Counterparties: Retiring the 401(k)

By Ben Walsh
March 13, 2013

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The first generation of 401(k) holders is retiring. Duncan Black, in USA Today, reports just how bad things are looking:

According to the Center for Retirement Research at Boston College, the median household retirement account balance in 2010 for workers between the ages of 55-64 was just $120,000. For people expecting to retire at around age 65, and to live for another 15 years or more, this will provide for only a trivial supplement to Social Security benefits… And that’s for people who actually have a retirement account of some kind. A third of households do not.

Americans have had more than 30 years to learn the ins and outs of this massive experiment in tax-deferred investing, but as Alicia Munnell, the director the Center for Retirement Research says, “we just don’t know how to do it”. What money people do save, they tend to manage poorly. They think they can do better than the market, or tend to choose financial professionals that are bad at beating it. More education isn’t going to fix the problem. As the Economist points out, financial education can actually lead to worse decision-making. And although the 401(k) costs $240 billion a year in tax deductions, research shows it doesn’t make people save any more than they otherwise would.

There’s a strong argument that defined benefit plans (like a pension, where the amount received is predetermined) should play an increasingly large role in funding Americans’ retirement. That’s the precise opposite of what has happened since the birth of the 401(k): in 1980, 38% of workers had a defined benefits plan; in 2008, 20% did.

There’s a simple way to alter this trend, Josh Barro writes: increase the size of the biggest defined benefit plan in the country, Social Security. It’s not only a remarkably efficient program, he says, it’s America’s “most important retirement-saving vehicle”, and should be expanded, not cut. Barro argues that we need to accept the reality that for most Americans, Social Security isn’t a way to supplement individual savings, but a primary source of funding for retirement.

Expanding Social Security shouldn’t be one-size-fits-all, says Kevin Drum. “The obvious way to address Social Security’s funding problems is to increase benefits to the relatively poor, whose benefits are low and who live shorter lives in the first place, and to reduce benefits for the well off”.

One thing is for sure: when 80% of stock market wealth is owned by 10% of the population, there’s no point in hoping that a soaring stock market might fix America’s retirement problems. — Ben Walsh

On to today’s links:

Sad But True
How the tobacco and soda lobbyists keep winning – Ben Smith

EU Mess
Meet Lee Buchheit, the “fairy godmother to finance ministers in distress” – Guardian

Oral Hazard
Too Sweet to Fail: The U.S. may bail out sugar processors – WSJ

Must Read
Martin Wolf’s terrific takedown of Britain’s disastrous fiscal policy – FT
“Cameron is more interested in rhetoric than he is in substance” – Felix

“Greed is good”: The story of Groupon’s bumpy, controversial rise – The Verge

New Normal
The last time US factory workers put in longer work weeks? WWII – Bloomberg
The payroll tax hike hasn’t really had any effect on retail sales – Business Insider
Religious affiliation in the United States is at its lowest point on record – Eureka Alert

Bad Ideas
eHarmony’s new business probably involves breaking Federal employment law – Inc.

Tax Arcana
Tax changes may be happening too quickly for companies to figure out how to evade them – WSJ

“I believe the road to hell is paved with adverbs, and I will shout it from the rooftops.” – Brain Pickings

Popular Myths
No, higher taxes do not cause people to move to another country – Mark Thoma

On Private Equity
Carlyle deigns to accept investments from the mildly wealthy – WSJ

We need a shadow CBO – Harper’s

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And, of course, there are many more links at Counterparties.


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If we got rid of the 401(k), why there’d be less money floating around in the casino that Lloyd Blankfein, Jamie Dimon and their merry bands of banksters gamble other people’s money in.

The 401k) was never intended to provide a vehicle for retirement savings, it’s at best a vehicle to facilitate financial sector rent-seeking and efficiently separating average working people from their money.

Posted by Strych09 | Report as abusive

Retirement Saving Is No Longer a Priority for Many Americans –

“58% don’t have a retirement plan; nearly 40% don’t know what an annuity or mutual fund is; and 20% expect to rely purely on Social Security for their retirement needs. More than half don’t trust anyone’s advice.” -americans-given-up-on-saving-for-retire ment/

Posted by rjs0 | Report as abusive

Strych09 is onto something — and Barro wants to make this state of affairs mandatory. Take away all self-determination in the matter (since people make bad decisions). Hire professional money managers to do the job (ignoring the fact that they also make bad decisions). Pay them handsomely, so that the money managers make much more off the system than the stakeholders do (since clearly they deserve to be well-compensated). Is Barro in the pocket of Wall Street?

Will note, however, that this is yet another gamepiece in the debate about how to distribute the nation’s production. Investing in the financial markets has little connection to investing in the future — when people invest in the stock market it mostly serves to drive prices higher (and forward returns lower). We are already seeing a record proportion of the GDP go to capital rather than labor. How much further can you squeeze the working population before they keel over?

Posted by TFF | Report as abusive

Indeed, that eHarmony’s new idea may run afoul of federal labor laws nicely illustrates how ludicrous federal labor laws are.

Posted by dWj | Report as abusive

“eHarmony’s new business probably involves breaking Federal employment law”

Is this just you guessing/assuming what sorts of information they might be sorting through to make matches? The article you linked to didn’t say.

As to the issue of saving for retirement, it seems pretty clear at this point that the 401K is a scam. You’re probably better off just keeping money in the bank, or at least you would be if you could get a little interest. My wife and I include as part of our “savings” paying off our mortgage as fast as we can afford to. Part of our retirement plan is to live as debt-free as we possibly can.

Posted by Moopheus | Report as abusive

Automatic 401(k)s… where employees can only opt out of plans and auto escalation… where savings into the plan goes up when pay goes up… and asset allocation funds as the plan default take most of the need for education out of the equation.

The problem with 401(k)s isn’t that the plans are crappy, it’s that worker net pay is, and has been, crappy. It’s hard to save more when your pay rate is flat for 10 years or more. This may be corrleated to the explosion of healhcare costs, where raises mostly went into insurance premiums.

And your timing has to be right. Those who planned on retiring in 2009 likely had to work a few years longer to make uo the losses when the market went south.

Posted by ChuckMiller | Report as abusive

Ah, apparently someone doesn’t understand 401(k) accounts.

In the typical 410(k) account the worker has a menu of mutual funds (between 5 and 15 funds, generally in one family) and chooses funds ranging from risky to safe.

The worker cannot choose a financial professional or try to beat the market. There are probably exceptions.

AFTER employment, when the money is usually rolled into an IRA, the retiree can make lots and lots of bad decisions.

Posted by rustyrustbelt | Report as abusive

Rusty, I don’t know about your 401(k), but the plans I’ve seen are grossly overpriced. Fund management fees ranging anywhere from 0.5% for an index fund to 2% for those marketed to naive young workers. It isn’t unusual for the fund managers to end up with greater profits than the account owners.

And every plan I’ve ever seen permits retirees to make bad decisions — most significantly, selling out of stocks in early 2009 and waiting four years to buy back in. Most bad decisions do not involve picking individual stocks, they involve foolish attempts at market timing.

Posted by TFF | Report as abusive

Looked back through my records — From 1/01 to 6/04 my 401k funded with $400 bi-weekly contributions (invested in Fidelity mutual funds) gained about $2k, less than 4% of the final balance. Those money managers made a heck of a lot more than I did!

When I quit, I withdrew my pension and 401k contributions, and put that into an IRA — which has since tripled without further additions. If I were stuck in the old 401k, I would never be able to retire.

Posted by TFF | Report as abusive

Let me raise one additional question…

As numerous recent articles have pointed out, many people today are working into/through retirement. My parents are already in their 70s, and intend to continue working through the age of 72. Even then, their “retirement” is likely to involve activites that others might describe as “work”, just in a flexible and less-than-full-time capacity. I work with another older gent in a similar situation. He has a pension and could easily live off that, but prefers to continue working/contributing in a reduced position.

If somebody chooses this course, why should we force them to save for an idle retirement that they don’t want or need?

I wholly agree that we need to guarantee a minimum subsistence living, but Social Security already does that. (People can and do live off Social Security alone, albeit not well.) Why should the government involve itself in decisions beyond that?

A greater concern, in my opinion, is the overall lifetime earnings for those without advanced degrees. Those who support mandatory savings plans are typically those who have no concept what it means to raise a family on $40k-$60k. Stealing another 12% of their income to sequester in a retirement plan would be enough to push many/most of these households over the edge.

Sometimes the masses are more rational than the economists.

Posted by TFF | Report as abusive

2 of my 3 surviving grandparents worked into their 80s. It is possible if people take pay cuts once they get out of their prime. You just need to scale back the price a bit, which can be hard.

Posted by QCIC | Report as abusive