TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Tuesday, October 28, 2008

Kaplan: Require 401(k) Plans Only as Supplement to Defined-Benefit Plans

From an Illinois press release:

Congress needs to reform flawed 401(k) laws that could push back retirement for millions of Americans whose savings have collapsed along with the stock market, a University of Illinois elder law expert says.

Law professor Richard L. Kaplan says 401(k) accounts were meant to supplement traditional defined-benefit pensions, but have evolved into the sole nest egg for the bulk of U.S. workers whose employers offer any kind of savings program. The shift, he says, has left workers with 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 [Enron, Pension Policy, and Social Security Privatization, 46 Ariz. L. Rev. 53 (2004)]. 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.

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Companies are not going back to defined benefit plans, and who really thinks nothing is better than a 401(k).

The "people are stupid" meme is getting old. Maybe professors deserve their egghead reputation.

Posted by: save_the_rustbelt | Oct 28, 2008 5:11:55 PM

A big part of the reason for the spread of 401(k) plans is the fact that Wall Street can collect lots more fees and commissions, holding funds in little buckets instead of big ones.

401(k) plans aren't going away, but Kaplan does have a point. Perhaps Congress should consider how to encourage more employers to preserve and expand defined benefit pensions. For example, the employer payroll tax might be slightly lower to slightly higher (on a sliding scale) depending on the generosity of defined benefit pensions. Of course those pensions need to be regulated and higher insurance limits.

Posted by: Tim | Oct 31, 2008 6:26:24 PM