How America’s 401(k) Revolution Rewarded the Rich and Turned the Rest of Us Into Big Losers

[xchrom]

http://www.alternet.org/economy/401k-revolution-and-inequality



***SNIP

The Dumbest Retirement Policy in the World

Thirty years ago, as laissez-faire fanaticism took hold of America, misguided policy-makers decided that do-it-yourself retirement plans, otherwise known as 401(k)s, would magically secure our financial future in the face of gyrating markets, economic crises, unpredictable life events, stagnant wages and rampant job insecurity. It was an extraordinary shift in thinking about public policy: Instead of having predictable streams of income from traditional pensions, ordinary people with little financial expertise would suddenly transform themselves into financial gurus, putting money aside and managing complicated investments in tax-deferred accounts.

There were red flags along the way. 401(k)s were originally supposed to supplement pensions, but clever corporate cost-cutters decided that voluntary individual accounts would replace them. Big difference! Meanwhile, throughout the 1990s, the national savings rate fell. Real wages dropped. As Helaine Olen details in her book Pound Foolish, Americans started borrowing against retirement plans to pay the mortgage or send the kids to college. The media was basically out to lunch, and politicians went on claiming the nonsense that individual retirement accounts would encourage savings and turn us all into professional money managers. The stock market would bring us double-digit returns. Whoopie!

Reality check: In 2007, the financial crisis destroyed America’s retirement fantasy. Jobs evaporated or were downsized. The stock market took a nosedive. Millions of Americans who had worked hard, straining to sock away a portion of their salary for 401(k)s, watched helplessly as a black cloud formed over their golden years. In October 2008, the Congressional Budget Office revealed that Americans had lost $2 trillion in just 15 months — money that will likely never be recovered. Not long after, President Obama betrayed the public by turning away from the jobs crisis to create a deficit commission whose leaders had the stunning lack of foresight to advise cutting Social Security at a time when the retirement train wreck was quickly picking up steam.

Today, the balance in our retirement accounts falls wildly short of what we need to keep us from destitution in old age, much less to secure a comfortable existence. According to the Vanguard Group, in 2012, the average account balance in our 401(k)s was $86,212 — and that number is skewed by high earners at the top. The amount experts say we need? $1 million or more, depending on how much you make now.

[dipsydoodle]

1. Another fly in the ointment

is the commissions charged by whoever manages the schemes. Same subject is under current investigation in the UK with a view to capping commission.

[GeorgeGist]

2. Greed is a disease.

[TheMastersNemesis]

3. The 401k Has Always Been A Scam From The Beginning.

And the American sheeple bought into it all along. Something needs to change.

[Nay]

6. In this case, unfortunately, the sheeple didn't have a choice. It was a setup by the big money guys.

They knew when they set the 401K up and told the masses that they were going to be 'free' to manage their own money, just like grownups, and didn't they want to be grownups? They didn't want to be patronized and told what to do, did they? It's 'freedumb' at its finest.

Of course, it was just a scam to allow the big money guys to charge fees and play with OPM with no consequences. They played on the vanity of the sheeple to get them to think it was a good idea, but there was resistance even back then. Plenty of money managers and regular people said this was a bad idea for several reasons: you can't allow people to borrow their retirement money for any reason(can you borrow from your SS account?); you can't expect everyday citizens to become investment experts; fees will eat up most gains; inevitable crashes, which can't be anticipated even by 'experts,' apparently, will destroy gains regularly; and for a dozen other good reasons. But greed prevailed and we now have this mess.

And don't forget, it's our fault for not working to become prescient investors like Warren Buffett.

[FBaggins]

8. That simply isn't true.

See my #7 below.

Most people forget that when these accounts were created, most younger workers were jumping from job to job frequently. It helped them increase their income, but also had the negative side effect of destroying pension benefit calculations. Many of them were accumulating no retirement benefit at all.

[Xyzse]

9. 401K was never meant to be someone's retirement

It was only meant to supplement and add to retirement.

I hate how it has also been loaded up with egregious fees.

[FBaggins]

10. Completely agree on the "egregious fees" point.

In some cases, the provider is even selling annuities within the already-tax-favored 401(k). That's incredibly profitable for the salesperson... but a ripoff for both worker and employer.

Even normal mutual funds are far too expensive compared to the more modern alternatives (ETFs).

The problem is that the worker doesn't see the fees that are involved and the employer (in many cases) doesn't pay them - and thus doesn't care. This was supposed to change recently (with fund-internal fees being disclosed on 401k statements)... but I think that was delayed.

[Xyzse]

13. Exactly!

It is why I don't trust 401Ks and other such accounts.
I have them, but I don't have much of a choice.

[Live and Learn]

4. The 401k sham is simply another way for the 1%to steal from the 99%. nt

[leftyladyfrommo]

5. Unfortunately most employees didn't have a choice

because a 401K was what they were offered. My first job about 1970 had a pension plan. After that it was all 401Ks.

I was doing good for a while. And then there were two stock market crashes and a recession.

Now I just try to make do the best I can.

But didn't a lot of people also lose their pension plans when their companies were bought out?

[FBaggins]

7. I disagree. The author forgets...

...that traditional pensions aren't worth much if you hop from one company to the next (as a growing number of workers were doing when 401(k) programs were created). In most cases, a worker would be far better off with a 401(k) and a balanced investment strategy than they would be with a traditional pension plan (which, keep in mind, also favored high-income workers)... particularly if they change jobs frequently.

The stats changed some with the declining economy (as workers were unwilling to leave an existing employer when the job market was so weak), but until recently, the average worker held seven jobs over the course of a career... working in each for an average of 4-1/2 years. I can tell you that even when traditional pensions were common, that worker would have essentially zero pension benefit at retirement (as most employers had a 5-year vesting period).

The real problems with 401(k)s are usually lack of education (due to employers being unwilling to take on the risk of offering advice and then getting sued), too-easy access to the funds, and too many people who incorrectly believed that they couldn't "afford" to participate (when in reality, they can't afford not to).

Congressional Budget Office revealed that Americans had lost $2 trillion in just 15 months — money that will likely never be recovered.

Untrue. The average 401k has completely recovered. Additionally, those who remained employed (and continued participating) were dollar cost averaging purchases at very low prices (with the S&P almost 150% above the low point).

According to the Vanguard Group, in 2012, the average account balance in our 401(k)s was $86,212 — and that number is skewed by high earners at the top.

And according to Fidelity (the largest manager of such accounts), workers over 55 saw their average balance climb from $130k to $255k as of May. And let's not forget that this is just the average 401(k) balance. Many accounts that used to be 401(k)s are now in IRAs after the worker left one employer and rolled the 401(k) into an IRA. Fidelity reported the average IRA balance at that age at about $100k.

The amount experts say we need? $1 million or more, depending on how much you make now.

This is certainly true for most people working today, but if you're 55 and have >$350k in retirement assets... you won't be "destitute" if you retire at 66.5 and start taking Social Security.

[hughee99]

11. There are certainly many downsides to a 401k, and it's not well suited for everyone

but it's not as bad as it is so often described.

No it's not a pension plan, but those aren't coming back. On the upside, though, an employee isn't tied to a company until they're "vested", and if something happens to the company, you won't get pennies on the dollar as someone walks off with your retirement in a bankruptcy proceeding.

No, you shouldn't use it as a piggy bank and borrow against it just as borrowing against any other investment is not going to help it grow.

Yes, it requires some effort on your part to understand what you're investment options are, and which ones (if any) are of value. For some people, the 401 options their company offers may not even be worthwhile to put your money into at all.

If you're not willing or able to put in the work to manage your retirement, if your company has a host of shitty investment options that either don't make money or eat up any profits in fees, or if you're planning to take out your investment to spend the money now, a 401k probably isn't for you. I agree that this is a shame, because most of the other real options aren't any better.

[PowerToThePeople]

12. I plan on finding a nice cardboard box to retire in.

Just kidding. But, I will probably be in a small apartment. 10 years into career w/ 401k based retirement plans. Easily down 75% of my investment. My projected retirement age for 1 million is 265 y/o. So, I have decided to quit investing into the capitalist system. They are just playing you.

[Lurker Deluxe]

14. ?

"Easily down 75% of my investment."

How??

Even with the worst plans I have ever heard of, the market just hit an all time high. How could you possibly be down 75% of your original investment?

[PowerToThePeople]

15. Agressive mix

I started late, was told to put more into aggressive mixes to make up for lost time. I took hits in the crash that never recovered.

[FBaggins]

16. Just agressive mix?

Or agressive mix, followed by a sharp decline, followed by getting out near the bottom and missing the climb out of the hole?

This appears to represent about 1-2% of 401k investors (that should never have been investors in the first place).

BTW - If the above describes you and that really was formal advice offered by someone related to your employer, you could have a legal case.

[Lurker Deluxe]

19. ?

Unless you cashed out, all of those declines have recovered. And if you would have continued to invest during the crash that money would have made some serious gains.

I knew some people here at work that made crazy decisions like that when the crash happened, they rode it up and gained money making their 401K worth far more than they paid into it and when the market crashed they pulled everything out and placed it in 0 risk and missed all of the gains in the recovery.

Some others listened to those of us who understand the market and doubled their contribution in 2007-09 and rode that wave all the way up to 15k in the DJIA and then started to balance the portfolio out when the market hit 15K.

If this is what happened to you, it wasn't the 401K that screwed you, it was bad choices or bad advise. As the other person who responded suggests if someone affiliated with the company advised you to do this you may have a legal case.

[PowerToThePeople]

20. Well, I became unemployed during the rise

So, I was unable to contribute more at that time.

Some of the biggest losses (2 cases) were due to fraud. Class actions did happen and a portion of the lost funds returned. Aprox 10% of my losses in those cases were returned via class action.

edit - and, maybe I am someone who should not be investing. So, as my post above stated, I am no longer investing and have no plans to in the future. It, imo, is all just a big pyramid scheme. Those running the scam never get in trouble. They just keep on doing the same thing, cycle after cycle. I will not play it any more.

[B Calm]

17. Investing in companies that off shore your job overseas. . .

I'd prefer a regular pension plan myself.

[FBaggins]

18. Good luck finding one.

The move away from traditional pensions was almost complete when the markets crashed.

IMO, it's on temporary hold while rates are so low, but I wouldn't expect them to be available to the vast majority of workers once rates climb significantly.

I still have one (and consider myself fortunate)... but I'm planning as if it won't be there forever.