For Jim McCool, Executive Vice President of Institutional Services at Charles Schwab, the 401(k) plan is more than a way to save for retirement; it’s been his life’s work.

Over the past 27 years, Jim has seen the 401(k) evolve into the major source for millions of Americans’ retirement savings. Now, he’s actively driving for the next big evolution in 401(k) plans – combining index funds with low operating expenses with independent, professional advice.

Recently, I sat down with Jim to talk about the 401(k) plan – past, present and future. Over the next few days, the Schwab Talk blog will feature excerpts from our conversation as Schwab launches an exciting new 401(k) offer – Schwab Index Advantage™.  More importantly, you’ll have the chance to add your comments or questions to the conversation.

Q: Why is the 401(k) so important for workers?

McCool: It’s simple. With fewer workers benefiting from traditional pension plans, and Social Security payouts covering a smaller portion of retirement expenses, today’s workers need to save more to ensure a healthy retirement. The 401(k) is perhaps the best way to do this. It offers workers the opportunity to save money before income taxes are taken out, is deducted automatically from their paychecks and often includes matching funds from employers.

Q. What changes have you seen to the 401(k) over the course of your career?

McCool: It is amazing how far we’ve come over the last three decades. When I first started in this industry, we had a system in which workers didn’t know on a daily basis how much they had in their 401(k) plan account, as statements would sometimes be delivered two to three months after the plan’s investment holdings were valued.  Over time, systems improved, and people began to be able to more easily track their retirement savings because plan results were updated on a daily basis.

The industry then began offering more 401(k) options. For example, we saw the number of investment funds available grow from three funds to eight and then to 16, 24 and more. The growth of choice didn’t stop with funds– it expanded into education, advice, guidance, tools, calculators and brokerage windows, which assist active investors as they make all their own investment selections for their 401(k).  All of these features were intended to offer American workers the best of everything to plan for retirement.

Q. You stressed the word “intended.” Would you say the 401(k) has been a success?

McCool: From certain perspectives, the 401(k) has been a tremendous success – especially if you look at the industry numbers: nearly $3 trillion in 401(k) savings and close to 50 million 401(k) savers.¹

But when you look at success through the eyes of the American worker, the story isn’t as compelling.  Three out of four people with a 401(k) plan report they are not on track to reach their retirement income goals², and research shows that average Americans just aren’t saving enough to meet their retirement goals.³
 

The reality is that today’s 401(k) plan, with all of the choices we talked about earlier, has at times become so complex that often people do not understand how their retirement plans work. In fact, despite, or perhaps because of, employers’ and the industry’s best intentions, options in today’s 401(k) plan have expanded to the point where more people than not feel their retirement plans are just as or more confusing than their health care plans.
 

And given concerns about the sustainability of Social Security, it’s more important than ever that workers are saving as much as possible. The 401(k) can and should be working harder for them. It’s clear the industry can do more to help people by working to simplify 401(k) plans, reduce costs and help more workers take advantage of independent advice.
 

On Wednesday, Jim McCool will share his thoughts on how we can improve the retirement system.  In the meantime, let us know: How do you save for retirement?  Are you on track to meet your retirement goals?  Why or why not?   Share your comments and questions below.

¹ Employee Benefit Research Institute. 401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2009, Issue Brief No. 350 (Washington D.C.: November 2010).
² The Financial Engines National 401(k) Evaluation 2010, Who benefits from today’s 401(k)?, Financial Engines, 2010.
³ EBRI, 2011 Retirement Confidence Survey Fact Sheet #1.