Your Money Belongs to the Fire

401(k) plans are being scrutinized like a disorderly child in the principal's office. Similar to the child in the principal's office, nobody knows exactly what is being said, but everyone knows he is in there. Some very smart people think that the 401(k) needs serious reform, with the accent on the word reform. There are two camps of thought, one saying that the 401(k) is the most powerful and responsible way of allowing a business-friendly tax deferral for a certain amount of income every year. The other says that with 64 year olds losing 25-40% of their retirement accounts last year (2008), in reasonably conservative investment allocations, is reason enough to sell 401(k) down the proverbial river.

The question you might ask is why would I even broach the subject of 401(k) at a time of so much bigger issues? Well if you look closer at the 401(k) you will see that it is very much intertwined with the economic crisis and thus, the stimulus bill. If you want to know how important this issue is to our new President you should look no further than his Chief of Staff, Mr. Rahm Emanuel, the cell phone-hogging, grinning Illinois liberal. He felt it very necessary to write a nice pithy op-ed in the Wall Street Journal back in September 2007. You can see this full article at: <http://online.wsj.com/article/SB118964627975525938.html?mod=googlenews_wsj> I believe that he fully intends to make good on his promises therein.

Furthermore, Obama is very likely to agree with the precepts of Emanuel's plan to "universalize" savings. Remember, government is here to cure you of the ills that you can not figure out for yourself (I apologize for the cynicism). Citing high expense ratios of mutual funds, Emanuel argued that government can make it much less expensive by universalizing the savings to all workers.

Later, when the economic crisis was starting to really rear its ugly head, on October 22, 2008 Joseph Hacker, PhD. testified before the House about the apparent peril that the 401(k) plan has and why it is not a sustainable method of retirement savings. http://edlabor.house.gov/testimony/2008-10-22-JacobHacker.pdf

Hacker cites that the risk has been shifted onto individuals' shoulders to a degree that they should not have to sustain. I disagree, wholeheartedly. While making decisions for 401(k) navigation is not easy, it is something that I can do provided with the tools that plans currently offer. I do not subscribe to the paternalistic view that either my government or my company or both, should have to continue to provide for me beyond my working age. I think it is quite doable to save and retain the amount of money to last me through a retirement, albeit with planning and foresight.

Some will point out to me that there are many others who are not as sophisticated and do not understand how to invest. Well, now there is a QDIA, an investment that will, if the person just defers up to the recommended amount most likely, provide a conservative, inflation beating return. There is no brains involved in QDIAs. Just fill out the enrollment form and leave the investment section blank. There needs to be lines in the sand where we say, OK - "I the individual control this." I believe retirement accounts to be ultimately an individually driven, conscious decision to opt-in.

You could always work until you die, if you wanted to. But most don't, most want to retire at some point. I certainly do, although the time I retire is far off. My gains and losses are only on paper at this point. Until I take my first distribution, hopefully around the minimum age of 59-1/2 but if I am like most Americans closer to 65, those gains and losses stay on paper. I must get more conservative as time goes on. Go more fixed, and as I near retirement be all about capital preservation and inflation beating.

The problem I have with the universalization is ethical, or at least value based in that, I must ask the question why Government is going to tell me how to save (or not save) my money? Then they will also tell companies to pay up 1% into these plans. Their reasoning is that because of how expensive it is to set up a 401(k) plan (it really isn't) the Universal Savings Account (USA) will save small companies money. This is hyper-bologna on its face because the tax efficiency to businesses and people are an active stimulus on business small and large. The costs and expenses of running a plan are a percentage of the benefit and not the other way around. I should know, I administer a 401(k) plan currently for a private company. For a good primer please refer to: http://en.wikipedia.org/wiki/401(k)

401(k) was set up originally as a tax break for the wealthy. Very quickly it was found to be a great way of saving for individuals of many economic levels and more importantly, relieved the burden of corporations in having to provide pension plans based on actuarial analysis. Keeping these plans funded for a struggling company was and is very difficult and because of that fact, defined benefit plans (pensions) are progressively a dying breed. Indeed, pension plans can strangle a doddering company.

As you can see we are entering hostile, dangerous and uncharted waters in these times. There is much more to talk about, so I will definitely see you tomorrow... Please see below for a preview of tomorrow's post:


Tomorrow's Discussion - Why Judd Gregg said "no go" to Obama after asking for the job and why the Census could be irreparably Destroyed

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