Authors berate 401(k)s as a 'great hoax'
Ann Perry
June 16, 2002
uniontrib.com
All is not OK with the 401(k).
It's eight years and counting before the first wave of baby boomers – and the first large group of workers to rely heavily on 401(k)s rather than traditional pensions – reaches the retirement age of 65.
And the shortcomings of this do-it-yourself system are all too evident, according to the authors of a provocative new book called "The Great 401(k) Hoax: Why Your Family's Financial Security Is at Risk, and What You Can Do About It."
William Wolman, an economist, senior contributing editor at Business Week and commentator for CNBC, and journalist Anne Colamosca say that the problems inherent in the 401(k)-driven retirement system were not readily apparent during two decades of rising stock prices.
During the stock market boom, the 401(k) handily met the interests of large companies, Wall Street and politicians, because in theory it allowed workers to share in the good fortune. But, in fact, most workers have amassed very little in 401(k) savings.
"The hoax promised people they would benefit from the great stock market boom, that the stock market would save them from the horrors of Social Security," Wolman says.
Colamosca, who has interviewed workers with small amounts in 401(k)s, says, "I just don't think it's hit a lot of people that they won't be getting a pension."
In this post-9/11, post-boom era symbolized by the collapse of Enron and the vaporization of its employee retirement plans, Wolman and Colamosca believe the outlook for corporate profits and the stock market could be bleak for a number of years.
They note that following major market blowouts in the 1920s and the 1960s, it took more than a decade for stocks to rebound.
Thus, the authors foresee a gloomy future ahead for most retirees and for the nation – unless workers begin to tune out Wall Street and take more responsibility for their own retirements.
Here's what they see as the major problems with how 401(k)s work in the workplace:
Rather than benefiting the average American worker, these retirement savings plans are set up to benefit corporations, because they cost less than traditional plans, and Wall Street, which supplies the investments. Typical employees have little control over how their 401(k)s are set up and how they can invest their money.
Despite the recent unprecedented prosperity, they note, half of Americans have less than $14,000 in their 401(k) plans.
Companies can take away what they give. They provide 401(k) and other retirement plans voluntarily, as well as any matching funds. The authors note that declining profits last year prompted such major corporations as Daimler-Chrysler, Bethlehem Steel and Wyndham International to cut back contributions to workers' 401(k)s.
Many employees don't participate in 401(k) plans. And among those who do, many end up spending what they save when they leave the company, rather than rolling the money over into an individual retirement account.
Most 401(k) savers are not sophisticated investors. They don't follow the stock market or hire financial planners to help with their retirement planning.
The statements that employees receive from their plans give limited information and can be difficult to understand.
Employees may feel pressured to invest in the stock of their companies, resulting in an unhealthy concentration of stock in one company.
Wolman and Colamosca say only Washington can make the necessary 401(k) reforms. However, any solutions could be successfully opposed by the powerful financial services industry.
Will companies ever go back to the traditional defined benefit retirement plan? "It just isn't going to happen," says Wolman. "We're stuck in a situation and people are going to have to understand it better."
But the talk of reviving the Social Security system by having workers invest some of their contributions on their own has died down with the break in the high-tech stock bubble. "That looks like a nonstarter," says Wolman. "That notion wouldn't stand up under scrutiny."
The best approach for American families is to learn to make the most of their 401(k) plans.
Here's what the authors suggest:
Tune out the Wall Street "pros." While Wall Street forecasters say stock prices won't surge ahead like they did in the 1990s, they nevertheless project returns of about 7 percent per year over the next decade.
But history suggests that after a market bubble like the one in the late 1990s, returns are likely to be meager. The authors predict no more than 2 percent, after inflation.
Fixed-income investments will be king. During this period, core investments should be in bonds, not stocks. Wolman and Colamosca recommend I bonds, or inflation-adjusted bonds, issued by the U.S. Treasury.
Minimize the cost of investing. During periods of low investment returns, it's especially important to keep the costs of expenses low. To achieve this, invest using low-cost index funds that match the returns of basic indexes of stocks and bonds and rely on mutual funds with low administrative and trading costs, such as Vanguard and TIAA-CREF.
Start 401(k) clubs. Wolman suggests that, just as people created investment clubs in the 1990s, co-workers should get together to learn more about how their retirement plans work and how they can make corporate management more sensitive to their needs.
In an ideal world, there would be 401(k) advocates, just as there are advocates for hospital patients or the elderly. These advocates would look at individual plans and try to correct what was wrong.
Americans must begin to save more and borrow less from their 401(k)s.
Finally, the authors say, American workers need a 401(k) Bill of Rights. It would include, for example, the right to buy and sell company stock freely, a right that many Enron employees no doubt wish they could have exercised. |
