Ms Theresa Ghilarducci has recently discussed in front of congress, her plans with regards to the future of 401k plans. It seems that she suggests changing the ‘risky’ 401k plans, into more stable government subsidized retirement accounts. What this would do, is make an already flawed system, worse.
Her proposal suggests switching investments in shares, into stable government bonds. Now over a long term, studies show that shares will outperform gains coming from stable government stocks. Also, the fact that contributions are done monthly, will average out the drastic share fluctuations. Ms Ghilarducci’s proposal suggests that if investments underperform in the long run, the plans will then be subsidized from tax money. This makes no sense at all.
Furthermore, had the congress amended the 401k plans, as per Ghilarducci’s recommendations, investors would right now be 10% worse off, since the Dow Jones has made an average improvement by this percentage.
Ghilarducci also proposed that everyone has the same plan, forking out the same $600 contribution. This is nonsense! At least 95% of Americans can easily afford their 401k contributions. The other 5% are probably so poor that anyway when they retire, their pension will be replaced by Social Security.
The 401k plan problems don’t lie with the underlying investments. The problem lies with the employers not matching their 3%. This is already one of the lowest rates in the whole world; even Mexican employers provide greater contribution! We should look at countries like Australia, where retirees will have more money in their pockets since the employer contributes a whopping 9% to the 401k plans.
Well the reform is currently being planned, and let’s hopes that the people who are in charge, will make it a point that our retirement plans will be worth it.
Reference: http://www.401khelpcenter.com/401k/white_donoharm.html
Monday, March 30, 2009
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