Retirement policy wonks don't usually get hate mail. But in 2008, Teresa Ghilarducci, an economics professor at the New School for Social Research, proposed replacing 401(k) plans and their income tax break with a mandated government savings plan for all workers. The blowback from some Tea Partyers was so intense that the school's chief of security gave her his cell phone number.
The plan called for mandatory savings of 5 percent of salary, with the government handling all investment decisions, guaranteeing a rate of return above inflation, and ultimately paying out the retirement money in a lifelong annuity. It's pretty radical. Conservatives hate it. She continues to advocate for it, though she won't comment on whether she has discussed it as one of the cadre of economists advising Hillary Clinton in her presidential bid.
Ghilarducci knows her own retirement plan is on track because, unlike today's savers in 401(k)s, she was forced to save, and save a lot from the start of her career. Just out of grad school at the University of California at Berkeley, she landed an assistant professorship at Notre Dame. The university's retirement plan is a 403(b), cousin to the 401(k) defined-contribution savings plan. It came with a crucial twist that has made all the difference to her retirement security: Participation was mandatory. You had to put in 5 percent of your salary, and Notre Dame kicked in another 10 percent.
That 15 percent savings rate is about three times what an unsuspecting millennial today will save in a 401(k). The typical salary deferral rate when new employees are automatically enrolled in plans is 3 percent, and if there is a company match, it might be half of that rate. It is extremely rare in the land of 401(k)s to find an employer doubling the contribution of the employee, let alone at a 10 percent rate.
“I was a stupid 26-year-old who was simply the recipient of a great deal," said Ghilarducci, 57, who in 2008 moved to the New School, where she is a professor of economic policy analysis. She said her approach to investing the money was one many economists would have taken ("we’re typically very risk- averse”). She put one-third in stocks, one-third in bonds, and one-third in fixed annuities. “I was aware at a young age that how much I saved was far more important than exactly how I allocated it..." she said. "But that’s what saving more buys you — the ability to not have to take as much risk.”
She lucked into another boon. Her annuities were offered through TIAA-CREF, a low-cost provider of annuities and investment funds for the academic world. Participants in the company's fixed annuities have seen their accounts grow at a risk-free 4 percent annual rate over the past decade.