TARGETING

YOUR 401(k)

WALL STREET JOURNAL

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TARGETING YOUR 401(k)

You may have heard about Argentina's plan

to nationalize private retirement accounts.
Some Democrats on Capitol Hill are inspired,
and with their big election victory they may get
the chance to test Peronist ideas in
America. Meet Congressmen George Miller
and Jim McDermott, who are eager to change
the way Americans save for their golden years.
They'll also be powerbrokers in the next
Congress. Mr. Miller, who came in with the
Class of 1974 from California, chairs the House
Education and Labor Committee. Mr.
McDermott, who has represented Seattle the
past two decades, runs a House Ways and
Means subcommittee on income security and
family support.
Before Election Day, the Congressmen
began to target the $3 trillion in 401(k)
accounts held by about 60% of Americans. Mr.
Miller called the system "an inadequate vehicle"
that "has not been terribly successful" in
encouraging retirement savings. He wants a
"wholesale re-examination" of pensions.

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Just what alternative these Democrats

support is unclear, and nothing has been
formally proposed beyond Mr. Miller's plan to
make the system "more transparent," reduce
fees charged by the money managers, and
suspend the tax penalty for seniors over 70 who
don't take the "required minimum" withdrawal

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TARGETING YOUR 401(k)

from their account, regardless of the market

situation.
But the Chairman has also signaled greater
ambitions. At a hearing last month, Mr. Miller
put the 401(k) system into play. Under the
current system, employers match employee
contributions that aren't taxed until redeemed,
an indirect subsidy worth some $80 billion
today. "We have to start to think about in
Congress . . . whether or not we want to
continue to invest that $80 billion for a policy
that's not generating what we now say it
should," Mr. Miller said. "For a taxpayer
investment of this size, we must ensure that the
structure of 401(k)s adequately protects the
nest eggs of participating workers."
His committee listened to possible reform
proposals. Most eye-catching was an idea from
Teresa Ghilarducci at New York's New School
for Social Research. Her plan would end the tax
breaks for 401(k)s; she proposes instead to give
all workers an annual $600 inflation-adjusted
tax credit for retirement and force them to
invest 5% of their pay into a government-run
retirement account managed by the Social
Security Administration. She called the 401(k)
"a failed experiment." A McDermott
spokesman called her proposals "intriguing"
and "part of the discussion." Mr. Miller hasn't
so far endorsed the plan.
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The main liberal objection to 401(k)s seems

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TARGETING YOUR 401(k)

to be that they let average Americans control

their own investment decisions for retirement.
As Shlomo Benartzi, a professor at UCLA's
Anderson business school, told Mr. Miller's
committee, "Individuals have a tendency to buy
at the peak, and then panic when the markets
drop and sell at the bottom." Better to have the
government do this instead.
It is certainly true that retirement plans have
lost, on paper, some $4 trillion in the past 15
months -- half in 401(k) and IRAs and half in
company defined-benefit plans. Average
401(k)s are down a quarter this year. But
assuming sensible policies and a normal
economic recovery, those asset values should
rise again over time. In any case, investment
returns on stocks and bonds over extended
periods far exceed the paltry returns on Social
Security that for some workers are a mere 1%
to 2%.
Tax breaks alone hardly explain the
popularity of 401(k)s. Over the past 30 years,
the number of individuals covered by them
nearly trebled, up to 65 million accounts, while
the number under defined-benefit pension fell
30%. People are attached to their 401(k)s
because it is their property, which they can
carry with them to new jobs (unlike traditional
pensions), manage as they see fit and bequeath
to heirs.
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Before entertaining dreams of state-

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TARGETING YOUR 401(k)

managed retirement accounts, Congressional

Democrats might ask why Europe and Latin
America have tried so hard in recent years to
move in the opposite direction. Their pension
systems are debt-ridden, can't easily adjust for
demographic shifts and show a historically
lower return.
If Democrats want to improve the prospects
for American retirees, their first priority should
be removing barriers to economic growth.
Anger over the drop in 401(k) balances is one
reason that voters who belong to the "investor
class" swung to Democrats in greater than
usual numbers this year. Their mandate is for
policies that improve those returns, not strip
them of tax benefits.
Read more:
http://online.wsj.com/news/articles/SB122662401729
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TARGETING YOUR 401(k)

Fidelity Financial Co., LLC

215 S. 88th Street
Omaha, NE 68114
Mark T. Houston
(402) 880-7008
mark@fidfin.co

WWW.FIDFIN.CO

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