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As the baby boom begins to withdraw from the labor force, ensuring a secure retirement income becomes an increasingly important issue, the number of people over age 65 is expected to double by 2030. That trend will continue, accompanied by worries about stock market volatility, corporate malfeasance, a rapidly changing economy, and the viability of Social Security. In Coming Up Short, two experts on retirement policy analyze 401(k) plans, the fastest-growing type of employer-sponsored pensions and a vital source of retirement income for the American middle class. Alicia Munnell and Annika Sunden chronicle the development of 401(k) plans, now the dominant form of private pensions. In accessible language, they explain how such plans work and discuss their popularity. For employees, these plans are appealing becuase they have more control over their own retirement funds, and the plans are portable. For employers, the plans are generally less costly than defined benefit plans. Despite those advantages, there are some significant downsides to 401(k) plans. These plans shift all the risk and responsibility to employees, who must decide whether to join, how much to contribute, how to invest, whether to "cash out" when changing jobs, and how to manage their nest egg in retirement. These are difficult decisions, and while in theory 401(k)s could be an effective savings vehicle for retirement, in practice many people make mistakes at every step along the way. Com ing Up Short discusses why these mistakes are made and proposes various reforms to ensure that the aging population will have adequate retirement income. Comprehensive and up-to-date, Coming Up Short is an essential resource on 401(k) plans for financial service professionals, policymakers, academics, and individuals planning for their own retirement.
- Sales Rank: #2377073 in Books
- Brand: Brand: Brookings Institution Press
- Published on: 2005-01-27
- Original language: English
- Number of items: 1
- Dimensions: 9.08" h x .64" w x 6.16" l, .69 pounds
- Binding: Paperback
- 272 pages
- Used Book in Good Condition
Review
"Munnell's ideas are based on a simple notion: that some of the burden for decision making has to be lifted from the shoulders of workers. In her book, she proposes a series of defaults, automatic fallbacks that would be applied to 401(k) accounts unless an individual chose to opt out....Munnell would like to see government take a bigger role, a difficult sell in the current political climate. Still, she is convinced some kind of reform is critical." —Charles Stein, Boston Globe, 1/31/2004
"In 'Coming Up Short,' Boston College economists Alicia H. Munnell and Annika Sunden show that so many people have 'goofed up' so much of the time that the shimmering promise of a private, voluntary, 401(k)-based retirement system, which so enticed policymakers and ordinary Americans, is essentially chimera....Munnell and Sunden do not propose to toss over 401(k)s but to improve them. But the bottom line is so at odds with what most people expect that it throws into question all of the attention, affection and support that Americans lavished on stocks in the 1990s. The bottom line, according to the authors, is that the median combined balance of 401(k)s and IRAs for 45- to 54- year-old workers--the first generation that will have to rely almost entirely on these accounts to supplement Social Security--is $37,000, or about an extra $200 a month in retirement benefits." —Peter G. Gosselin, Los Angeles Times, Los Angeles Times, 2/1/2004
"Overall, the book provides an excellent background to a discussion of whether a pension system that relies so heavily upon the 401(k) plan will provide adequate retirement income security in the futture. The literature review is current, wide-ranging and accessible to a wide audience. The discussion of the regulatory environement is sufficient for an understnading of the research covered in the book and a cursory overview is provided in an appendix." —Richard Disney, Professor fo Economics, Universtiy of Nottingham, Journal of Pensions, Economics, and Finance, 7/7/2004
"[The authors] have organized their book around the sequence of decisions Americans must make about 401(k)s--whether to participate, how much to contribute and so forth--and their findings are disconcerting." — Los Angeles Times Book Review
"COMING UP SHORT is a highly practical resource for not only financial service professionals, students and policymakers, but also lay individuals planning their own retirement. Highly recommended." — Wisconsin Bookwatch, 5/1/2005
"The [authors'] reforms offer an ingenious way of guiding choices in pension saving without compulsion." — The Economist
"This valuable volume contains everything you always wanted to know about 401(k) plans, but didn't know enough to ask--written in clear English by two real experts." —Alan Blinder, professor of economics, Princeton University
"Munnell and Sunden nail down the evidence and chart some paths to a retirement system that works. Theirs is an important and absolutely necessary book." —Jane Bryant Quinn, author of MAKING THE MOST OF YOUR MONEY
"Munnell and Sunden ask the right questions and provide sensible, clear answers for helping the average worker build a better retirement." —Beth Kobliner, author, GET A FINANCIAL LIFE
About the Author
Alicia H. Munnell is the Peter F. Drucker Professor of Management Sciences at Boston College's Carroll School of Management and director of the Center for Retirement Research at Boston College. A former member of the president's Council of Economic Advisers, she has written or edited numerous books. Annika Sundén is the a research associate at the Center for Retirement Research at Boston College and a senior economist at the Swedish National Social Insurance Board.
Most helpful customer reviews
3 of 3 people found the following review helpful.
Where will tomorrow's money come from?
By Jared Gross
In this concise volume, the authors first lay out a bleak assessment of the future of private retirement funding in the United States, and then provide a clear roadmap to reform with straightforward remedies that will lead to better funding and more secure futures for retirees. This is not a diatribe against 401(k) plans, but rather a clear explanation of the shortcomings both in current law and in the strategies (or lack thereof) employed by individuals in such retirement savings vehicles. A good choice for an anyone with a 401 K plan, a great choice for anyone interested in the public policy of retirement.
7 of 9 people found the following review helpful.
Comes up just a little short
By A Customer
The authors, currently academic economists, trace and bemoan the demise of traditional defined benefit pension plans and make the case that 401(k) plans, which have significantly supplanted the "DB plan" on the employee benefit plan menu, will not, without a number of changes, adequately take the DB plan's place in providing retirement income for an important number of today's American workers. Citing a broad range of studies and the developing literature on 401(k) plans, the book explains in a workmanlike way the legal underpinnings of 401(k) plans (accurately enough for the authors' purposes), how 401(k) plans might operate, in theory and, most importantly, how they seem to operate in practice. (I say "seem" because, as the authors point out more than once, good data is hard to come by.) There is a large gap.
That is, there is a gap between what 401(k) plans could, theoretically, provide in the way of retirement income and what it looks like they will in fact provide. Employees (and, it is fair to say, employers) don't contribute enough to 401(k) plans in the first place. Employees, who are almost invariably asked to decide how to invest their 401(k) plan accounts, don't invest wisely. (In the case of investments in "Company Stock," the employer's own stock, employees often aren't even given the chance to invest wisely.) Finally, at the end of the road, premature withdrawals and the failure to annuitize account balances means that the opportunity to maximize what there is of the 401(k) plan's retirement benefit potential is often squandered. The discussion of annuitization, that is, the conversion of a single sum account balance into a fixed stream of income for life, may be the most useful material in the book.
Although the Munnell and Sunden offer several suggestions for "reform" of the pension system ("change" would have been a more appropriate word to use here), they conclude that their real goal is "to stimulate a debate that we hope will generate other ideas and options." To the extent that the book accomplishes this purpose it will be useful. However, long on data and data analysis and short on thought provoking discussion, I'm not sure that's going to happen.
Another difficulty I have is that I uncertain who is going to read "Coming Up Short." What's the market? It is certainly not written for the typical employee who wants practical information that he or she can use in understanding and making the most of his (or her) employer's 401(k) plan. (Not that we need another book on that subject right now.) Moreover, the politicians, bureaucrats and other inside players in the employee benefit plan game -- actuaries, accountants, lawyers, consultants, record keepers and the financial industry, primarily mutual funds and insurance companies -- are already well aware of the shortcomings of 401(k) plans as retirement plans. After all, neither by law are 401(k) plans required, nor by employer choice and design (except in rare instances) are they intended, to be retirement plans. The challenge for those of us who are interested in pension or retirement income politics is to first take one step backward and to acknowledge that 401(k) plans are not retirement plans.
5 of 7 people found the following review helpful.
Balanced and Informative Report
By dennis wentraub
Dire predictions over the future of social security divert attention from a more immediate reality. The fact is that social security benefits only replace about forty percent of pre-retirement earnings for the average worker retiring at sixty-five. Future retirees, our current generation of baby boomers, will need to develop other sources of reliable income to maintain their standard of living. The obvious supplemental program for workers atempting to build wealth is the voluntary 401(k) salary reduction plan. Technically this is a "defined contribution" plan, different from a defined "benefit" plan, with greater potential to accumulate wealth. Unfortunately a quarter of eligible workers fail to sign-up for it. Many do not begin to seriously save until they are fifty. Fewer than ten percent contribute to their maximum permitted level. And those who do contribute make basic investment errors at every step of the way according to the authors.
Among the authors' other findings:
Many employees expose themselves to excessive risk by aggressively stuffing their plans with their company stock. A misplaced sense of worker loyalty or a desire to emulate the success of their corporate leaders may partially explain why participants ignore the first rule of risk reduction, diversification. On the other hand a recent study concluded that twenty-eight percent of all participants had no stock exposure despite the undisputed historical outperformance of stocks over bonds.
Few employees buy an annuity with their plan assets. But an annuity contract addresses the biggest risk faced by retirees, namely that they will outlive their nest egg. It is telling that the main purchasers of annuities are large sponsors of defined benefit pension plans whose paramount purpose is to guarantee retirees a life-long stream of income. Surrendering control of a significant sum of money after years of accumulation is a wrenching decision. The choice of an annuity is particularly difficult for those who believe they are skilled at managing their money or who want to maximize their bequests once they pass on. Retirees may also fear extraordinary healthcare expenses that would not be covered by an annuity. My guess, however, is that participants who have never considered an annuity might be swayed here to consider a partial commitment to one.
The authors see the need for a set of default choices based on sound financial planning experience that addresses each of the shortcomings they discuss. Participants overwhelmed by their options need some structured simplicity in the process. These are choices that can be confirmed or declined. Workers can only benefit from more professional guidance and education, but employers should not risk liability if the desired investment results are not achieved. COMING UP SHORT has a grasp of the current research on its subject and clearly (albeit dryly) outlines the issues. Experienced financial planners will find this book sobering but will not likely be surprised by its findings. Policy makers will find this a balanced and objective study. Lastly, 401(k) participants who just skim it will be motivated to do more on their own behalf.
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