Posted on November 2, 2008

A Goofy Proposal Endangering Your 401(k) Plan


To be sure, 401(k) plans are not a “be-all-and-end-all.” Their biggest drawback is that they do not guarantee any specific monthly income. Since they are simply tax-favored investment plans, they can go up or down depending on what the money is invested in.

Law Professor Richard L. Kaplan has taken this inherent aspect of all investments and has, in his own mind, turned it into a “flaw”—a flaw so serious that he has floated a proposal that, if implemented, would mean the end of 401(k) plans altogether.

Prof. Kaplan’s bizarre reasoning begins with the assumption that most people are too stupid to understand their own plans, and goes downhill from there:

[W]orkers [have] the illusion of a company-funded pension when in fact it’s largely their own money in investments that are generally tethered to the stock market, which has lost $8 trillion during an economic meltdown over the last year.

“People mistakenly think they have an employer pension plan and don’t understand that their retirement income, other than Social Security, is in very serious jeopardy right now,” said Kaplan, who wrote a 2004 article on the risks of 401(k) plans that appeared in the Arizona Law Review.

He argues that Congress should rewrite laws to allow 401(k) programs only in concert with defined-benefit pensions, even if it means more companies join the roughly half of U.S. employers that offer no retirement savings plan [our emphasis]…

“As matters stand currently, workers are being tricked,” Kaplan said. “They think they have a pension plan at work when it’s really their own money…

Note the sentence we bolded in the quote: Prof. Kaplan understands that if companies are forced to offer defined-benefit plans alongside 401(k)s, they’ll probably offer no retirement plans at all… yet that’s okay with him. It’s like trying to improve workers’ meals by demanding that any company that has an employee lunch room must either (1) offer filet mignon, or (2) close down the lunch room altogether—and ignoring the fact that most will opt for number (2).

Still, this proposal is being seriously floated. It’s yet another reason why future retirees must be vigilant, and speak out against attempts to reduce their retirement benefits—regardless of whether they sound reasonable, unreasonable, or just plain goofy.

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