401K Originator Regrets What They Started

The Champions of the 401(k) Lamentthe Revolution They Started

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The dominant vehicle for retirement savings has fallen short of its early backers’ rosy expectations; longer life spans, high fees and stock-market declines

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Herbert Whitehouse was one of the first in the U.S. to suggest workers use a 401(k)

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Thirty-five years later, the J & J human-resources executive has misgivings about what he helped start.

“We weren’t social visionaries,” Mr. Whitehouse says.

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Many early backers of the 401(k) now say they have regrets about how their creation turned out despite its emergence asthe dominant way most Americans save. Some say it wasn’t designed to be a primary retirement tool and acknowledge they used forecasts that were too optimistic to sell the plan in its early days.

Others say the proliferation of 401(k) plans has exposed workers to big drops in the stock market and high fees from Wall Street money managers.

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“The great lie is that the 401(k) was capable of replacing the old system of pensions,” says former American Society of Pension Actuaries head Gerald Facciani, who helped turn back a 1986 Reagan administration push to kill the 401(k). “It was oversold.”

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Misgivings about 401(k) plans are part of a larger debate over how best to boost the savings of all Americans. Some early 401(k) backers are now calling for changes that either force employees to save more

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A 401(k) is an employer-sponsored plan that allows workers to place pretax wages into a savings account. Companies aren’t required to make matching contributions, but they often do as an employee perk. Unlike defined benefit pensions, which provide set payouts for life, 401(k) accounts rise and fall with financial markets.

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The advent of 401(k)s gave individuals considerable discretion as to how and even whether they would save for retirement. Just 61% of eligible workers are currently saving, and most have never calculated how much they would need to retire comfortably, according to the Employee Benefit Research Institute and market researcher Greenwald & Associates

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Financial experts recommend people amass at least eight times their annual salary to retire.

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Savings gap

Fifty-two percent of U.S. households are at risk of running low on money during retirement, based on projections of assets, home prices, debt levels and Social Security income, according to Boston College’s Center for Retirement Research. That is up from 31% of householdsin 1983. Roughly 45% of all households currently have zero saved for retirement, according to the National Institute on Retirement Security.

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More than 30 million U.S. workers don’t have access to any retirement plan because many small businesses don’t provide one. People are living longer than they did in the 1980s, fewer companies are covering retirees’ health-care expenses, wages have largely stagnated and low interest rates have diluted investment gains.

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“I go around the country. The thing that people are terrified about is running out of money,” says Phyllis C. Borzi, a U.S. Labor Department assistant secretary and retirement-income expert.