Yesterday we offered a few thoughts on Stephen Gandel's furious assault on defined-contribution retirement plans. Today we'll pick up where we left off...
Gandel's core argument is that workers would be better off in traditional defined-benefit pensions than in defined-contribution plans.* In the abstract, we can't argue with that, assuming all such pensions were (and were to remain) fiscally sound. But we know that many, in the private and public sectors alike, aren't fiscally sound. So it strikes us as a little too simple to hold up traditional pensions as the rock-solid, safe-and-sound alternative to the 401(k). That doesn't diminish the problems in the 401(k) world. Not at all. But it does complicate the question of alternatives a little.
Gandel notes the virtue of portability, a clear advantage of DC over DB. (Alas, the accompanying quality of "raidability," the opportunity to pillage one's retirement account during one's working years, has impaired many participants' balances in a big way.) In an economy where people change jobs and careers more frequently than ever, portability will be an indispensable part of any retirement plan regime policymakers might come up with.
Gandel returns repeatedly to the perils of retiring in a down market. "If you retired last year," he writes, "you're toast." Um...no. Not necessarily.
As we've noted in the space time and again, the "retirement moment" isn't the true finish line; instead, it's one's life expectancy. Now, it's absolutely true that taking initial withdrawals from a depressed portfolio does real damage to that's portfolio's likelihood of surviving as long as its owner. But again, the solution for those at or nearing retirement is absolutely obvious and utterly simple: Hold a few years' living expenses in safe, liquid positions. Doing so eliminates the need to tap (or, worse yet, fully annuitize) a beaten-down portfolio of securities.
If an investor (in a 401(k) plan or not) experiences a substantial decline in portfolio value at the retirement moment, he or she shouldn't annuitize that portfolio, and should minimize (or, better yet, fully avoid) tapping any holdings whose prices have fallen precipitously.
The system has the technology to facilitate this approach, one that mitigates (but doesn't eliminate) the single biggest disadvantage of DC plans relative to their DB counterparts: the concentration of longevity and investment risks at the individual level.
Gandel finishes his piece with a discussion of "retirement insurance" proposals. Though we're pretty darn skeptical about a lot of products that mix investments and insurance, we're not remotely "anti-insurance." If our systems of social insurance are inadequate or unreliable, we'll have to supplement them with private/individualized resources.** Getting those systems right is one of the most important problems policy makers, plan sponsors, service providers, and individual participants will tackle as our population ages.
We aren't thrilled by the status quo in the 401(k) marketplace, but we don't think the system is beyond repair. Indeed, recent legislative and regulatory changes have helped, and more such improvements are on the way. Unless and until the system is overhauled in some fundamental way, the moral and practical imperative is to make defined-contribution plans work as well as they can.
* "Some said they were happy with their 401(k)," Gandel writes. "But all the people who shared their financials with us would have been better off in a pension."
** Our view is that they're more inadequate than unreliable. We think Social Security will be around when today's young workers retire, but it'll never be enough, and can't be enough.
Stephen Gandel, "Why It's Time to Retire the 401(k)," Time, October 9th, 2009