The new tier of retirement accounts described by Munnell would supplement declining Social Security replacement rates for low-wage workers and provide some security for middle- and upper-wage workers relying mainly on their 401(k)s to supplement Social Security. This idea is a work in progress with several questions needing to be answered, such as who's responsible for the contributions; should payments be in lump sums or annuities; and should this then be in a DC format dependent on market performance or an account that can provide a targeted return.
In October, two Congressional hearings that examined the nation's current retirement system essentially put DC plans on trial as witnesses pointed out their flaws and posited possible alternatives. One witness, Teresa Ghilarducci, a professor at The New School for Social Research in New York, proposed a plan where people contribute 5% of salary into a guaranteed retirement account overseen by the government. Investors would be guaranteed an annual 3% return, adjusted for inflation.
In the 12 months between October 9, 2007 and October 9, 2008, the value of equities in retirement plans sank about $4 trillion, evenly divided between defined contribution and defined benefit plans. Of that, $1.1 trillion evaporated from 401(k) plans. Which leads to the question: Why are people picking on 401(k) plans when the bear market has hammered retirement assets across the board?
"IRAs are in the same boat," says Michael Scarborough, president of Scarborough Capital Management, which specializes in 401(k) advisory services. "I'd submit that 401(k)s are in a helluva lot better position because people are completely on their own when they make IRA investment decisions. At least with 401(k)s, an investment committee reviewed the investment choices and there's a broad smattering of options."
Steven Lipper, director of retirement marketing at Lord Abbett, says he believes the angst directed against 401(k)s is driven by the need to vent anger and affix blame for account balances that went south. "There are only three candidates to provide retirement security--government, employers and yourself," he says. "If you don't want to do it yourself, that leaves the other two. If the government funds your retirement, it'll be done through an inefficient intermediary, and I'm not sure that solves the problem."
Pamela Hess, director of retirement research at Hewitt Associates, says 401(k)s have been continually tweaked since they were introduced in 1978. "We're refining it more and more, and it's getting to a good place," she says. "But given the realities of Social Security and pension plans, 401(k) plans are the primary retirement savings vehicle for most people. We have to make it work because there's nothing else out there."
Morningstar Names Managers Of The Year
Morningstar named its 2008 fund managers of the year, although it was a stretch to call any of the recipients genuine "winners."
Fund performance was so dismal last year, for example, that the domestic stock manager of the year, Charlie Dreifus of the Royce Special Equity Fund, lost nearly 20%.
"Why give out awards when everyone's year-end statement is swimming in red ink?" Morningstar added in announcing the awards. "Because limiting losses was difficult to do, yet incredibly valuable." Morningstar also noted its fund manager awards are meant to recognize long-term performance and strong stewardship, not just a single year's results.
In naming Dreifus domestic manager of the year, Morningstar cited his dedication to buying "only stocks that trade at a steep discount to his intrinsic-value estimates." He also demands high returns on invested capital and clean accounting.