The plan that could render your 401(k) obsolete

The financial services landscape is full of a soup of retirement plan alphabets: IRA, Keogh, 401 (k), Roth IRA, MyRA, 403 (b), etc., and now they are possibly giving way to one more: the GRA.

Abbreviation for Guaranteed Retirement Account, the proposal is presented as a “comprehensive plan to address the crisis of retirement savings” and is being presented by two experts on financial issues: labor economist Teresa Ghilarducci, of The New School University, and Hamilton “Tony.” James, president of Blackstone Group, a New York-based asset management company.

Ghilarducci and James said GRAs are needed to prevent millions of Americans from falling into poverty after retirement. Ghilarducci has long been a critic plans 401 (k).and James believes the current savings system is not only ineffective, but “unfortunate.”

The GRAs would effectively act as a self-funded pension to increase Social Security payments, said Ghilarducci and James, who recently published a white paper describing the details of their plan, which would completely replace the 401 (k).

The proposal would be funded with a mandatory contribution of about 3 percent of the salary of full-time workers, half of which would be borne by employers. Low-income people will receive tax breaks to offset the additional cost, and the self-employed will pay the full amount, as they do now with Social Security taxes.

Funds would be automatically deducted from pay, pooled, and invested in long-term, low-cost vehicles that could generate better returns and fewer losses than 401 (k) plans. In this sense, GRAs are more similar to pensions, which many employers negotiated some time ago for 401 (k) s less expensive.

GRAs would not require any news tax or add to the federal deficit and could be integrated into existing infrastructure. In addition, the plans would not add a substantial financial burden, as they would cost an average-income family only $ 75 a year, after the tax credits, the authors noted.

The appropriations would be financed by gradually eliminating the ability of individuals to defer taxes on 401 (k) contributions. The cost of contributions for most employers would be offset by the fact that they no longer have to manage or contribute to other retirement plans.

The authors said GRAs are not another form of Social Security. Workers’ savings are kept in their own accounts, although the Social Security Administration would administer the payments.

What also makes GRAs different from the current harvest of retirement plans is that employee contributions could only be used for one thing: retirement. This is unlike 401 (k) if other plans, which have provisions that allow workers to borrow money to buy a home or for emergencies.

Ghilarducci and James said the plans are necessary because of the large gap that now exists between how much workers should have saved and how much they have saved. U.S. workers between the ages of 40 and 55, on average, only have $ 14,500 saved for retirement, well below the $ 290,000 needed for the typical person in this age range.

While it can be tempting to blame savers, the newspaper said, “the fact is that most people simply can’t afford to save enough for retirement.”

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• 401k