See this year’s 401(k) Buyer’s Guide.
Soon after Section 401(k) of the Internal Revenue Code took effect in 1980, it morphed from an obscure investment option into the goose that laid the golden nest egg.
Has that goose been cooked?
The value of the equities held in defined-contribution plans has declined by $2.8 trillion since the market peaked in 2007. The Hewitt 401(k) Index finds employees moving substantial sums into fixed-income investments. And multiple surveys have found that a majority of employees, from the C-suite to the front lines, are now delaying or reconsidering their retirement plans as a result of the sharp decrease in their personal wealth.
This has already had some short-term effects, notably employees fleeing to safer investments or abandoning 401(k) plans altogether. What it will take to restore their comfort level in equities, and what impact their understandable skittishness will have on their overall retirement strategies, remains to be seen.
But far more profound may be the impacts still to come: lawsuits, new regulations, and the specter of an aging workforce that, like a bad party guest, shows no inclination to leave.
It wasn’t supposed to be this way. Almost from the start, 401(k) plans enjoyed a huge marketing push from companies and investment firms, and an enthusiastic embrace by workers. Positioned initially as the proverbial “third leg” of the retirement-income stool (along with pensions and Social Security), 401(k)s quickly became the dominant leg (see “A Wobbly Stool” at the end of this article), and companies worked hard to encourage participants to invest for growth rather than safety.
They may rue the day. Many experts in the field say it’s nearly certain that the massive investment losses will fuel ERISA-related class-action lawsuits against employers. “If an allegation of a breach of fiduciary duty can be made, it will be made,” warns class-action defense attorney Gerald L. Maatman Jr., a partner in Seyfarth, Shaw, a national management-side law firm. Across the board, anxious sponsors are reviewing and retooling their 401(k) programs to minimize their exposure to litigation, even as they try to encourage employees to keep saving.
Fear and Anger
Companies find themselves in a very difficult position. At Call4Health, a medical answering-service company with 60 employees, CFO Nicholas Koutrakos says the company fought a valiant but losing effort to save its plan. “We maintained our match, and we did everything we could to encourage people to stay in the plan,” he says. “But our employees are scared. The last thing they want is to put more money into a market that’s already down so much.” As the economy unraveled, participation dropped from 70 percent to just 30 percent, contribution levels fell drastically, and the plan became too cost-heavy to support. Call4Health terminated the 401(k) plan and now accommodates employees who want to save for retirement by providing direct deposit into individual retirement accounts (IRAs).