Why 401(k)s are bad for the future of long-term care

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John O'Connor, editorial director, McKnight's Long-Term Care News
John O'Connor, editorial director, McKnight's Long-Term Care News

We live in a world of unintended consequences.

Consider a 1978 change in the tax code designed to let corporate executives supplement their pensions with extra cash. Believe it or not, that was the idea behind this subsection in the Internal Revenue Code, better known as 401(k). It was never meant to be the nation's de facto retirement system, but here we are.

For it wasn't long before employers realized this provision allowed them to slash pension expenses and shift much of the retirement burden onto employees. And what a sweet deal that turned out to be. Suddenly, trillions of dollars that companies might have to set aside and manage were wiped off the books. For many providers, that turned out to be a very welcome short-term gift.

But it won't be long before the bitter fruits of this harvest reveal themselves. According to the Employee Benefit Research Institute , the average balance in the nation's 50 million 401(k) accounts is about $60,000.

Part of the problem is the recent economic downturn our nation has faced. About a third of the value of 401(k)s — that's $1.6 trillion — was wiped out by the Great Recession.

But if you think that's bad, consider this: About half of all current workers have no retirement plan at all. That speaks to another troubling reality: Most middle class Americans — those who presumably will be the majority of your future customers — do a lousy job of anticipating how much money they will need late in life.

The heartbreaker here is that 401(k)s have exacerbated that profound shortcoming, while also managing to blow an engine.

When these boomers start needing your services, which customer would you prefer to have: Those who started out with a $60,000 total retirement fund, or those with pensions? Put differently, would you rather have more Medicaid-eligible residents, or customers in a position to help pay?

That may be a theoretical issue right now, but it sure won't be in two decades. Sadly, many of these octogenarians won't be stopping by to check out your service portfolio. Instead, they'll be dropping off resumes.

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Daily Editors' Notes

McKnight's Daily Editors' Notes features commentary on the latest in long-term care news and issues. Entries are written by Editorial Director John O'Connor, Editor James M. Berklan, Senior Editor Elizabeth Newman and Staff Writer Emily Mongan.

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