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And now for something radical and extreme: Get rid of the 401K

Last weekend, I got polled.  Er, by Harris, the polling company.  I’ve been getting a lot of that lately.  Maybe being a middle class suburbanite independent Democrat-in-exile in NJ means I have finally arrived but it’s unlikely I fit their notions of the typical polling subject.  Well, not after this poll anyway.

The first question was about my attitudes towards the military.  Would I suggest the military to a young person?  As it happens, I’m a military brat, my family has a long tradition of joining up and I have current family members who are career military.  So, while a military career is not for everyone and it’s certainly more dangerous than it was 10 years ago, I wouldn’t rule it out for someone who doesn’t know what they want to do as a career.

That first answer seemed to have put me, a lifelong liberal, on the Tea Party branch of the decision tree.  Many of the other questions after that point were kind of insulting to the intelligence.  For instance, is someone arrested for a crime entitled to speak to an attorney?  Jeez, all those years of Dragnet should have sunk in by now.  Of course they are.  What about if the crime is serious or particularly heinous?  Um, yeah, that’s when you are most in need of one to defend you.  What about if it’s a TERRORIST???  Do they get to speak to an attorney on the government’s dime if they are accused of TERRORISM?  Well, Timothy McVeigh went through the process, was represented, had a fair trial and got what was coming to him.  I think the system can work.  Let’s not start making exceptions for alleged terrorists.

Anyway, that wasn’t the section that tripped my trigger.  No, the one that got to me was about 401Ks.  I don’t know what our brilliant braintrusts in the Democratic party are up to but if they are the ones who are suggesting that it would be a nifty keen idea to expand the 401K system, we might as well all just get used to an America whose salad days are over.  The poll question was something like, “Would you approve or disapprove of expanding the 401k system to workers whose employers would not be required to make a matching contribution?”

That’s a weird question for so many reasons.  The first one is, if you allow *some* employers to opt out of making contributions, wouldn’t you just give the rest of them justification for also opting out?  And what about the Enron-esque employers who match with stock?  But I digress.  Because the real employment trend is to make everyone contractors, freeing the corporation from actually employing and being responsible for the lives of the people who work for them.  So, maybe that’s where this question is coming from.  Say you are now a contractor, forced to go through some rent collecting middle man who acts as an intermediary between the corporate entity and your paycheck.  Now YOU are responsible for your retirement accounts, not the corporate entity.  So, does the old corporation have to match your 401k contributions?  Something to think about as the traditional bonds between employer and employee are redefined.

But that’s not why the 401K needs to go.  Now, I am not a financial wizard.  Far from it.  If you want that kind of expertise, check out Dakinikat’s posts, or Baseline Scenario or Naked Capitalism.  No, I am just Jane Bagodonuts from the burbs.  Nevertheless, blogging allows me to expound on any subject I like or don’t like.  And I have particular dislike for my 401k, may it grow and prosper.  Here are my reasons from a liberal perspective:

1.) It’s a Ponzi scheme.  Yep.  Unlike Social Security, which we are all required to participate in and which has actuarial expertise built into it and is a fall back retirement insurance policy, the 401k is for suckers.  It relies on lots of people dumping their investment dollars into pumping up the price of stocks.  When the baby boom generation starts to retire in earnest, it’s going to want to cash in, leaving us with funds with diminishing value.  UNLESS we get some other poor schmos who don’t have employer contributions to send their money to our 401Ks in return.

2.) Wall Street thinks the money in your 401K is there for them to use as gambling chips in some global game of roulette.   We saw this happen in 2008 when the subprime mortgage market collapsed but it’s not limited to the bond market.  Oh, sure, the stock market is more highly regulated but when the bottom fell out of the mezzanine subprime tranche CDO’s it took everything else with it.  Besides, who has time to monitor their 401K’s at every minute of the day?  Most of us follow the Ron Popeill method of financial investment: set it and forget it. Turning a bunch of naive amateurs into financial planners of their old age lifestyles has turned into a windfall for the predators on Wall Street.  What we don’t know can hurt us and we don’t know what they’re up to.

3.) Wall Street and the financial sector in general is like the Wild West right now.  Until there is more oversight and regulation, you just can’t trust them.  The constant infusion of cash to these testosterone poisoned, self centered, highly overrated gamblers who manage our money only encourages more risk taking and future financial collapses.

4.) 401Ks lead to employees betting against themselves.  The shareholder is the emperor.  The money we put into these funds increase when employers see staff as unattractive drags on the bottom line.  I’ve always preferred the word Personnel to Human Resources because it acknowledges that there are persons actually doing the work and that we are not just variable costs to be minimized for the benefit of the bonus class.  Nevertheless, when corporations cut staff, the stock goes up and everyone starts dreaming of their new retirement condo in Mexico.  That is, iff they have the privilege of actually retiring.

5.) 401ks lead to less innovation.  Well, if you have to cut staff to assuage the quarterly panic attacks of the shareholders, you don’t have people innovating for you.  It’s true.  People who no longer work for you are not required to do your thinking for you.  The people who are left are too busy preparing for their own “displacement” to do any real work.

6.) 401ks invite the bonus class to invest in emerging markets, not the American market.  They’re always chasing profits.  For themselves.  For you?  Ehhhhh, not so much.  Shareholders, that is the BIG shareholders, not you and me, have to be satisfied so the money must go somewhere.  Why not India?  Oh, sure, it means that the capital will be invested in a place that means more Americans will lose their jobs and potential American entrepreneurs will go begging for startup money. But that’s the nature of capitalism.  Suck it up.

5.) In order to get a break on taxes, which in my case are pretty ugly, you can’t take the money out until you retire.  You can borrow from your 401K but then, you have to make sure you stay employed so you can pay yourself back.  It’s not very liquid and most of us can’t afford to fund multiple retirement/savings/college funds.  In emergencies, it’s useless.

Now, I am glad that I have a 401K, for the short term forseeable future, and that my employer is rather generous in funding it.  But it’s all on paper as far as I’m concerned.  By the time I am ready to retire, it might be worthless.  Getting rid of them wouldn’t exclude investing in the stock market.  It would just not institutionalize it and make it an all-but-mandatory retirement strategy.  Maybe the financial sector would be a little bit more attentive to our needs if they didn’t have a steady stream of easy money flowing into their gargantuan gullets.  Maybe customer service would improve.  There might be incentives offered to attract your business.  Maybe the risky gambling addiction behavior would cease.

I dunno.  I can only speculate with my money averse mind. But the more I hear about the financial meltdown, the more I keep coming back to the 401K “instrument” as the root of all evil.

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49 Responses

  1. I don’t have a 401k or any other retirement accounts.

    I spent most of my money on booze and sins of the flesh.

    The rest I just wasted.

    • You mean, you spend it on sins of the flesh and booze and if there’s any left over, you pay the rent?
      I envy your blissfully untethered and irresponsible mind.

  2. This is completely OT, but I was hoping conflucians could help advise me.

    What is a good place to go to for college/career advice for a middle-schooler? Talking about a 13yo is talented at writing, an artist, also good at math, and is consistently a straight A student. She is probably in the gifted IQ range in terms of math & language. Not into science at all though.

    I am at a loss at where to steer her in terms of college or future work … given the state of our nation. I would hope that she could get solid training in something that would keep her body & soul together (and not get outsourced) and still allow her to write, since she really seems drawn to that.

    • Sorry to say that the educational establishment doesn’t take kindly to gifted kids. BUT there are some things you could look into. The EPGY program at Stanford university has options for gifted middle school and high school students. They have summer courses in creative writing. The kid would have to qualify. My daughter qualified for middle school. I am now going through a similar admissions process for their online high school.
      One other option is early college admission. Not a regular college but something like Bard College at Simon’s Rock, which speciailizes in gifted youth who can’t take even one more minute of traditional high school. It’s expensive but what college isn’t?
      My gifted one, (and they really are a weird bunch aren’t they? you don’t really know what they’re like until you actually have one) wants to be a Pixar animator or work for Industrial Light and Magic. This is a really good fit for her. It’s either that or mermaid. She’s undecided.

      • I have been trying to look around. It’s depressing though — some of these cost an arm & a leg (between 2k-3k for a summer program?)
        She qualified in 6th grade on the John Hopkins gifted test, but then we couldn’t really afford any of the programs they offered.
        I was hoping that in high school she’d get into a governor’s summer school program, but apparently those have been cut because of the economy.
        Pixar animator sounds really cool, but nothing beats mermaid! :)

    • The smartest thing for her to do is grow a penis.

      It will increase her education and employment opportunities and virtually guarantees a substantial increase in her lifetime earnings.

      • Or, conversely, get her male teachers. For some reason, my kid has had better experiences with men than women teachers. They are more results oriented and less social compliance nazis.

    • How about going abroad for higher education?
      If she has is gifted as far as language have her start taking French, German or an Asian courses .

      • An idea, certainly. I have already suggested to her that learning chinese would be an advantage in whatever career she does choose.

        (They’ve studied Spanish at school since 1st grade and yet they are still not conversational in it, so I don’t know if she has a knack for foreign languages at all, actually. Lately I’ve been making them watch Harry Potter videos with either the spanish dubbing on or the spanish subtitles)

  3. I agree that we need to quit handing our money over to Wall Street. I’d like to see the government remove the ten percent penalty on accessing 401K money. It seems to be the only leverage the government has over the Wall Street banksters. That is, if our government wants to have any leverage over them. We need to start keeping our money for ourselves. The problem is, where do we put it? I wish I knew where to hide my money from the clutches of the bankers and the brokers, short of digging a hole in my back yard.

    • I’m in favor or old fashioned pensions. Well regulated pensions, that is.

      • Always hated the 401k. Gambling money and rents to a bunch of crooks. What good does it do to sock money away when it probably won’t be there when you need it?

        Same with pensions. Only defined benefit plans are worth anything. And, as far as I can see, they’re mostly gone. Defined contribution plans simply fork over more gambling money to the crooks.

        Just my humble opinion. I divested from it all years ago.

  4. OT

    Politico:

    Former astronaut Neil Armstrong has issued a strongly worded rebuke of President Barack Obama, criticizing the president for proposed revisions to the U.S.’ space program.

    Armstrong, along with astronauts James Lovell and Eugene Cernan, called the proposal “devastating” in a letter obtained by NBC News.

    The letter is at the link.

  5. Totally right. You really learn about the 401k scam in business school. It’s pretty astounding.

    We need a revival of defined benefit retirement accounts, but I don’t expect that coming anytime soon. In the mean time, if you must use a 401k(just don’t) use Vanguard. They rip you off less than the other guys in commissions.

    • and get asset allocation funds. You don’t get ripped off as muich in those

      • variable annuities are a good vehicle , if they’re the kind that protect your assets in an economic downturn, like right now.

        • Not so much for variable annuities. A better investment would be a 0 coupon bond right now.

  6. I can’t concern myself with trivial things like pensions when the top local news is that some intrepid students at my alma mater went dumpster diving to expose the truth about Sarah Palin and bendy straws.

  7. Against the Economic Cheerleaders

    Americans don’t think the economy’s getting better, and they’re not confident it will get better. That’s the governing party’s major political challenge for the midterms. It also produces a disjuncture between elite opinion, which is talking up the economy, and public opinion, which is living with it.

    http://www.theatlantic.com/politics/archive/2010/04/against-the-economic-cheerleaders/38862/

  8. 2012 Poll: Obama Leads Potential Foes; Huck GOP Frontrunner

    http://realclearpolitics.blogs.time.com/2010/04/13/2012-poll-obama-leads-potential-foes-huck-gop-frontrunner/

    Then again, it’s a CNN poll. So depressing either way.

  9. If Obama and the Ronster have their way Social Security will be extinct and the government will be mandating 401ks ala health insurance. You don’t contribute you pay a penalty.
    This current crop of Democrats is doing to us what republicans could only dream as the ‘bots say,”Thank you, Obama, may we take another up the butt?”

  10. The question you were asked doesn’t make any sense. Corporations aren’t required to provide any match for 401k contributions *now*. Many do, but there’s no obligation – I’ve worked for three companies that didn’t.

    • Go figure. That’s the question that was asked. I have no idea what they’re up to. And every company *I’ve* worked for did have a match. The last company’s match was pathetic. This one is excellent but it still all goes to Wall Street.

      • Well, I guess it doesn’t require any more financial acumen to be a pollster than to be Secretary of the Treasury. ;-)

  11. Two new posts up. A fabulous post about using drones in war by Kat, and a news post is up. And yes, I said fabulous, what of it.

  12. The place where I am currently a worker unit doesn’t match and was going to do so only to attract talent prior to its becoming an employer’s market. It was bought by a huge company that suspended its small match when the economy stalled, thanks to financial manipulation and ignorance and fraud in sub primes in the latest bubble. Unfortunately, what pensions remain are invested in financial instruments and provide a huge stash for the gamblers who are moving the funds around for their own profit.

    There is a tax advantage and an automatic savings vehicle in these 401ks. I am not taxed now on the amount and any profit it might make. The choices are limited,however, and the financial company makes its fees regardless of performance. A real boon to Wall Street. The thinking is that people will need the help of money managers since the workings of Wall Street are so arcane, intentionally so. I’d like the option of investing in several stocks of my pick in my 401k, following value investing principles, or simply a decent interest rate on laddered CDs. Right now I have 40% in a money market that is supposedly safe. Doesn’t increase in value but won’t be lost. Add that to my tax savings and it isn’t a total loss. I remember a video in which Obama talked about his investments–he seemed clueless.

  13. I’m waiting for this Administration to “suggest,” and then mandate that they, in their infinite wisdom, take over our 401k packages. We’re up to our eyeballs in debt and there’s no way we can fund any of these cockeyed programs. My husband and I unfortunately fell for the 401k scam and have a sizeable amount of money invested.

    Up until this year the company matched. But now we’re locked in with all the rules and regulations and penalties involved. We’ve just managed to recoup from the meltdown of 2007-2008. But I’m betting when the next crash arrives [which is bound to happen], the Government in an act of charity and benevolence will step forward with their grand suggestion: Let us handle your money, dear children. Let us guide your retirement and future, investing your Golden Years in something safe and reliable like ummm . . . T bills.

    I can hear Geithner adding the columns of fresh money as I write. Nancy Pelosi was murmering the same idea before the election–the Government would make us whole and then invest our funds for us.

    We’ve been fleeced.

  14. As advised, I dutifully contributed as much as I could every year while I was working. But from the beginning I kept asking why, if huge numbers of people are putting money into the market week after week, paying no attention to what the real value of stocks is, this should not lead to enormous overvaluation. Everyone I asked said it wouldn’t, although they never gave me a convincing reason. What else do we ever buy without even looking at the price or caring how high it is?

  15. The real value of a 401k is the tax savings you get up front on the money you contribute. Roll it over into a contributory ira and get control of it personally. That’s what I did and I do my own investing of my own funds in what ever I want to. Probably not a huge moneymaker but at least I know the choices made were mine.

    • You can’t rollover while working for the company that sponsors it, can you?

      When I left a full-time job, I moved the funds into my SEP-IRA. Now I’d love to capture the funds in my current full-time job’s 401k.

  16. Riverdaughter, are you given control over which fund your money goes into? I have taken all of my 401K and moved it into the guaranteed “safe” low risk funds. The early historical data that Wall Street was using to coax people into the S & P – type indexes, or the esoteric funds were those that paid 8-12% “over the long term.” The problem with that is that the boom years of the 90s were factored in giving a false sense of security in those high risk funds.

    • I can invest in a great variety of funds and I have a mix. I can sink money into the retirement funds or risk it. Still, I don’t trust the fund managers. ANY managers. Not after I read Lewis’s book anyway.
      There is too little regulation and if Wall Street can figure out a way of sucking your money into its vacuum, it will.
      And we still haven’t addressed the fact that all of this money is used to bet against American workers. That’s the real irony and tragedy of it.

      • There are safe funds available in most plans with guaranteed albeit small returns.

        I no longer “mix” my funds. One, safe, guaranteed return fund is all I use.

        Not me. No more gambling. No high risk. Low rate, guaranteed money. PERIOD.

  17. I work for the State of Colorado. We have a 401(K) Plan through PERA. The State has not contributed any kind of matching funds to our 401(K) for 10 years. So, I don’t understand why there would be a question about allowing employers not to contribute. Mine already doesn’t.

  18. Imo, if the company is matching your 401k contribution, it makes sense to contribute the max tax deferred amount. The company’s contribution is a just another form of salary to you. You will eventually have to pay a capital gains tax up to 20% when you withdraw after you retire, but that will still likely be less than the income tax you pay today. It also makes sense to contribute to an after tax IRA to the max if you can. That money will not be taxed for capital gains after you retire and withdraw. Income that you invest outside of these programs will be taxed for income now and for capital gains later.

    • The caveat is if you weren’t planning on investing any savings at all because you believe that the economy will be on a respirator for the next couple of generations, than these programs would not make sense. I suppose the other caveat for the 401k at least is if you believe capital gains taxes will double by the time you retire.

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