So, there I was last Thursday on WNYC radio, the public broadcasting station of New York City, where I was rebutting the recent Time magazine article that called for "retiring the 401(k)" because of the latter's apparent failure. I can't beat these people off with a stick. On Brian Lehrer's show, I was pitted against Stephen Gandel, the author of the cover article that was riddled with errors and half truths.
If what Gandel says is true, then "both sides of the aisle" in Congress are inclined to want to dump the 401(k) and substitute a program run by one giant private company that would, (get this) take 5 percent per year of everyone's salary and then guarantee them an income for the rest of their lives equal to 26 percent of their final salary.
This program would not be a government program, but would be run by some combination of insurance companies with oversight by the government. These are the same insurance companies, presumably, that have recently been scuttling like cockroaches to try to buy little regional banks so they could all qualify for the Troubled Asset Relief Program and avoid bankruptcy.
In the middle of that Time article another glaring misstatement purports to illustrate the failure of 401(k) plans. A hypothetical worker makes $100,000 per year for 30 years and saves 5 percent of their pay. The article goes on to say, ...the market does pretty well, boosting her diversified portfolio 5 percent a year on average. When she retires, our worker will have $332,194 in her account." Not enough to retire, obviously.
Excuse me, but there has never been any 30-year period where a diversified portfolio has averaged as little as 5 percent. A balanced portfolio of stocks and bonds would have averaged 8 percent, and stocks alone would have been about 10 percent. Even recent history, taking just the 15-year period from 1994 to the present, with its recent 10-year flat spot, would have generated an average 7 percent return.
A reasonable 30-year assumption of an 8 percent return would have generated over $800,000 in this example, an amount of money that could dwarf what would have been the proposed $26,000 or 26 percent of final pay lifetime annuity. Annuities are fine if you live a long time, but you lose everything if you retire and get hit by a bus a few days later. It doesn't surprise me that the financial services industry is a primary instigator of what would be yet another feeding trough. My family and I would elect to make do with the $800,000 any day over some promise by the insurance industry to pay $26,000 per year until death prompted us to part.
Last Thursday's Wall Street Journal reported that the 401(k) accounts now stood at $2.7 trillion, and that Individual Retirement Accounts (formed mainly by 401(k) roll-overs) stood at $3.7 trillion. As I said on the radio, how can you fault a socio-economic mechanism that has generated so much value for people on a voluntary basis?
The New York Times reported this week that a woman retiring from Delphi, the GM parts supplier was leaving after 29 years and 11 months. Instead of what would have been a $2,200 per month pension benefit one month later, she will now receive slightly more than $200 per month. These long-term promises are loose cannons at best and fundamentally unsustainable at worst. This is no time to start pandering to those who lack the discipline needed to take advantage of the 401(k) wealth-building opportunity.