Wednesday, February 25, 2009

The 401(k): Have we been conned?

You graduated from college 15 years ago. You got a job, got sensible and started thinking early about your retirement. You contributed to a 401(k), got your company match, maybe 2 percent, maybe 3 - no matter, because everyone was telling you what a good investment this was.

Now, 15 years later, you open up your 401(k) statement, and the amount on the front page is about equal to the total of the contributions you've made. Net gain = zero.

Are you mad? George Miller is.

Tuesday, in a hearing of the House Education and Labor Committee, the California Democrat blistered Wall Street for an elaborate ruse that's persuaded millions of Americans to fatten the stock market and investment industry.

“For too many Americans, 401(k) plans have become little more than a high-stakes crap shoot,” said Miller. “We are realizing that Wall Street’s promises of predictable benefits and peace of mind throughout retirement was nothing more than a con job that would make Bernie Madoff proud.”

The Congressional Budget Office, back in October, estimated that workers lost $2 trillion over a span of 15 months from declining stock markets. Those numbers have surely worsened.

And by the way, the government pumps an estimated $80 billion in tax breaks/subsidies into those retirement accounts each year.

Says Joseph Leonard, The Squeeze's 401(k) expert and an N.C.-based author and investment advisor: "Wall Street has buffaloed us, and the government has stepped in and said, 'Don't take your money out of your 401 (k). Hang in there. Well, if people had taken their cash out (moved investments) months ago, they'd be much better off today."

Miller and guests at the hearing advocated lower-risk savings plans, perhaps run by the government, that guarantee a more modest rate of return. Leonard wasn't so keen on a heavier hand from the government, which already runs one retirement plan - Social Security. "The return on that is only about 1 or 2 percent," he says.

Leonard's advice: Convert your 401(k) to an IRA, which gives you greater control over how the money is invested. Keep contributing to it, because IRAs are tax deferred. If you want the security of a guaranteed return, consider fixed-rate annuities, which offer a smaller payoff but less risk.

Most of all, he says, educate yourself. We caught up with Leonard by phone from Disney World with his three children. "People spend more time planning their vacation each year than they do thinking about their retirement investment options," he said. "Educate yourself about what your choices are. Americans think the only place they can invest in the market, when that's really the only place they can risk their money."

What do you think? Would you prefer the guaranteed return of a Miller-type government plan? Or do you believe the market will rebound to a point where 401(k) plans are worthy again?


Tom Burger said...

"Miller and guests at the hearing advocated lower-risk savings plans, perhaps run by the government"

This seems to be the Dems answer to everything - "run by the government." Unfortunately, government has a history of poor performance. I would much prefer making my own determinations, even with higher risk.

Government does nothing well.

Anonymous said...

I would like the option of converting my 401(k) to an IRA without the horrible penalities it would incur.

Anonymous said...

I was always made fun of for not contributing much to my 401K. Everytime I left a job I liquidated any balances and got cash out. Now I am happy that I did that. There are many others places to invest other than the market.

Anonymous said...

Saving for retirement should be a 30 or 40 year process. Anybody that is down on 401(k)s or doesn't contribute to one because of a few bad quarters is an idiot.

Anonymous said...

Points well taken. I recently checked my 401K statement – my balance was down to 749K from just under 1.3MM only 18 months ago. Literally, I feel robbed by the system. Should I leave the remaining balance in the 401K or transfer to another IRA? Any advice?

Anonymous said...

If the crook, liar and thief Miller is so corcerne why in the h---are he and his sorry brethern NOT included in the sorry laws the con-artists make for the rest of us slaves? NO NO NO they are much too royal for the ponsi schemes Social Security and lousy Mediscare for they have their own million dollar pensions and Rolls Royce health care plans WHILE WE HAVE THE HORSE AND BUGGY PLANS! NOT ONLY ARE THEY STUPID CROOKS BUT HYPOCRITES! HYPOCRITES! HYPOCRITES!WE NEED A REVOLUTION RIGHT NOW!

Anonymous said...

Even though your 401K statement's balance is showing lower numbers, you haven't oficially lost any money until you withdraw those funds. As long as you keep the money in the account, you don't just have a balance you have SHARES. The value of the shares has dropped, but you still hold the same number of shares as before - and even get MORE shares for your money while the value is down. Pulling your money out now and locking in your losses is foolish. The market WILL rebound.

Anonymous said...

“We are realizing that Wall Street’s promises of predictable benefits and peace of mind throughout retirement was nothing more than a con job that would make Bernie Madoff proud.”

Anyone that has ever signed up for a 401(k) was given a choice of how to invest within that plan. If you chose high risk funds, that's what you got, HIGH RISK. All most, if not every 401(k) plan has a low risk guaranteed fund for those that can't stomach the ups and downs of the high risk market.

If the markets are down, all you have to do is move your money to the guaranteed fund untill the markets rebound.

These are the facts that the democrats don't want people to know so they can force everyone to invest in a government mandated savings plan.

Wall Street has never promised predictable rates of return on investments. This is just a sad attempt of someone trying to blame someone else for thier own poor choices.

All the democrats want to do is find more and more ways to force you to give up your hard earned money.

Anonymous said...

This should NOT be a politial issue. It is just further evidence of the push to become a 'nanny state' where government sticks their ineffective hands more an more pots and people are allowed to take no risk becasue we are too stupid. 401(k)s are none of their business - they all have safer options than just stocks/funds. The only government involvment I think is possibly warranted is to ensure that employees are educated.

Anonymous said...


Maybe you would fare better someplace like say...Somalia.

No government
Unregulated free market
Everyone's got a gun

A libertarian paradise!!

Anonymous said...

i have yet to see the government run anything well(i.e.)medicare,medicaid,social security,prescription drug plan.why would anybody trust them to invest your money?once it gets into the system it becomes part of the general fund and then it's a new cash cow for them to play with.

Anonymous said...

I know with my IRA and other investments I have options to choose HIGH and LOW risk funds. They are pretty clear that you can lose money. They are pretty clear about what high risk means. The downside to IRA's is that you can save less money tax free than with 401K's, and I guess you might not get matching funds.

The system isn't broke- people just don't understand (or don't want to understand) the concept of risk and reward. If you want great returns, you need to take high risks. Which can yield giant losses.

Also, perhaps the real answer is that most of us simply do not have skills worth the standard of living we think we are owed, and that perhaps the concept of a comfy retirement at 65 with a condo on the golf course and the best health care money can buy may be out of reach to the vast majority of Americans. There is NO WAY the government can give us the lifestyle we think we deserve.

You need to be repsonsible for your own retirement, saving your own money in a vehicle with a level of risk that you can tolerate. Nobody forces you to put money in a 401K. Probably most of the losses will be recovered within 5-10 years. If not sooner....

Anonymous said...

Remember that 401(k) plans, as such, are not retirement plans. That's not the way Congress designed them. They are simply tax-deferred investment plans to which you employer may contribute, but is not legally required to. You can invest for a retirement objective, or for other purposes.

Typically, 401(k) plans offer a range of investment options, from high risk to low risk. Although your employer is required to invest your account for you, most employees pick and choose their own investments, sometimes wisely but many times unwisely.

If you make good asset allocation choices in light of your objectives for the account and rebalance regularly, you should not be disappointed. Your account will do what it is supposed to do.

In terms of having a variety of investment choices throughout the risk-return range, you're generally not going to be any better off with an IRA than in a 401(k) plan, and in the 401(k) you may receive employer contributions not available to you in the IRA. If you make the right choice in an IRA, you might be able to lower your investment costs if you know what you are doing.

The stock market has tanked before. It will recover and it will tank again, recover, and so on. That's not news. Now if it never tanked, that would be news.

Should you leave your money in your 401(k) or (if possible) take it out and put it in an IRA? That question is simply not answerable in the abstract. What investment options to you have in your 401(k) plan? What are their costs? If you've got a good range of options and the costs are reasonable, there's no reason not to stay there. Again, the vehicle, IRA or 401(k), is not important in this debate. What is important are your investment options and how you choose to use them.

Anonymous said...

Wasn't it just a couple of years ago that the Bush Administration wanted to invest part of our Social Security in the stock market? Wonder what the outcry would be if that had happened?

Anonymous said...

More 'Givernment' involved is not needed. The President just flushed a Trillion down the toilet and now says the Toilets clogged.

The 'Givernment' is just disappointed that when they finally had a chance to redistribute their 401K bucket of cash it was leaking a few trillion.

Now they want to make sure they control the next bucket of Ca$h.

Anonymous said...

Study the length, history and severity of secular bear markets:

Educate yourself and don't listen to everything the CFA's, suze orman or the motley fool tells you.

And hold on as this will probably be the longest bear market in the history of the american financial system... (IMHO)

Anonymous said...

No one is being conned... if you can't figure out that you need to diversify your holdings as you age and move away from risk the closer you get to retirement than you miss out on the gains. Anyone who doesn't contribute to a 401k is missing free money from their employers.

Probably the only area in which government should be involved in is allocating money for the clueless...40% stocks, 60% bonds etc

Anonymous said...

I wish the gov't would step in and pass some regulations that require 401k plans to list the fees charged for each fund.

Anonymous said...

I have ALWAYS considered my 401K a gamble. Just like S.S. I realise it may not be there when my time to retire comes. Heck you're not promised tommorrow,NOTHING is for sure! We ALL (at least most of us)know there HAS to be way UP and way DOWN periods in the stock market. Pulling your investment now is foolish. It starts a chain reaction that ultimately causes it to plunge even further for everyone else. Hang in there!

Anonymous said...

401K savings allows you to choose to put your money into stocks or bonds. Most people choose stock because the rate of return is higher (usually) but things have changed. Most stocks seem to be drifting south every day may never return to the value they were at before. If you're tired of seeing red and watching your investments blead then you can trade them in for bonds which are much more stable. If you are optimistic, then keep everything in stock and stop worrying, otherwise switch to something more secure. Some portfolios may not recover for many months, maybe years, or maybe never, at least the rate of return on government bonds is safe.

Greg said...

Remember Bush's idea of private accounts as a replacement for social security? Doesn't seem like such a good idea anymore, does it?

Anonymous said...

Anonymous said...
Wasn't it just a couple of years ago that the Bush Administration wanted to invest part of our Social Security in the stock market? Wonder what the outcry would be if that had happened?

February 25, 2009 1:23 PM

No, what the Bush Administration proposed was that the taxpayer should be allowed to take part(not all)of thier S.S. withholdings and invest them in the way they saw fit. If someone didn't want to do that, they would not be forced to.

What could possibly be the downside to that.

Anonymous said...

THe problem is not the 401k program, it's how people invest their money. Most people have an option to be conservative or take more risk. I put almost none in stocks, and still have most of my savings, plus the company match.

When I was young (long ago) the only people who bought stocks were rich people who could afford to lose the money or ride out the storm. People today need to learn that lesson. 401k program is (was) the best deal around for employees as long as they din't get greedy.

Have we learned from this, or when the market rebounds, will we again stand around at the water cooler and brag about our international funds? I know it's eye-opening to younger people, but there is no free lunch.....despite what your parents told you.

Anonymous said...

The people whining about these losses are the same people who, had they profited greatly, would be congratulating no one but themselves.

Anonymous said...

Had I been 55 ten years ago I wouldn't be in very good shape right now (at age 65), because I would get no more out than I put in - even with conservative investments and matching contributions. I would have been better off putting that money into CD's or a simple savings account. So since I'm 55 now... maybe it's a good time to watch for the market to bottom and then get aggressive in an attempt to gain the lost 10 years while plus keep pace with the next 10.

Anonymous said...

The idea behind the 401K (and IRA) was that it would be tax-deferred and that when you retired and withdrew your "savings", it would be AT A LOWER TAX RATE.

Only problem is, it seems, there is no GUARANTEE that you will be in a LOWER tax rate when you retire.

At the rate we are going now, moving to a non-deferred tax account (like Roth IRAs) may be the smart thing to do.

Just go ahead and take those tax hits now while they are low, because who knows how high tax rates will be in 20 years.

As far as the alleged "returns" go, I knew they were BS from the beginning.

Every d-amned company I've ever worked for showed projections that I'd have millions of dollars (using the old 12% "historical return" rules of S&P 500) in 20 or 30 years.





I entered the job market in the late 1970's when these things were first getting started and I KNEW they were just a scam to get companies off the hook for PENSIONS.

PENSIONS were great. Guaranteed income for life. The only thing left like that for most people is social security.

Hang on to SSI for dear life or you will probably be eating out of a dumpster when you retire.

I've been saving about 30 years now and have another 15 to go to reach "full" retirement age.

But it seems that every time I get a decent amount saved (say about $200K or so) some economic disaster hits and sets me back a decade, so I'm about where I was ten years ago (except I don't have an extra ten to make up that loss).

Sure, I'll retire with a few hundred extra bucks income a month off this, but not nearly enough to live on.

Basically, I can see that my future has been screwed.

I can survive when I retire, but it won't be living in the U.S., that's for sure.

Anonymous said...

What no one with a 401(k) plan, mutual fund or stock plans wants is these banks and auto companies to go bankrupt. Your plans own shares in these companies. You may be down now w/ bank stock riding at $3-5 a share. But it can and probably will go back up to $20-$40 a share over the next 5 years or so. That means your holdings and values will go back up. These companies go under and your loss is permanent.

As for all the folks down talking the government's management ability, Wall Street and the banks are making them look like stars!

Anonymous said...

The employee should bare some of the blame. I've been very conservative with my 401k. It has earned earned 5-6% each year. Yes, even this past year.

Anonymous said...

Outsourcing the management of our retirement savings to the government is a mistake. The author notes that we've already done this in one instance--Social Security--and the results are manifest. We get virtually no return on our investment. Anyone who invests 15 minutes in listening to our congressional reprentatives question Messrs. Bernanke and Geithner would quickly realize that these are not the people (the congressmen and women) who we want making financial decisions for us.

The real issue is one of accountability, both individually and for our employers. Employers must be held accountable for carefully selecting investment options available in retirement plans and then closely monitoring them. They must also do a far better job of managing the costs (which are generally passed on to participants).

And as individuals, we must step up to the plate and begin accepting responsibility for our own financial futures. We need to research our investment options, determine our risk tolerance, and make some informed choices regarding our investments. We cannot pick our funds at the enrollment meeting, then forget about them for 10 years and wonder why we've lost half our account balance. Blaming others for our own intellectual laziness is not a coherent strategy for building retirement savings.

Hold ourselves and our employers accountable, and the system can (and does) work. Pointing fingers and expecting the government to solve the problem only leads to a different set of problems, with a much higher price tag for all of us.

Anonymous said...

They are telling us now what I have known for a DECADE. Stock brokers and investment firms get paid based on 1) how much money you have with them and 2) how much of that money you move from A to B. They get paid regardless of you making money or not. They kow this and for decades they have concocted stories about college savings and scaring people off insinuating your life will be miserable if you don't pump as much as you can in their stocks, funds, and college savings plans. Now it is payback time for all Americans. I hope everyone now realizes that stock brokers are nothing but used-car salesmen trying to make the most money out of your money - period. Good luck to everyone out there...

Anonymous said...

Anyone who thinks pensions are great is a moron. Pensions are unsustainable - which is why they're all going broke.

The 401k is a brilliant device. However, it would be better to allow your employer to contribute directly to your IRA with the same tax structure instead of a limited-fund 401k.

As for Miller, please. Whenever a far-left politician thinks he can manage your money better than you can, he's trying to scam you. When you can name one - just one - well-run federal government program, come back to me and talk about competence.

And, BTW, if you aren't invested in inflation protected securities, you might want to research them. You're about to start seeing hyperinflation in this country.

Anonymous said...

Good wonder this guy is proposing the government manage 401k plans. Judging by some of these posts, people do not have enough sense to run lemonade stand much less their 401k.

Anonymous said...

Pulling your money from an employer 401(k) plan to an IRA is generally a BAD idea. Sure, you'll get more choices, but you'll also PAY MORE FEES.

Funds are like other commodities: employer-sponsored funds are purchased wholesale and have less fees than the retail products that are available through IRAs.

Anonymous said...

401Ks are a good plan. 100% profit due to company match on day one is the best deal you can get this side of Vegas. Your allocation, however needs to change as you get older. I'm 61 and my 401K is as high today as it's ever been.