Ted Benna, knew the 401(k) was going to be big, but he states that he never imagined that it would become the primary way people would be accumulating money for retirement. That was never the intention. All was looking good with two bull-market runs in the 1980s and 1990s pushing 401(k) accounts higher. Then two recessions in the 2000s erased those gains and prompted very serious second thoughts from some early 401(k) champions, like Ted Beena.
It is often stated that the 401(k) came about by ‘accident.’ But considering how big Wall Street won when a gazillion baby boomers put trillions of dollars into a poker game they knew nothing about, considering how big the government won by making themselves a partner in the growth of our retirement savings for 30 or more years, I must say, “I don’t believe it!” Think about it, when we had pensions the government did not get a cut of our pension fund growth! But now they do. Yes, approximately 30% of your retirement savings IS NOT YOURS. It is Uncle Sam’s. Their share is called income tax. Yes, our old pension income was also taxable, BUT… they did not share in the growth of that money for all the years we worked.
Ted Beena, in many ways the ‘father’ of the 401(k). He as well as many early backers of the 401(k) say, “The 401(k) was not designed to be a primary retirement tool” and further acknowledges, “we used forecasts that were overly optimistic in order to sell the plan in its early days.” Others say, “the proliferation of 401(k) plans has exposed workers to big drops in the stock market and high fees from Wall Street money managers.” Beena says, the 401(k) helped open the door even wider, for Wall Street to make even more money than they were already making. In other words, the biggest effect the 401(k) has had is ‘sweetening the pot’ for the real players.
Many financial experts, those that are not working for Wall Street agree, “it was not a good idea and it is not working well.” The Economic Policy Institute recently declared 401(k)s “a poor substitute” for the defined benefit pension plans workers used to count on, which provided income to live on throughout their retirement years. The fact is, 401(k)s are far less safe than old school pensions because they rise and fall with financial markets. The risk of having enough money to live on is now borne by the retiree. A modern stress most baby boomers would have preferred to avoid. Many Americans are more worried about running out of money more than they are of death.
The retirement revolution began in 1978, when Congress decided to alter the tax code with the Revenue Act. Companies pretty quickly jumped on the band wagon because it was cheaper and it put the brunt of the responsibility on the worker. It was sold pretty hard and employees were attracted to the new strategy for retirement, promoted as a better way. It was touted as a savings vehicle that, they were told, could put them in a better position to retire. Savings, by definition does not include ‘loss’. In reality, the 401(k) was a risk vehicle sold as a savings plan for retirement. Even the employer match you paid for. You worked for it. The 401(k) is still being ‘sold’ as the best way to ‘save’ for retirement. Understanding the difference between saving and risk is HUGE. It is a make or break for many retirees.
“The great lie is that the 401(k) was capable of replacing the old system of pensions,” former American Society of Pension Actuaries head Gerald Facciani tells The Journal. “It was oversold.” The harrowing truth is that most retirees have little clue about how to convert their nest egg into income in any efficient and cost effective way. Even scarier than that, neither do many of the financial professionals they are relying on to help.