Will Democrats Kill Your 401k?
The short answer is NO. But if you follow news about 401k plans, you might find some pretty scary headlines like this one or this one, where the writers contend that the Democrats want to take away the tax incentive out of 401k plans and force a mandatory pension savings of 5% on employees.
Let’s put this in perspective. Testimony was given to the House Education and Labor Committee by Professor Teresa Ghilarducci. And it was dramatic testimony, no doubt. She proposed to eliminate all tax incentives for 401k plans and shift to a universal government-sponsored program with mandatory minimum savings rates per worker of 5% with a government-subsidized match of $600/year for lower-income workers. (As an aside, this time of year is generally when House Committees hear testimony on pension and tax reform, so it’s not unusual to have such testimony given).
Drastic. And it will not happen in this way, in this form. I cannot stress this strongly enough. This is certainly one proposal presented in testimony, and I suspect it got the press play because it is also the most drastic testimony I have heard about. However, others have testified, proposing milder and far more necessary reforms.
401k plans are flawed. They have been flawed from the beginning, and some changes have reduced the flaws while other have highlighted them. The biggest fallacy of the 401k is the idea that it should be the single vehicle to fund our retirement. If you haven’t figured out why by now, here’s an example:
Jenny Worker enrolls in her company 401k Plan and socks away 3,000 per year. Her company contributes a $750 matching contribution. Jenny starts her 401k contributions at age 25 and has them invested in a moderate portfolio mix of stocks, bonds and cash. Her average rate of return over the past ten years has been 8%. On 12/31/2007 Jenny is now 35 and her 401K balance is $54,325.
Against her better judgment, Jenny checks her 401k statement on October 15, 2008 and discovers that her balance is now $35,200 based on a 35% or so loss on her investments. Jenny’s retirement fund, adjusted for inflation and future rates of return, will not meet her targets for retirement income or security, even if the markets recover most of their values over the next ten years.
This is the danger that everyone who works with 401K plans warns against. But even those of us who are professionals never, ever expected or anticipated a simultaneous crash of the bond AND stock markets at the same time, where money market funds even found themselves at risk. Certainly if we had plotted models based upon this kind of contingency when markets were moving at a growth rate of 10% or so per year, we would have been viewed as nutcases without legs to stand on.
And yet, here we are. The primary flaw in the 401k model is that it is clearly subject to the whims of the market, and there are never ANY guarantees in the markets, no matter how stable they may appear. Add employees’ lack of education about investing or the markets, and it paints a stunning picture where the one with everything to lose is the employee, while the employer bears no burden or obligation for those employees’ retirement security.
What reforms make sense?
- Keep the tax incentives, but require some sort of minimum investment in Treasury Bonds with a guaranteed rate of return of 3%. Sell it as patriotic, even — a way to pull our country out of the crisis and debt to foreign countries. I’d rather have the US owe ME than have China own the US. To those of you who cringe at anything earning 3%, I challenge you to look at your 401K portfolio rate of return today if 25% of it were invested in guaranteed treasury bonds. Somehow that 3% looks a whole lot better than a 35% loss.
- Require fee transparency and simplicity. It’s true. There are many hidden fees in 401k investments right now that eat into that rate of return. Those fees may be acceptable, but you as the participant should have the absolute right to know what they represent and who receives them.
- Give incentives for entry-level employees to save One of the biggest issues Congress has with 401k plans is that it benefits mid-level and highly-paid employees quite well, while leaving the entry-level employees in the cold. Barack Obama’s plan has a tax incentive for any worker who saves through a 401k plan to encourage them to save from the beginning.
There is another factor that I haven’t addressed here, and that is the “guaranteed pension” that used to be the mainstay of every employee’s retirement. I am not addressing it here because I’m not sure how, in our current economy, that burden can be placed upon corporations with any expectation for economic growth. However, I do think that a blended approach, where participants in 401k plans are guaranteed a minimum retirement benefit by the employer which is funded by 401k and employer contributions, would be a good approach to the problem.
Don’t be fooled by the hysterical GOP headlines. It’s a play for votes, no more, no less. At the same time, I’d encourage everyone to stay engaged and aware of the proposals swirling around 401k plans and make sure any action Congress takes next year is responsible and actually benefits YOU.
Update: Actual summary of the hearing
Obama’s Foreign Policy Speech
One of his best yet. The full text is here.
The 5 goals he outlined were:
- Securing all loose nuclear materials
- Working toward a world with no nuclear weapons
- Investment of $150 billion in alternative energy with a goal to end dependence on foreign oil
- Arriving at a diplomatic solution with Iran
- Rebuilding alliances to meet common challenges of 21st century
Here’s one of the most compelling moments in the speech:
Imagine, for a moment, what we could have done in those days, and months, and years after 9/11.
We could have deployed the full force of American power to hunt down
and destroy Osama bin Laden, al Qaeda, the Taliban, and all of the
terrorists responsible for 9/11, while supporting real security in
Afghanistan.We could have secured loose nuclear materials around the world, and
updated a 20th century non-proliferation framework to meet the
challenges of the 21st.We could have invested hundreds of billions of dollars in
alternative sources of energy to grow our economy, save our planet, and
end the tyranny of oil.We could have strengthened old alliances, formed new partnerships,
and renewed international institutions to advance peace and prosperity.We could have called on a new generation to step into the strong
currents of history, and to serve their country as troops and teachers,
Peace Corps volunteers and police officers.We could have secured our homeland–investing in sophisticated new protection for our ports, our trains and our power plants.
We could have rebuilt our roads and bridges, laid down new rail and
broadband and electricity systems, and made college affordable for
every American to strengthen our ability to compete.We could have done that.
Instead, we have lost thousands of American lives, spent nearly a
trillion dollars, alienated allies and neglected emerging threats - all
in the cause of fighting a war for well over five years in a country
that had absolutely nothing to do with the 9/11 attacks.
Yes, imagine.
Really a fine speech from Sen. Obama. Don’t listen to the pundits, go read it or listen when they post it on the Obama website.
Before Clinton Voters Vow to Switch to McCain, Consider…
- The possibility of a Supreme Court appointment that guarantees an overturn of Roe v. Wade
- Privatized Social Security, which will hurt working women more than men, since women tend to undercontribute to 401(k) plans
- A serious deficit in the area of economics. By his own admission, he is not as informed about economic policy as he is about military and security policy. Given that, he is spouting the GOP talking points without regard to any grounding in reality.
- An attitude toward women that dates back to pre-feminism days. He has no compunction about bullying women in order to dodge their concerns. If you don’t believe me, listen to his response to Erin Kotecki Vest when she asked a reasonable question during his open conference call. And as much as I utterly despise Michelle Malkin, she’s not the only blogger who has been hostile to McCain, but she is the only blogger on his side of the aisle that’s been excluded from blogger conference calls.
- A complete lack of moral compass in exchange for the realization of ambition. The thing about McCain that has been most shocking to me personally is how he has turned his back on issues he was always solid about and instead embraced the Republican party line, even if it is worth less than a bag of dog food aging on the shelf.
I totally understand how Clinton voters feel, because every time I hear her claim she’s won the popular vote, can attract working white voters, calls the dog whistle for racism, and chooses to ignore caucus states, I feel the same thing. When I discovered that the madrassa story could be traced directly back to her campaign, when her campaign released the photo of Obama that had been in the public for 2 years prior of him in African garb, reinforcing ignorance, when she squandered an opportunity to categorically clear the record with regard to Obama’s religion, when she pushed Reverend Wright, when she pushed Ayers at the press, when she danced around after winning those “swing states” as if there hadn’t been a clear effort to feed into people’s dark fears that a black guy might be dangerous, yes. I get it. I totally know how they feel.
When that happens, I start chanting. Supreme Court. Social Security. Iraq. Economy. Military-industrial complex. $4/gallon gas.
After awhile, I calm down. Clinton supporters, I hope you’ll start chanting too, because 4 more years of the nonsense we have now will surely ruin this country for us, for our children, and for their children at a minimum.
