The 401(k) Plan As Rainy-Day Fund

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Short-term financial concerns can trump long-range investing in these tough economic times. Some consumers are sacrificing retirement savings in order to pay for groceries or other household expenses. And a growing number of companies are pulling back from matching 401(k) contribution plans. According to a recent survey by CFO Research Services and Charles Schwab, about a quarter of companies have eliminated employer matching plans or are considering doing so.

Zvi Bodie, an economics and finance professor at the Boston University School of Management, has written widely on pension finance and investment strategy. His latest book is “Worry Free Investing: A Safe Approach to Achieving Your Lifetime Financial Goals.” Bodie came into to our studios to talk about cutbacks and the future of retirement savings.

Bob Oakes: Why are companies suspending or eliminating matching 401(k) contributions under their 401(k) plans?

Zvi Bodie: They’re hurting. And they need cash. And since these matching contributions are discretionary, for the most part, they’re cutting back in this crisis.

Once suspended, do you think they’ll ever return? Some of them probably won’t.

None of the companies I know of have said that they are permanently stopping their matching contributions. They’ve all said that they’re suspending them temporarily. Lots of experts are concerned that individuals are going to take lump-sum distributions from their retirement accounts, and that they’ll never resume them.

Your opinion: How deep a measure is a company’s decision to do away with its matching 401(k) contributions, or their 401(k) plans altogether? How big an indication is that of how serious a company is in financial trouble?

Everybody’s hurting in this crisis. It’s an emergency. Hopefully a short-run emergency. And what you do in an emergency — a financial emergency — is you stop all of your discretionary outlays, if you can.

What does all this say about relying on 401(k)s for a good portion of a person’s retirement?

What we are seeing is that 401(k) plans, IRAs, serve more than just the function of saving for retirement. They are in essence rainy-day funds as well. And I don’t think that’s a bad thing. In fact, I think if we recognize that, and if the government recognized that, it might expand the definition.

In the big picture, do you think that it says that the 401(k) system is still a reliable retirement vehicle, or maybe it’s less so and it’s been proven less so because of what’s happened to some 401(k) plans in this crisis?

I have grave reservations with respect to the way 401(k) money has been invested, on behalf of the employees — supposedly by the employees — except my experience is the vast majority of people who choose their asset allocation just don’t understand what they’re doing.

As a result, we’ve seen in this crisis that a lot of people approaching retirement have experienced a 30 percent loss in the value of their accounts because they were way over-invested in the stock market. Under the false belief that somehow they were protected — that stocks were going to give them growth, going to protect them against inflation, and a lot of other nonsense that has been promulgated by all sorts of special interests.

Do you see people struggling to try to figure out alternatives to the 401(k) system?

Yes. The Obama administration has appointed a special person in the U.S. Treasury to be responsible for proposing legislation relating to retirement and health issues. I think with the proposal to create a consumer financial protection agency — if that actually comes to pass — retirement investing and retirement saving surely will be a major issue.

There is a lemon law that protects car buyers against cars that turn out to be lemons. Should there be a lemon law for retirement plans?

I think so. I am a very strong advocate of having, as a default option, some sort of guarantee — I would say a guarantee of principle — so that people are guaranteed to get back the value of their contributions over the years, adjusted for inflation.

I am a big advocate of TIPS, which are U.S. Treasury inflation-protected bonds. Which not only are guaranteed to maintain their dollar value, but are also guaranteed to keep pace with the rate of inflation.

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