401k plans at risk as Wall Street struggles

by Tina Kells | October 2, 2008 at 01:26 pm

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If you think that the financial crisis can't hit any harder, think again. While politicians debate on just how to bailout the financial sector, average Americans are watching their retirement savings turn to dust.

While the banking execs were mismanaging their affairs, the average American was happily reaping the rewards of an artificially inflated marketplace. Now, as the economy is tumbling back to earth, the market generated return rates of 401k plans are falling fast.

The meltdown in the markets comes as pensions are being eliminated. The burden is increasingly on individuals to manage their own 401(k) plans and invest in the market.

In 1980, 60 percent of workers were covered by defined-benefit pension plans and just 17 percent relied on defined-contribution plans, such as a 401(k), according to the Center for Retirement Research at Boston College.

By 2004, the numbers had changed dramatically: 11 percent of workers were covered by defined-benefit plans and 61 percent were covered by defined-contribution plans.

"I think what this catastrophe in the financial markets highlights is how vulnerable this approach to retirement makes people," said Alicia Munnell, director of the center. "Their welfare depends on market gyrations. They can be very responsible and still end up being hurt."

Fifty-five percent of people surveyed for the AP-GfK poll said they were worried that the financial crisis would reduce their savings and force them to postpone retirement.