TheLoop21.com

By: Devona Walker (Add to your loop)
Thu, 02/12/2009 - 01:00

Your nest egg is shrinking. Time for an alternative?

American workers lost more than $1 trillion of their retirement nest eggs in 2008. (Read about what to do with it in the recession.)

This is not because throngs of people decided to take their life’s savings down to the nearest casino. Instead, it is because of the ongoing financial crisis and the fact that millions of American retirement plans are now based solely on stock-driven 401K plans.

According to research from Fidelity Investments, roughly 27 percent of all 401(k) contributions have been lost due to the volatile stock market.

“It will take over 20 years to recover what we lost in one year,” said Teresa Ghilarducci, an economist at the New School for Social Research. “Telling people to just hang in there. That it will come back around really is just as meaningless as it was in the 1930s. It’s like rearranging the chairs on the Titanic.”

The average 401(k) balance went from $69,200 in 2007 to $50,200 last year because of dramatic market declines. Despite the losses, however, Fidelity found that employees continued to make contributions to their retirement savings. In fact, the contributions in 2008 were slightly higher than they were in 2007.

The study also showed that the vast majority of folks with 401(k)s have not even changed their investments. This didn't hold true for just one group — workers with more than $250,000 in their accounts. Roughly 37 percent of them rebalanced their investments.

“American workers recognize that having personal savings for their retirement is a need to have, not a nice to have,” said Scott David, Fidelity's president of workplace investing.

In fact, he added, 401(k)s have become more popular due to economic uncertainy.

Others, however, have started to question the entire 401K system.

“401(k) plans are a joke,” said Richard Kaplan, an elder law professor at the University of Illinois.

They were initially introduced, he said, as a means for high-paid executives to subsidize other types of retirement programs they had. But they have slowly replaced all other forms of retirement and pension programs. The shift, he said, has left many American workers with the illusion of a company-funded pension plan. But in reality, it is largely their own money being invested.

“People mistakenly think they have an employer pension plan and don’t understand that their retirement income, other than Social Security, is in very serious jeopardy right now,” Kaplan said.

Only about half of American employers offer any retirement savings program at all. About 60 percent of those plans are 401(k)s. And every year, fewer are providing matches.

Ghilarducci would like to change that. In October, she pitched a plan to Congress that would replace 401(k) plans with government-run Guaranteed Retirement Accounts. She said 401(k)s provide the least benefit for the workers that need them most, and that employers should be mandated to contribute to workers' retirements plans. And, she said, the industry has a tendency to be predatory, due to lax regulations.

“You see they way they want to spin it. They release the research and says this proves people have confidence in 401(k) plans,” Ghilarducci said. “But I believe this speaks to the weakness of the program. The ideal behavior would show that people were rebalancing their investments. Instead, they are inattentive. Instead, people feel threatened and weak. Instead, they freeze.”

“This shows that people aren’t equipped to manage their 401Ks," she added. "If they were, there would have been a lot more rebalancing going on."

Devona Walker is The Loop's senior reporter/blogger. She writes the Post-Race? blog.

What's the best way to save in this economy?

Use coupons

Stop eating out

Put money away every month

Cut bills

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