The plan that could render your 401(k) obsolete

The financial-services landscape is littered with an alphabet soup of retirement plans -- IRA, Keogh, 401(k), Roth IRA, MyRA, 403(b), etc. -- and now make way for possibly one more: the GRA.

Short for Guaranteed Retirement Account, the proposal is touted as a "comprehensive plan to confront the retirement savings crisis" and is being put forth by two experts in things financial: labor economist Teresa Ghilarducci, from The New School university, and Hamilton "Tony" James, president of Blackstone Group, a New York-based asset-management firm.

Ghilarducci and James said GRAs are necessary to prevent millions of Americans from falling into poverty upon retirement. Ghilarducci has long been a critic of 401(k) plans, and James believes the current system for saving isn't merely ineffective, but "woeful."

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

The proposal would be funded by a mandatory contribution of 3 percent or so of full-time workers' pay, half of which would be paid by employers. Low-income earners would receive tax credits to offset the additional cost, and self-employed workers would pay the full amount, like they do now with Social Security taxes.

The funds would be automatically deducted from pay, pooled together and invested in long-term, low-fee vehicles that could generate better returns and fewer losses than 401(k) plans. In that sense, GRAs are more akin to pensions, which many employers long ago traded in for less expensive 401(k)s.

GRAs wouldn't require any news taxes or add to the federal deficit and could be integrated into the existing infrastructure. Also, the plans wouldn't add a substantial financial burden, costing a median-income family just $75 a year, after tax credits, the authors' paper noted.

The credits would be funded by phasing out the ability of individuals to defer taxes on 401(k) contributions. The contribution cost for most employers would be offset by their no longer having to administer or contribute to other retirement plans.

GRAs aren't another form of Social Security, the authors said. Workers' savings are held within their own accounts, though the Social Security Administration would administer payments.

What also makes GRAs different from the current crop of retirement plans is that employees' contributions could be used for only one thing: retirement. That's unlike 401(k)s and other plans, which have provisions that allow workers to borrow money from them to purchase a home or for emergencies.

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

While it may be tempting to blame savers, the paper said, "the fact is that most people simply cannot afford to save enough for retirement."