David L. Wray is the president of the Profit Sharing/401k Council of America (PSCA), a national, non-profit association of 1200 companies that sponsor profit sharing and 401(k) plans for over 5 million employees.
Wray is a nationally recognized authority on 401(k) and other defined-contribution plan issues and he has testified before congressional committees and at Labor Department, Treasury Department, and Internal Revenue Service hearings. He was the 2004 Chair of the Department of Labor’s ERISA Advisory Council, which advises the Secretary of Labor on benefits issues, and was a member of the Certified Financial Planner Board of Standards Advisory Board. He is a member of the John Marshall Law School Center for Tax Law and Employee Benefits Advisory Board. He served as President from 1993 to 1996 of the International Association for Financial Participation (IAFP), a Paris based alliance of national organizations that promote the use of employee financial participation.
He frequently speaks before trade groups, contributes to benefits publications and is quoted frequently in the media. His book, “Take Control with Your 401(k)”, originally published in June 2002, was revised and re-released in December 2007.
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PROspective David Wray - Past and Future of the 401(k)
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| David Wray on the Past and Future of the 401(k) |
| David Wray Interview |
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PROspective Vol I No I January 2010
In October, Time magazine’s cover story was titled “Why It's Time to Retire the 401(k)”
The article’s thrust was that 401(k)s have failed because participants can’t replace the large payouts from DB plans with savings and investment from 401(k) plans:
“In practice, 401(k)s haven't been nearly so rewarding. When Boston College's Munnell looked at the returns 401(k)s have actually produced compared with the projections, the difference was sobering. The average 55-to-64-year-old should have a 401(k) balance of $320,000. In fact, at the end of 2007, the average 401(k) of a near retiree held just $78,000 — and that was before the market meltdown.
“Why don't these accounts amount to much? Munnell found a number of reasons. Some people don't contribute as much as they should — essentially ignoring free money from company matches and tax relief. And, as the original engineers of the 401(k) suspected, the less you earn, the less you are likely or able to contribute. For most employees, the maximum contribution to a 401(k) is $16,000 annually. She found that just 5% of people earning $80,000 to $100,000 maxed out, compared with 30% of those making $100,000 or more.
“Additionally, to get the hypothetical higher returns over time and avoid investing disasters, you have to hold a diversified portfolio of stocks and bonds. Many of us don't. Munnell found that 14% of workers held no stocks at all, leading to weaker-than-average returns. On the opposite end, more than a quarter of all 401(k)s were 100% stocks, exposing those accounts to big losses when the market dropped.”
David Wray countered on his blog that the criticism of 401(k)s is misplaced:
“As in the article, opponents use extreme market points to evaluate 401(k) performance. They fail to report that employer contributions, dollar cost averaging and market returns over time make 401(k) plans the safest place in America to save. Even using unfavorable points in time, few 401(k) participants have experienced a decline in value of their own contributions. Comparing 401(k) values at market peaks with market bottoms is ridiculous. The 401(k) is a long-term savings and investment program. Participant returns should be calculated by subtracting total personal contributions from the account balance and calculating a return using the difference.
”The article touts the benefit of traditional pension plans. It fails to point out that even at their peak defined benefit plans covered less than half the American workforce. More importantly, a significant percentage of those covered did not work their entire career with the sponsoring company and thus received little or no retirement benefit. This was especially true for women, whose attachment to the workforce was, and is, more intermittent than for men.”
We asked Wray to comment on the past and future of 401(k) plans, and why they have become so accepted by employers AND employees.