One Sneaky Corporate Trick Will Make Your Retirement More Insecure

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The one positive thing for workers about the shift from pension plans to individually managed 401(k) retirement accounts may be going the way of the Mexican walking fish.

America Online (AOL) employees will not be able to collect any matching funds toward their retirement savings from the company for any given year if they leave before December 31 of that year, the Washington Post’s WonkBlog reported Tuesday. The change means that workers lose the flexibility and portability that the 401(k) system of accounts provides, which has long been seen as a bright spot for workers in a dim overall system.

“This is now essentially a way for some corporations to pay workers less,” Center for American Progress (CAP) retirement expert Jennifer Erickson told ThinkProgress, “and also to pay them in a way that denies them the benefits of more sensible money management and of spreading their investment out over the course of the year.”

The change also takes a significant bite out of workers’ retirement earnings. Take 2013 as an example. The stock markets had a very strong year, and having a lump sum deposited into an investment portfolio at the end of that year means losing out on all those gains over the preceding 12 months. Like a gambler putting a whole year’s worth of betting money on one horse race, the shift also means starkly higher risks for workers.

Higher risks, lower returns, and less portability make 401(k)s a nightmare for workers, and AOL isn’t the first major company to make this change. International Business Machines (IBM) did the same thing just over a year ago, prompting retirement experts to warn that the lump-sum approach would exacerbate the country’s retirement crisis if it spread to other large companies.

There is little room for error in America’s retirement system, and it’s not as though the system was serving them all that well previously. The fees financial advisers charge siphon off a third of all investment gains in the typical 401(k) account over a worker’s career. Unlike pensions, investment-based retirement savings expose workers to having their future wiped out by a market crash such as the 2008 financial crisis. There is a $6.6 trillion gap between what Americans have saved and what they need to maintain their lifestyle in retirement, prompting experts at CAP and in government to propose reforms ranging from revised 401(k) rules to the small, risk-free public “myRA” accounts President Obama created last month to a significant expansion of Social Security benefits.

Teresa Ghilarducci, an economist at the New School and a long-time critic of 401(k)s as a primary retirement security means, agreed with Erickson’s assessment but struck a slightly hopeful tone: the bad news for workers brings the demise of the 401(k) system a little bit closer.

“This move exposed the fatal weakness of the program and paves the way for all of us to think about a better system,” Ghilarducci said in an interview. “The system enables employers to allow workers to contribute to a plan, but it in no way obligates them to make a match,” she said, adding that she is “shocked” at how commonly experts and workers alike make the mistake of thinking a 401(k) means a company matches employee savings. “It was a social rule and custom for many to make a match,” she said, “but it looks like social norms and customs are changing.” If even workers who are lucky enough to receive matching funds from an employer like AOL or IBM are having the value of that voluntary employer contribution undermined, then the myths about the 401(k) system are harder for financial advisers to maintain.

“You know when you meet somebody on a first date and you really think that they’re the one?” Ghilarducci joked. “People have been on dates with the 401(k) system for decades, and as we get to know this system we realize that it’s always been voluntary.”