Eighty percent of all Americans don't save enough. Nor do they get a high enough return on their savings.

Result? A low-income retirement.

I learned that over thirty years ago, while building the mathematical models for a book on personal finance. Published in 1972 by Doubleday, "Squeeze It Till the Eagle Grins" drew its title from a Depression era blues song.

"If I ever get a dollar again, I'll squeeze it, squeeze it, till the eagle grins."

Much has changed since then, but the indigent retirement reality remains.

The question is how to change reality.

One set of answers is in a new study from the National Center for Policy Analysis in Dallas. Titled "Reinventing Retirement Income in America," the study suggests how we can turn 401(k) plans into true savings tools that will help working Americans retire with dignity. While I am co-author of the study, its prime mover is Brooks Hamilton, a Dallas benefits attorney and 401k plan record keeper.

Mr. Hamilton was the source for a column on lifetime accumulations in 1990. We discovered both of us had the same concerns. We had been building the same kinds of models for years. This study is the product of ten years of research, conversations, and friendship.

How much we accumulate for retirement is determined by three factors:
  • How long we work.
  • How much we save.
  • How much we earn on our savings.
All three are problems.

Today, we are staying in school longer, retiring earlier, and living longer. Those trends are a problem for financing Social Security. They are also a problem for financing retirements with personal savings. Some would call this a "Cadillac Problem"--- the result of our incredible success at becoming a long-lived, knowledge based society.

There are two solutions for longevity. Shorten it--- which no one suggests--- or work longer, an idea everyone is reluctant to embrace.

The pragmatic answer: make changes in the other two areas. Change qualified plans to increase our savings rate. Make changes that will increase the return on our savings.

Here are the changes that need to be made so that qualified plans deliver the expected retirement income:
  • Automatic enrollment for all employees. All workers participate in their company plan unless they specifically opt out.
  • Automatic start up with a significant employee contribution. It should capture the full company match. Typically, this would be a 6 percent contribution with a 50 percent match. This is an effective savings rate of 9 percent of pay. Workers who wanted to save less could do so--- but they would have to make a deliberate decision. With 9 percent of pay being saved and the kind of return earned by major pension plans, workers can expect a well-financed retirement.
  • A default investment choice to a managed diversified plan. Encourage the use of index investments and portfolios composed of index investments. Evidence clearly shows that many participants take too much risk. Others take too little. Either way, they are penalizing their long-term results. This is evidenced in a review of 401k plan results at five financial services firms over four years. We found that all five trailed a 60/40 equity/fixed income portfolio significantly. While the 60/40 mix had an average annual return of 21 percent from 1995 through 1998, Morningstar returned 13.1 percent, Prudential 10.5 percent, Merrill Lynch 11.0 percent, and Citigroup 17.8 percent. If financial services firms can't get reasonable average, how will the rest of us? We need something better than the mutual fund casino.
  • Require that companies bear all plan costs or that they be capped at no more than 1 percent a year. This would force down fees. It would end the shifting of costs back to employees. As pointed out in a recent column, high fees are an enormous drain of investment accumulations.
  • Replace hardship withdrawals with hardship loans. The long-term impact of hardship withdrawals is devastating.
Not mentioned in the study, but also necessary, is the elimination of company stock as the employers' matching contribution. The collapse of Enron and its 401(k) plan is a spectacular example of why this is necessary.

While limited employer contributions of company stock is reasonable for companies that offer both a defined benefit pension plan and a 401(k) plan, it is inappropriate for companies whose only retirement vehicle is a 401(k) plan

It is time to get serious about making 401(k) plans work.

Readers who would like to read the complete study can download it from the NCPA website. In addition, I have assembled a collection of previous columns with Brooks Hamilton and other columns about 401(k) plans on my website.