Ted Benna is known as the father of the 401(k). As a benefits consultant with the Johnson Companies in suburban Philadelphia in 1980, he was among the first to peddle a savings plan that today enables many American workers to set aside a pre-tax portion of their paycheck, oftentimes with a matching sum from their employer, in preparation for retirement.
As the approach has supplanted traditional pensions, however, and Americans have failed to set aside adequate savings, Mr. Benna and other early proponents say they dislike what the 401(k) has spawned. The tool was never meant to serve as the main means by which workers save for retirement, they say, but that is precisely what it became – increasing financial risk for workers along the way.
"I helped open the door for Wall Street to make even more money than they were already making," Benna told The Wall Street Journal. "That is one thing I do regret."
In 1979, 38 percent of private-sector workers in the United States had traditional pensions. These "defined-benefit" plans guaranteed a monthly income upon retirement. But that figure has since fallen to just 13 percent, as The Wall Street Journal reported – a drop that coincided with a rise in the use of employer-sponsored 401(k) "defined-contribution" plans.
Instead of guaranteeing a particular payout, these 401(k) plans can expose retirement savings to steep fees and major swings in the stock market. While some workers may enjoy the added flexibility a 401(k) offers, many have a hard time avoiding investment pitfalls, says Geoff Sanzenbacher, a research economist at the Center for Retirement Research at Boston College.
"There’s nothing inherently wrong with shifting from pensions to 401(k)s," Dr. Sanzenbacher tells The Christian Science Monitor in a phone interview Wednesday. "But if people don’t save enough in their 401(k)s because their contribution rates are too low, that’s a problem. If they invest in options that have really high fees – whereas pensions typically have pretty low fees because of all the pooling that was going on – that’s a problem."
And when retirement comes, it's possible to withdraw too much or too little from a 401(k), presenting workers with even more opportunities to make mistakes, Sanzenbacher adds.
Experts advise workers to set aside at least eight-times their annual salary to retire, but average Americans in every income bracket are behind their savings goals, as the Journal reported. That is likely a big reason why only about a quarter of Americans, 26 percent, expect to attain a traditional concept of retirement – to stop working, as The Pew Charitable Trusts reported in 2015.
Some suggest that inadequate savings result from inadequate personal planning. Trent Hamm, a blogger for The Simple Dollar, wrote in 2013 that he expects to have a comfortable four-decade retirement because he took control of his finances at an early age.
"I took responsibility for my own retirement and because of that, I’m going to be able to retire on my own terms," Mr. Hamm wrote. "I don’t feel that someone else is to blame if people choose not to save in advance for their own retirement. If you’re choosing not to save, that’s your choice, but it doesn’t mean that retirement plans are evil. It just means you’re choosing to spend now in exchange for working later in life."
Others contend that policy changes and better business practices would help workers make smarter provisions for their own futures. Helaine Olen, author of "Pound Foolish: Exposing the Dark Side of the Personal Finance Industry," argues that the industry has failed to take responsibility for its role in selling Americans "a false mirage," one which average workers simply cannot attain – especially in light of the skyrocketing costs of higher education and health care.
"When combined with stagnating salaries, rising expenses and a stock market that did not perform like Rumpelstiltskin and spin straw into gold, do-it-yourself retirement was all but guaranteed to lead future generations of Americans to a financially insecure old age," Ms. Olen wrote. "And so it has."
A separate Pew study found that the amount of "slack" in household budgets – the money leftover when total expenses were deducted from total income – decreased notably for all income groups between 2004 and 2014, leaving less money for long-term investments, life insurance, and education. The decrease was so severe for lower-income households that it pushed them into the red, leaving many with no money to set aside.
President Obama's administration has sought to address the problem by encouraging states to establish retirement savings plans of their own, with automatic enrollment options, as the Journal reported. Eight states have made plans to participate, and more are considering it.
"I think the state initiatives are probably the most promising thing right now," Sanzenbacher tells the Monitor, noting that such programs can increase the percentage of workers who benefit from retirement savings plans.
While it would be great to teach each and every worker how to maximize their investment portfolio, calculate how much money they'll need in order to retire, and avoid the pitfalls associated with 401(k)s, Sanzenbacher says it could be more effective if employers and the financial sector optimized the savings plan for workers.
"Education is great, but if you put people into the right situation right away, then they’ll do the right thing," he says. "You can just make it automatic."
By automatically enrolling employees and automatically increasing their contribution as they age – while still giving them the option to opt-out at any point – the industry could nudge workers toward a more stable retirement.
"If you start people on the right path," Sanzenbacher says, "most of them will stay on the right path.”