Should We Scrap The 401(k) System And Start Over?

June 1, 2012 | | Reuters |

A new format mandated by federal regulators will give investors a more transparent view of the fees they pay and a study released this week suggests many will be shocked by what they see.

Demos, a progressive think tank, argues that even in best-case scenarios, fees take an enormous bite from retirement nest eggs. The report kicked off immediate blow-back from the industry, which criticized its methodology.

REPORT: The Retirement Savings Drain: Hidden & Excessive Costs of 401(k)s

The study looked at a median-earning couple that makes substantial, escalating 401(k) contributions over a 40-year period. The couple - each invested 50-50 in stock and bond index funds - accumulates a $510,000 portfolio over that period, but would end up paying a whopping $155,000 in fees, a number that is disputed by some critics.

While the fee disclosures mandated under new U.S. Department of Labor rules are a good start, Demos argues that transparency is not nearly enough. The report suggests a more radical step - scrapping the defined contribution system entirely and replacing it with a new plan focused on low cost and guaranteed returns.

Robert Hiltonsmith, a Demos policy analyst who wrote the report, thinks the new statement format will help raise awareness, but argues that we need to re-think the entire approach to financing retirement.

"The fee disclosures certainly will get some people angry," says Hiltonsmith. "But the 401(k) system can't be fixed through transparency alone. The high cost and the risk of market exposure we're all shouldering just are not a smart way to do retirement for a majority of the country."