Alphabet Soup of Government Plans a Recipe for Confusion, Inaction
Retirement has long been viewed as a race you run from the day you begin working to the day you can finally stop. But the notion that the race is about getting to a “finish” line as fast as you can, and with a huge nest egg saved, doesn’t fit reality for many Americans today. This report focuses on different ways of thinking about the journey to retirement--and what life can be like after you get there.
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Money isn’t everything in retirement, but it obviously comes in handy.
Yet for many Americans who are trying hard to save a decent nest egg for their later years, government efforts to boost such savings--and to replace traditional pensions--have resulted in a thick tangle of plans so confusing to many people that they may be having the opposite effect.
Indeed, today’s piecemeal, patchwork system of 401(k)s, 403(b)s, 457s, traditional IRAs, nondeductible IRAs, Roth IRAs, SIMPLEs, and SEPs--each with different rules--seems to be discouraging some Americans from maximizing their retirement savings, retirement experts say.
And as baby boomers, the first generation to rely on these “self-directed” plans, begin to retire in the coming decade, confusion that leads to under-use of savings options may place an even heavier load on the already burdened federal Social Security system.
Here’s what we know so far from recent industry and government surveys:
* The vast majority of working Americans ages 22 to 52, who are most affected by this new system, say they’re confused about how to save and invest for retirement.
* About a third of Americans who haven’t begun saving for retirement cite confusion as a major reason.
* Indeed, a third of Americans eligible to open a Roth IRA who haven’t say they are too confused about the rules to open the account, according to a recent Fidelity Investments survey. “The new Roth IRA is a great option for many people but certainly adds a new level of complexity,” says Stephen Mitchell, senior vice president at Fidelity.
“Frankly, I’m concerned,” says Martha Priddy Patterson, head of employee benefits policy and analysis at KPMG in Washington. “I do think people are very confused.”
Yet this patchwork is likely to grow even more complex.
This spring, the Clinton administration unveiled plans for so-called USA Accounts, federally subsidized tax-deferred investment vehicles. Meanwhile, there is still talk of privatizing at least a portion of Social Security, perhaps allowing individuals the option of investing Social Security funds in the stock market through personal accounts.
What’s more, Senate Finance Committee Chairman William V. Roth Jr. (R-Del.) has proposed creating Roth 401(k)s, modeled on Roth IRAs, to which investors could contribute money with after-tax dollars and be able to withdraw money later tax-free.
Says Arnold Charitan, 72, a Westwood resident who is just beginning to familiarize himself with the rules of the new Roth IRA: “Other than professionals, I don’t know anyone who isn’t suffering some degree of confusion regarding their retirement plans.”
Take Marie, 36, a nurse who’s worked at various jobs throughout Southern California for more than a decade.
Her first position was at a public hospital, where she stayed more than five years--long enough to qualify for a traditional pension, though tiny--and where she contributed money to a tax-deferred 457 retirement plan, a type of plan often offered to public employees.
Next she took a job in the private sector. The company didn’t offer a traditional pension, but it did allow her to contribute about 15% of her salary to a 401(k), which she did.
Two years later, she went back to the public sector, and back to a 457.
And less than a year after that, she took a job at a nonprofit, where she was able to contribute money into a 403(b), a tax-deferred plan like a 401(k) but with different investment options and a different set of rules.
Along the way, the San Fernando Valley resident opened a traditional IRA with Fidelity Investments, then converted what she had amassed there into a Roth IRA. She also opened a separate Roth IRA with Vanguard Group.
“Plus I have mutual funds that aren’t in retirement accounts,” says Marie, who asked that her full name not be used.
“It’s all very complicated,” she says. “I can’t imagine what it’s going to be like when I get to be 80 or 90 years old, to have to write to all these companies” in order to determine how much she has in each account, what the money is invested in, how much she can withdraw and when she can withdraw it.
The issue may be a big one in the future: learning to manage separate piles of money in an ever-growing list of tax-deferred retirement plans--each with different rules for how much you can contribute, how you can invest the money, when you can take it out and how it will eventually be taxed.
The federal government is proposing to add pieces to this puzzle, even as financial services firms such as Merrill Lynch, Charles Schwab and E-Trade recognize the desire for simplicity and are making it easier for investors to consolidate their non-retirement investments and other finances in a single, easy-to-track account.
Critics acknowledge that each of these component plans was created with the best of intentions. And tax-conscious investors are always happy to have new places to shelter their investments from the IRS.
But taken together, many benefits consultants say, the nation’s retirement system has turned into a thick alphabet soup that, while good for you, is certainly hard to swallow.
“It’s just freakin’ nuts,” says Dan Maul, president of Retirement Planning Associates, an employee benefits firm in Kirkland, Wash. “There’s a small group of individuals who are aware of how all this works and who, on their own, can sort it out. But by and large, I don’t think the average person has a glimmer of what to do in this morass of confusing alternatives.”
To be sure, about 86% of all workers eligible to contribute money to a company-sponsored 401(k) retirement plan--roughly 30 million Americans--do, to the tune of about $1.4 trillion. However, recent studies indicate that only 55% of baby boomers--people ages 34 to 52--contribute to a 401(k), and among typical boomers, only about a third contribute the maximum amount allowed. This is troubling to many retirement experts, since 401(k)s are considered the most efficient and effective way for workers to invest large amounts of money on a tax-deferred basis. The majority of companies that offer these plans, for instance, match employee contributions in some form.
The upshot of all this is that 57% of baby boomers say they are concerned that they may not have enough to retire on--more than any other age group.
How baby boomers adapt to this new system is of particular concern to retirement experts. Unlike Generation Xers, baby boomers entered the work force at a time when traditional pensions were still the norm.
“Boomers had an expectation that somehow they’d be taken care of,” just like their parents’ generation, notes Neil Howe, coauthor of “Generations: The History of America’s Future, 1584 to 2069.”
Plus, as a generation that was less concerned with material wealth at a young age than Xers, boomers got a late start saving and investing for retirement. In fact, even today, the typical boomer contributes only slightly more money to his or her 401(k) than the average Xer does ($284 per month versus $224), even though boomers are older and earn more money, on average.
This may explain why even after an unprecedented bull market in the 1990s, the average boomer has only about $50,000 saved in his or her 401(k), according to the Fidelity survey.
This is one reason why many are now calling for the system not only to be improved, but simplified.
“The system ought to be easy to understand and the rules governing the different plans--taxes, contribution limits, the ability to keep money in--ought to be consistent, regardless of employment status,” says David Wray, president of the Profit Sharing/401(k) Council of America in Chicago.
Benefits expert Maul goes further. “There needs to be a single, omnibus retirement account,” he says. “They need to say, under the broad defined-contribution arena, that the most anybody can put away is X, whether it comes from employers or employee. And you need to keep the withdrawal rules consistent.”
Rep. Rob Portman (R-Ohio), who sits on the House Ways and Means subcommittee on Social Security, agrees that the system “is unnecessarily complicated.”
“I don’t think it’s unreasonable to begin to collapse the various defined-contribution plans into one giant plan,” he says.
Still, the likelihood of creating an omnibus plan seems slim, since there was always a seemingly logical reason to create all the different rules in the first place.
Sen. Charles E. Grassley (R-Iowa), a member of the Senate Finance Committee and the Joint Committee on Taxation and chairman of the Senate Special Committee on Aging, concedes that the system is “very, very complex.”
But, he says, the top priority right now is to get those Americans who don’t currently have access to a retirement plan beyond Social Security “covered by the pension system, even if we create a more complicated system in the process.”
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In the meantime, though, there are proposals in Congress that call for simplifying specific portions of the system.
For instance, several bills--including one jointly sponsored by Grassley and Sen. Bob Graham (D-Fla.), and another jointly sponsored by Portman and Rep. Benjamin L. Cardin (D-Md.)--call for streamlining the administrative rules for employer-sponsored plans, especially for small businesses.
At least three proposals call for increased portability between different types of plans. That way, employees who change jobs throughout the course of a career, leaving a trail of 403(b)s, 401(k)s and 457s, can roll the proceeds of one account into another.
Other proposals aim at improving education. Overall, “they’re not going to make pension law simple,” says Frank McArdele, a principal with the employee benefits consulting firm Hewitt Associates in Washington. “Nothing can do that.”
“But around the edges, they’re going to try to simplify a few things,” he says.
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Times staff writer Paul J. Lim can be reached at paul.lim@latimes.com.
