401ks Are A Scam? They're The Worst Scam?

Ok, here we go.

So that's quite a bit to chew on even if it isn't a new idea. Is he right? Some, yes. Is he wrong? Some, yes. That makes for a great topic to explore. 

Generally speaking, pensions are less viable than they used to be, the math doesn't work as well. Problems have been long in the making and seem to have gotten worse. About 40 years ago employers started to pivot away from pensions to 401k, they started to pivot away from defined benefit plans to defined contribution plans. There are fewer pensions and many of the ones left are in trouble for being underfunded. 

The only pension I am remotely close to is the Arizona Public Safety Personnel Retirement System. It's been underfunded for a long time, I gave my two cents about interest rates and expected returns at the Arizona Fire Chief Association meeting seven or eight years ago and while it is still underfunded, I don't know if it has improved or gotten worse. 

The concept of pensions is that they provide a security net to retired workers. Workers are not on the hook for managing their portfolios, don't have to manage withdrawal rates and have some security that their monthly check is what it is, maybe there's a COLA or maybe not but no surprises.

On the downside, pensions can go bust and of course you don't have control over the money or any say in how it is managed. The control issue won't matter at all to some but be very high on the priority list for others. It would be high on my priority list. When pensions go bust, pensioners can get some help from the Pension Benefit Guarantee Corporation but that is typically not a full payout, pensioners are taking hit if it gets to that point. 

A 401k does shift the burden to the employee. The contribution match certainly is a nice benefit but the responsibility to enroll is usually on the employee (or they have to stay enrolled in circumstances where companies auto enroll), make investment decisions perhaps with no understanding of what to do, have the wherewithal to avoid catastrophic mistakes during their accumulation phase, not make costly tax mistakes rolling it over when they retire, manage their withdrawals intelligently, understand how to manage the assets once retired versus just buying the same 2-4 mutual funds every paycheck while still working. Some portion of this population will seek some form of help but plenty never will. 

With pensions it takes many years to vest, 30 years is fairly typical although it is usually 20 in the fire service. It has become exceedingly rare now for people to stay at one company for anywhere near 30 years. 401ks are portable, you just rollover what you've accumulated when you move to the next job. Portability is an advantage over pensions.

Was it a money grab for Wall Street? Did somehow the financial services industry lobby to get the law that created the 401k passed? And then somehow push companies to do this? As I understand it, the law, law might be the wrong word, that allowed the 401k plan to happen was not about 401ks, that somehow there was just a blurb or small piece the dominoed into becoming the 401k. If correct, that argues no. Where 401ks are cheaper for employers than pensions, an investment bank advising companies to do this argues that yes, the IBs could see the potential benefit for mutual fund companies. Intended or not, 401k money has radically altered the mutual fund landscape, bringing trillions in managed assets that generate fees. Another possible argument in favor of being an orchestrated money grab is with all the terrible conflicts of interest that have emerged in recent years related to so many things, health care and the food industry just to name a couple, it doesn't make sense to me that behavior has changed just that it is now harder to hide conflicted behavior. That last one is certainly biased so fee free to dismiss out of hand. 

If we concede it was an orchestrated money grab, ok, that was 40+ years ago and if what you have is a 401k then that is what you have to make work. If the Joe Moglia quote that I cite all the time about no one caring more about your retirement than you resonates then it is up to you to make the 401k work. Spend a little time learning or get some help like maybe HR has something in place for employees to get input from professionals. 

I am always going to prefer the path where I play a role in determining my own outcome but I readily accept that a huge portion, maybe the majority, will retire with little more than an emergency fund built up in their 401ks. They were essentially left to sink or swim on their own. If correct then there will be some sort of retirement crisis even if I am not exactly sure what that means or will look like. 

We know that average balances are horribly low. Numbers vary but we all know the numbers in aggregate are too low to provide sustainable retirements. Is that unfair? Probably, but <harshness coming> life is often unfair and it is up to us to solve our own problems. No one will care more about your problem than you.

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