More Fear and Loathing in 401(k) Land

The buzz article of the month seems to be Time’s Why It’s Time to Retire the 401(k) which came out October 9th. It is not to be confused with Time’s Should the 401k Be Killed? from last winter. And I am sure the serious print Train_wreck_at_Montparnasse_1895_2journalists at Time would be offended if I likened their work to the 60 Minutes  piece from the spring Retirement Dreams Disappear With 401(k)s. (See my comments on that here.)

I suspect there are many more such articles and TV news segments out there telling us how 401(k)s are terminally broken. I don’t have the heart to search for them. These particular three say roughly the same thing, with similar quotes from experts and profiles of folks in their sixties who are poorer than they expected to be and, we presume, than they deserve to be.

There is an unavoidable, and I think completely unhelpful, undercurrent in this genre that the 401(k) is not a good idea with some serious implementation issues, or even a noble experiment that failed, but a scam perpetrated on workers by Evil Big Business. 401(k)s, we are told, were designed by our beneficent law givers in Washington as a nice side dish to the main retirement course of corporate pensions. Somehow, when we weren’t paying attention, employers pulled a switch on us and passed off the side dish as the whole meal.

As Time tells us in the recent article:

The tax-deferred 401(k) plan, and others like it, such as the 403(b) and the IRA, have become our nation’s go-to retirement piggy bank. Invented nearly 30 years ago as an executive perk — one more way to dodge Uncle Sam — the 401(k) was never meant to replace the employer-guaranteed pension fund, supplemented by Social Security, as the cornerstone of our nation’s retirement system. But propelled by a combination of companies looking to cut costs and consumers who wanted control of their retirement destiny, that’s exactly what happened.

But corporate pensions were never as universal as nostalgia suggests.  At their peak, which was a while ago now, less than half of American workers were covered by them.  And setting aside the question of what may or may not  have been the original intent, in practice a 401(k) is very explicitly thought of as a substitute for a pension plan, and as far as I know this has always been the case in the corporate world. You can argue that pension schemes are better, but arguing that 401(k)s were "never meant" as an alternative is just silly.

This wave of anti-401(k) literature that we are now seeing has a fairly obvious cause. The stock market recently took a tumble. I haven’t done anything like a scientific study, but I’ll bet that there was hardly any buzz around the problems with 401(k) two years ago. Things were good, 401(k) (and IRA) balances were big, and nobody paid much attention to the terrible problems that were apparently always there. Then the accounts suddenly shrank and it occurred to a lot of people that they would have been better off with a boring old pension.

Come to think of it, why don’t we all have pensions? It must be because we were cheated out of them. The Time article tells us about a man who had a salary of $80K when he retired. Had he been covered by a pension, he would have gotten a monthly check of about $3100 in retirement. Of course, this ignores the annoying detail that if he had been covered by a pension, he likely wouldn’t have been paid $80K. The money for the pension has to come from somewhere.

And here is, I think, the flaw in the campaign against 401(k)s. People think that having a guaranteed pension is a fabulous idea, provided that they don’t have to pay for it. As long as it is free money dropping from the sky, it’s a good thing. But ask if they would prefer a) a pension scheme paid for via a reduction in salary or b) no pension or salary reduction but a special tax deferred account to help you save on your own, no pension wins in a landslide.

What we have done in America is to replace centralized corporate pension schemes with millions of individual pension schemes. There are a few drawbacks to this, principally that if you make every worker his own pension fund manager, most workers will have totally incompetent pension fund managers.

It’s not the worker’s fault. Turns out it’s pretty hard to find good professional pension fund managers, never mind millions of competent amateur ones. I don’t think it would be impossible, in principle, to have a nation of consumers who did a decent job of managing the funding of their own retirement, but I think we are, at best, decades from that. And I haven’t seen much forward motion towards the goal of late.

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