If you were to design a retirement program from scratch, you probably wouldn’t create what we have now.  The problems with the 401(k), IRA, Social Security “system” — or hodgepodge, if you prefer — are almost too numerous to count. The result of its flaws is that many Americans are on track to only replace half of their income in retirement, according to a Pew study earlier this year.  One of the reasons for this impending disaster is a monumental shift that occurred in our country in 1978: Companies began offering 401(k) plans instead of pensions. This transition from a retirement plan in which the payout was predictable (“defined benefit”) to one in which it wasn’t (“defined contribution”) left individuals to shoulder a lot of the risk and responsibility for their own retirement.  The first challenge defined contribution plans such as the 401(k) present is getting workers to save enough. But even if workers manage that feat, upon retirement, they’re faced with yet another tricky question: what to do with their nest egg. If you have heard about how poorly lottery winners manage the huge sums of money they receive, you could hazard a guess that retirees aren’t much better when their 401(k) plan writes them a check for, say, a half million dollars, on their retirement day — which is typically called the “lump sum” payout.  For this reason, among many others, the U.S. Government Accountability Office conducted a study, released last week, of how other countries who offer similar defined contribution plans manage their programs.  “401(k)s first came in in 1978,” says Charlie Jeszeck, the GAO’s director of education, workforce, income security team. “So now you start having people who are first approaching retirement, and they are the first graduates of the 401(k) system, and a key aspect of that — now you’ve accumulated an account balance, what do you so with it? So this report focuses on the decumulation or the spend-down phase and different strategies. How should people draw upon their retirement resources?”  The study did not look at countries with pension systems such as France, Italy or Scandinavian nations, but instead six select countries with defined contribution plans — Australia, Canada, Chile, Singapore, Switzerland and the United Kingdom. Here are some of their ideas which could help us improve the 401(k).  1. Multiple Options In Addition To The Lump Sum  There’s no doubt the lump sum option can be overwhelming to people: In broad strokes, it requires people to hazard a guess as to how long they will live, how their expenses will change in retirement, how inflation will affect those costs, and how they should invest as well as withdraw their assets in order to meet those expenses. On the other hand, the upside of the lump sum is that it gives people flexibility and access to their savings if they need it immediately, and allows them to invest as they want. (Learn how to avoid these five investing mistakes.)  But two options other than the lump sum could be right for other retirees:  While most 401(k) plans only offer the lump sum option, the six other countries in the study have moved to offering multiple choices.  “In the U.S., you can get at these other options, but they’re not intertwined with the whole retirement system,” says Jeszeck. “You can get an annuity, but you’ll buy it on the retail market and you won’t get as good rates as if you bought it in a group setting. You could give your money to a financial advisor or one of these investment companies and they could set up a structured drawdown for you, but you have to face the retail market on your own without the support and information that governments and regulators provide participants in these other nations.”  See the GAO’s model of various hypothetical retirement scenarios, such as how programmed withdrawals compare to annuities and more. And read about a new type of financial planner who helps you turn your assets into retirement income here.  2. Improved Communication With Plan Participants  Other countries also put a priority on disseminating information to account holders. “In Australia, they provide this booklet developed by the government — and it shows, for each option, here are the drawbacks and here are the benefits…. They’re making sure the participant has the right information,” says Jeszeck.
The 401(k) has numerous flaws. A GAO study of six other countries with similar retirement plans sheds light on how we could improve it.