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Opinion
The failure of our 401(k)s
The accounts were never meant to entirely fund retirements, and the =
financial crisis has hit many hard.
Tim Rutten

January 10, 2009

As President-elect Barack Obama and lawmakers attempt to reach agreement =
on what sort of stimulus package has the best chance of arresting =
America's economic free fall, the enormity of the immediate crisis =
naturally pushes any issue that can be deferred to the margin.

As a consequence, there's been little discussion of the way in which =
this economic implosion has exposed the utter failure of the =
now-ubiquitous 401(k) retirement accounts. In fact, the entire 401(k) =
system looks increasingly like the sort of bait-and-switch con relished =
by the Bernie Madoff's of the world.

As Robyn Credico, a leading consultant on pensions, told the Wall Street =
Journal this week, "This is the biggest test that the 401(k) plan has =
seen to date, and it has failed."

Here's the problem: In 1978, when Congress amended the Internal Revenue =
Code to include Section 401(k), it envisioned the provision mainly as a =
way for workers to supplement their companies' traditional =
defined-benefit pension plans and Social Security. (Secondarily, it also =
was a nifty hideaway where highly paid executives could shelter income =
from taxes.)

Nobody at the time envisioned the 401(k) as something on which people =
would rely for their retirement.

But in the years that followed, more and more employers began to look =
for ways to get out of funding the pension and health plans that, up to =
then, had been regarded as part of the responsible capitalist social =
contract. Two innovations in political ideology -- one on the left and =
one on the right -- provided superb cover for the companies' greed.

For the Democrats, "choice" became a mantra, and the 401(k) suddenly =
became a mechanism through which working people could "choose" how to =
fund and manage their own retirement. On the Republican side, the notion =
of "an ownership society" came into vogue. There, the theory was that =
giving working people an ownership interest in the equities market would =
promote greater personal responsibility and make people better citizens.

Nobody bothered to ask employees whether they wanted to swap their =
pensions for choice or ownership, nor did anybody stop to notice that =
very few people are suited by background, ability or temperament to =
actively manage investments.

If there is such a thing as lethal social poison, it is avarice cloaked =
in political piety.

Companies seized the opportunity to abandon their defined-benefit =
pension plans. Today, more than 60% of all U.S. workers rely on 401(k)s =
as their primary retirement fund. They're not eager to "choose" their =
own retirement program, nor are they enthusiastic "owners" of American =
business. They're draftees. Essentially, millions of us have been =
conscripted into the equities markets, where we have helped fuel stock =
prices and provided a bonanza for the financial services companies that =
manage and sell investment funds.

The problem is that, since the markets' peak in October 2007, our =
401(k)s have lost a collective $1 trillion in value. That's fully a =
third of the value of all 401(k)s. The picture is actually worse than =
that because another $1 trillion has been stripped from people who lost =
or changed jobs and rolled their 401(k)s into individual retirement =
accounts.

Those are the most obvious losses. Look a little closer and the picture =
is even bleaker: According to a study by the American Assn. of Retired =
People, 20% of American workers have been forced to stop contributing to =
their 401(k)s and individual retirement accounts by economic hardship.

Millions of others have been forced to make early, so-called hardship =
withdrawals from their accounts because they've lost their jobs or =
healthcare or are facing foreclosure. The 10% early withdrawal penalty =
is a catastrophic expense in such a context. Millions more have taken =
loans from their 401(k)s to meet pressing debts or expenses, like =
college tuitions. Not only are those workers missing out on any =
available appreciation in their investment, but -- in a time of rising =
unemployment -- they're running a terrible risk. If you lose your job, =
you must immediately repay the entire balance on any outstanding loan =
from your 401(k). If you can't, you're liable not only for income tax on =
the unpaid balance but also the additional 10% penalty for early =
withdrawal from the 401(k).

With many economists predicting unemployment at 9% to 10% by the end of =
2009 -- welcome to hard times.

Finally, consider this: The collapse of the 401(k) experiment is =
occurring just as the baby boom generation begins to retire in =
significant numbers. Welcome to hard times, indeed.

timothy.rutten at latimes.com