. Just compare the typical account balance in the U.S. with the Australians.
While Australians between the ages of 20 and 24 will have nearly $700,000 in their version of our 401(k) accounts when they reach retirement age, the median amount saved by middle-aged Americans even before the market slump in 2007 was a measly $103,600-- less than twice the median Boomer salary when it needs to be 10-13 times that amount. In other words, if you're 65 and earning $65,000, $650,000 in retirement savings isn't a windfall--it's the goal.
Why can Aussies retire when we can't? Very simply: Australian employers are REQUIRED to contribute three times the rate that American companies do to the Aussie version of a 401(k) account-the current contribution rate is 9% of salary up to a salary ceiling of $137,880 up to age 75.
We have to require successful American businesses to "share the wealth" with their hard-working employees, as is the case with most of the advanced world. Here's the plan--and tell us what you think.
- Mandate employer contributions to 401(k) accounts equaling 9% of pay for Fortune 500 companies.While some may claim this mandate would be too burdensome in these recessionary times, America's largest corporations are doing just fine. In 2011 the Fortune 500 saw a whopping 81% jump in profits--the third largest gain in the group's history. Rich companies are making a killing at the expense of American jobs. According to the Wall Street Journal, Fortune 100 companies alone have killed 2.9 million American jobs in the past decade while adding 2.4 million abroad. If we assume that the other 400 of the Fortune 500 is also outsourcing, that accounts for a significant chunk of the 14 million people who are currently unemployed.
- Smaller Non Fortune 500 companies with 10 or more employees that have been in business for five years or more must contribute the equivalent of 6% of pay. Those employers who contend that a 6% contribution rate is too burdensome should consider that the U.S. has one of the least generous pension systems in the advanced world; only six member countries of the OECD have lower pension wealth. Employees working in companies with fewer than ten employees in business less than five years would be enrolled in a Universal 401(k) featuring a government matching contribution equivalent to 6% of pay.
- Employer contributions must start when your job does, as is the case with your paycheck: Can you imagine if your new boss said to you on your first day of work, "Welcome to Widget Works, Fred! We hope you've saved enough money to pay your bills for your first year because you won't be getting a paycheck." But that's how it works with many 401(k) employer contributions. Not only do many employers require one year of service before the match starts, even more make their employees wait between one to six years before they "own" these employer contributions. Who does this affect? Most Americans: the typical worker born in the latter years of the baby boom worked for more than 10 employers between the ages of 23 and 44 alone, according to the Bureau of Labor Statistics.
- Employer contributions must be in cash, not the "play money" known as company stock: Suppose your employer said, "Unfortunately, sales are down, Selma, so we'll be paying you with Monopoly money instead of regular money." Remember Enron? Despite the catastrophe that cost 22,000 workers their jobs and their 401(k) savings, a decade after it filed for bankruptcy 11 million of the nation's more than 52 million 401(k) participants have more than 20% of their balances in company stock. While such exposure would be "illegal" in a traditional pension, the so-called Pension Protection Act of 2006 only requires that employers send a warning to 401(k) participants with more than 20% exposure that their savings "may not be diversified."
- Retirement Plans for Life: Wouldn't it be great if you could just pick a high-performing mutual fund and stick with it throughout your career rather than having to start over again at each employer? Even the minority of Americans who stay at one employer for a lifetime may lose out because their employers often select inferior funds that they wind up replacing. More than 60% of employers said in a recent survey that they replaced an underperforming fund within the previous two years. Picking a fund should be a no-brainer: if more than two thirds of the world's 500 largest companies are based overseas--let's put our money where the economy is. The 10-year return for Vanguard Global Equity Fund (VGEF) was nearly 7% compared to near-inflation rate returns of 2.71% for the S&P 500 during the "lost decade."
- Are you a worker in your sixties whose boss has encouraged you to attend workplace seminars in which presenters try to convince you to retire--and "annuitize" your account balances? Bad idea. For one thing, you can't afford to retire unless you've accumulated at least 10 times your salary at retirement. Even if you have, while annuities offered at the workplace may be fixed-rate commission-free products, once you leave the workplace a different broker will likely try to convince you to buy a new (most likely variable) annuity, an example of "churning", in order to generate commissions. Elected officials in Florida, New York and New Jersey have increased penalties and limited the ability of annuity sellers to impose surrender charges.
Your new retirement plan would feature more generous employer contributions that must be in cash and not company stock. Employer contributions would begin as soon as you start work and are "portable" to a new job and the plan would enable you to stick with the same mutual funds for life if you choose to. Download the the full proposal.
Agree we need reform? Please email the link to this page to your Congressperson.