A Retirement Plan That Should be DOA

Milton Friedman once remarked that you could take any three letters from the alphabet, scramble them in any order you want, and you'll end up with an acronym for a federal agency we could do without.

I think about this quote from time to time when I run into a bureaucratic snafu – such as clogged lines at the DMV or the Post Office.

But I digress.

This weekend I came across an interesting article focusing on 401(k) plans and how they have fallen woefully short of their intended goal of helping the average American save for retirement. The article was somewhat more direct labeling the program a “failure.” According to a report by the Employee Benefit Research Institute, the median amount in a 401(k) account is $18,433, with nearly 40 percent of employees having less than $10,000 in their respective plan.

For older workers, the median for those ages 55 to 64 was $76,381. 

I immediately took out my calculator and extrapolated out that figure to see how long I would be able to continue my present lifestyle armed with that amount in retirement.

About 7 months.

And that’s if our idea of dining out would be Burger King once a week.

Enter a labor economist from the New School of Social Research, one Teresa Ghilarducci, a fan of defined benefit plans, which apparently are dwindling as the number of 401(k) plans rise. A number of years ago, she proposed eliminating the tax breaks for the 401(k) plans and use the money to create government-run retirement plans, or GRAs.

I wrote about this scenario roughly five years ago, when the GRA plan was still under most people’s radar and the country was dealing with the financial crisis.

It was a terrible idea then and it is today. Here’s why.

First of all, at the time it was first proposed, the guarantee of the GRA was 3 percent. Now I may not be CNBC’s Jim Cramer but I think if I managed my 401(k) I could get better than a 3 percent return.

On average, the long-run return of the stock market, adjusted for inflation, hovers around 7 percent. If, for example, you enrolled in a GRA plan at 25 and you have lump sum of say, $40,000 growing at 3 percent per year. In 40 years, you would have $130,481.51 under the GRA. If you invested in the stock market, pending a 7 percent return for the same 40-year span, your principle would be just shy of $599,000. Considering the federal government's track record in financial matters, I'll gladly take my chances with the market.

Second, there’s the matter of vested ownership. Once an employee is vested, he or she owns 100 percent of the 401(k). Should that employee die, their designated heirs receive 100 percent of the money. Under the GRA the deceased's family would receive just 50 percent, with the rest circulated back to Uncle Sam.

I won’t pretend that there are not problems with the 401(k) or the critical need for greater financial education beginning in high school, but I’ll go one better than Dr. Friedman and my apprehension of anything run by Washington – and that includes the nine most frightening words ever heard in the English language.

“I’m from the government and I’m here to help.”