A Safer Retirement Nest Egg for the Golden State

Recently, the Wall Street Journal published an editorial harshly criticizing a bill being considered by the California State Assembly to create universal, portable retirement accounts, administered by an independent board and invested in private financial markets. The op-ed calls the accounts “a joke,” saying they would create new “unfunded liabilities” and characterizing them as a giveaway to Democrats and unions.

The only joke, however, is the country’s private sector retirement system, which fails to cover nearly half of all workers nationwide and is particularly laughable in California, where over 6 million workers don’t have access to an employer-sponsored retirement plan.This farce actually extends even to those who do have a retirement plan, because these days, such plans are primarily 401(k)-type plans. There is a growing consensus that an alternative to these 401(k)-type accounts is desperately needed, flying in the face of the Journal editorial’s implication that everything is as rosy as can be in the land of U.S. retirement.

Individual retirement accounts have proved to be a failed experiment in the 30 years since they were introduced, exposing savers to a host of risks and charging them excessive fees while generating below-average returns. This is the same market, after all, that lost $2 trillion of individual retirement assets in 2008 alone.

Yes, that’s “trillion” with a “t.” It took 4 years for 401(k) and IRA assets to recover from these losses, meaning that the average 401(k) plan has actually produced negative returns over the past 5 years. To add insult to injury, investors are losing billions annually to excessive, secretive, fees charged by 401(k) plans. In a recent study on 401(k) fees published by Demos that I authored, we found that these fees cost savers, on average, 30% of their investment returns over their working lifetimes. Even worse, these fees are excessive: investment management and administrative fees for the average 401(k) plan are more than double those of the average public pension plan.These excessive fees, together with the risk of losing one’s retirement savings to a market downturn or outliving one’s retirement savings, prove that 401(k)s are thoroughly unsuited to be most workers’ safety net during retirement.

Savers in this country desperately need a secure, low-cost, and portable place to build their retirement nest eggs. The “Golden State Retirement Accounts” proposed by the California bill that the Wall Street Journal criticized would be, contrary to the Journal’s claims, just such a place.

Though these accounts are very similar to “cash balance” retirement accounts, they are more accurately thought of as “hybrid” accounts, a compromise midway between a defined benefit plan and a 401(k)-type account. They’re a compromise because they boast the benefits of traditional pensions for workers, but pose far less risk to plan sponsors (i.e. employers or governments.)

The California legislature’s retirement proposal  includes a guaranteed 3% average return, the focal point of the WSJ’s criticism. This return would not pose a risk to taxpayers because it would be backed by insurance from private financial firms, who would, contrary to the Journal’s claim, jump at the chance to insure such a minimal risk. Offering a guaranteed return is far from a radical idea: TIAA-CREF, one of the country’s largest financial firms, has been offering such a return through their flagship investment vehicle, their “Traditional Annuity,” for nearly a century.

The Wall Street Journal and other financial industry newspapers opposing the bill need to wake up and realize what the majority of retirement savers have long known: we need a safer, cheaper place to save for retirement, and we need it now. The proposed “Golden State Retirement Accounts” would provide that place, buffering savers against market turbulence while providing higher returns at a lower cost. Because, as financial crisis proved, the retirement status quo just isn’t working, and if we don’t wake up and realize the need for a new private retirement system in this country, the joke will be on all of us