401(k)s won’t provide secure retirements Guest column

For those of us who work to ensure Americans have a secure retirement, Maryland Gov. Larry Hogan's plan to allow new state employees to choose between a 401(k) or the state pension system reminds us of darker times, nearly a decade ago.

It was late 2007 and you could already see that the world economy was beginning to look unstable. President George W. Bush's last year in office was near and campaign buses were criss-crossing the country. No one - except for a handful of hedge fund managers, Wall Street executives and traders - knew of the impending housing market crash and, ultimately, the Great Recession to follow.

As many hardworking people across the country know, 401(k) accounts were decimated and many lost their hard-earned retirement savings after the crash -pushing them to work longer than originally planned and hurting their stability in retirement. In the first two quarters of 2008 alone, 401(k)s and IRAs lost about $2.4 trillion.

Decades ago, more Americans had access to pensions: professionally managed group plans designed to weather financial crises. During the financial crisis, pensions, too, took a hit, to the tune of $849 billion collectively. Now, almost 10 years later, many have recovered and are nearing healthy or full funding status. Average funding levels moved to 74 percent in 2015, according to the Center for Retirement Research at Boston College.

Gov. Hogan's plan should be rejected for several reasons.

First, it threatens the stability of the funding of the Maryland pension system, which has steadily improved over the last few years thanks to efforts from both Gov. Hogan and former Gov. Martin O'Malley.

Second, it threatens the retirement security of public employees.

Finally, this bill is a solution in search of a problem. Maryland already offers optional 401(k)s that public employees can sign up for and contribute to if they wish to save beyond their pension. This proposal is unnecessary and could do more harm than good to Maryland's public pensions.

Pensions are the most cost-effective way to provide retirement security to firefighters, police officers, nurses and other public employees. They are professionally managed pooled plans that absorb market fluctuations more than defined contribution plans do. The National Institute of Retirement Security has found that defined benefit plans deliver the same level of benefits as 401(k)-style plans at almost half the cost.

For workers, pensions have multiple advantages over 401(k)s.

First, pensions are pooled accounts that share market risk among employers and employees. As we saw with the Great Recession, pension funds on average have recovered, while 401(k)s have been slower to do so.

Second, pension funds are professionally managed, while 401(k)s rely on individuals to wade through hundreds of complex financial instruments to determine how to meet their needs in retirement. Professionally managed pension funds are better equipped to recover losses over time.

Lastly, 401(k)s have costly administrative fees that go into the pockets of Wall Street executives instead of the pockets of the hardworking people making the investment. And reality teaches us that workers simply cannot save what they need to retire with dignity with a 401 (k). In Maryland, the average 401(k) account balance is only $32,094 - a mere fraction of what is needed for a secure retirement.

It's long past due for Marylanders and the rest of America to re-think our approach to retirement security. The 401(k) is a failed model for most working men and women and the only way to move back to a system like pensions, where risk is shared among employers and employees, funds are professionally managed and no individual is left alone to face another Great Recession.

Bailey Childers is the executive director of National Public Pension Coalition. Contact her at bchilders@protectpensions.org.

Credit: Bailey Childers