Alternative to 401(k)s tax trap in disguise

by Stephen Butler

Barbarians are at the gate. Time magazine last week had a cover article called "Retire the 401(k)" wherein they cite that "the average balance is $45,519." How stupid do they think we are?

This misinformation would be laughable if it wasn't part of a growing insurgency seriously bent on doing away with the favorable tax treatment for 401(k) plans. What they want to replace it with is something that seizes the current tax savings and applies them to the funding of a national defined benefit plan (a plan that guarantees a specific retirement benefit for each year of employment.) These are the plans offering hopeless expectations that have bankrupted the auto industry and that will soon be gutting the budgets of state and local governments.

As for that $45,519? It is the average balance which means it includes the accounts of brand new participants who have next to nothing. How about the balance that counts, the one for participants in their 60s who are about to retire? That average balance is $150,000.

But wait, that's not all. For participants with $150,000 in their current 401(k), that participant has another $150,000 in roll-over Individual Retirement Accounts or 401(k) accounts left at a succession of previous employers. Widely-touted, misleading statistics ignore the accumulation of IRA money that resulted from 401(k) accumulations, because this figure can't be determined from available government information. When we factor in all that the average 401(k) participant can accomplish, 30 years of 401(k) contributions add up to $300,000. Participants got that far with nothing more than $200 per month invested in stock funds.

The Time article points out that the average employee changes jobs every seven years. Assuming a 40-year career with six job changes, third-grade arithmetic tells us that the average employee might be accumulating that average $43,519 and rolling it over about six times during a career. Ignoring any further earnings once the money is rolled, the total of the roll-overs alone is about $250,000, not far from my $300,000 guesstimate.

An employee's 401(k), then, can take credit for one or more of the following: 1) the current plan, 2) previous 401(k) money left at former employers, and 3) roll-over IRAs. According to McKinsey and company, anyone in their 60s has five times more money than would have been their retirement nest-egg of the pre-401(k) era. (a McKinsey statistic.) Why? Because average job tenure has always been seven years, and retirement plans were operated with vesting schedules that denied any benefit at all to those who left before 10 years.

Moreover, 99 percent of all Americans work for companies with less than 500 employees. Most small companies never had any retirement plan, so a voluntary 401(k) opportunity was a godsend.

The 401(k) plan is an accident of legislative history. No one predicted the amazing success of today's $3 trillion testimonial to self-discipline and a confidence in the markets. Any effort to dismantle this engine and replace it with a dysfunctional "promise" of guaranteed retirement incomes is hopelessly misguided.

Times' article and others like it are the public relations products of an ill-advised self-serving scheme out of Boston that would put a handful of academics in charge of the nation's retirement program.

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