The 401(k) Problem

©Grainne Rhuad 2013
©Grainne Rhuad 2013

By: Grainne Rhuad

Generation X is creeping up on middle age, or in a lot of cases already there and as they do so they are beginning to worry about the things people in the middle of their lives do; how will I live out the rest of my life (I don’t want to be a Wal-Mart greeter!) and what sort of legacy am I leaving?  What have I achieved/accomplished?

It’s a bit ironic that the Gen X’ers who eschewed both the societal rules of their grandparents and the peace, love and brown rice of their parents are now sitting where we all sit eventually:  In the shadow of our own humanity, wondering if it all was worth anything.

Being a Gen X’er myself I can remember the immense promise of the future that was being sold to us.  The Regan era was full of pop-culture references to how bright a future we had.  The economy was looking good, albeit artificially so.  After school specials assured us that if we just said “no” to drugs we would be a-okay in any endeavor we chose.  And not just in business although that was a great booming industry.

Tech-nerds had it going on with Silicon Valley blowing up.  I can remember living in Vallejo for a while in the 80’s and it was a city consistently under construction.  Little Box homes popped up seemingly overnight with lush lawns following.  Moving trucks were always pulling up and unloading a new family of 4 complete with bikes, skateboards, matching furniture, new fangled kitchen gadgets.  There were parks for these kids, mini-golf, grocery stores.  I can remember the huge shift once Apple took off.  The one grocery store for every town (Alpha Beta in mine.) grew to 5 or 6 and was quickly followed by big box stores which required memberships and made every head of the household feel important for being able to be a member of something.

The big big message I got was if I went to college, no matter what major I chose, I would be well taken care of.  I would find a job, a house, a husband, a child under a cabbage leaf all healthy and fat-not necessarily in that order.

This would be true if I chose art, history of something obscure or journalism.  Every sort of art was being bought up seemingly for no good reason other than to invest.  Cross sections of cows were funded by the national foundation of the arts for crying out loud.  Graffiti was being sold to collectors.  Stupid rap artists were making money off of stupidly designed clothing with their names on them.  Hell, for a while you could even buy clothes that stupidly changed colors when you sweated on them.  Journalism was having a hey day with larger than usual news teams even in small towns, talk shows, start up public access radio stations were being funded by private citizens and then bought up by national syndicates.  You could seemingly do anything as long as you showed up to class often enough to turn in important papers and take tests.

What happened is a disappointment on such a large scale that it hardly needs going into.  Greed and low morals and possibly the influence of the fictional character Gordon Gecko resulted in everything crashing harder than a dealer who uses his/her own product.  Gen X was promised the world and they believed they could have it and along with their burnt out hippie parents they crashed the train while they were partying.

Now we are looking at how we will make it in our golden years and it isn’t looking good.  Social Security, the temporary stop-gap that was never intended to last forever has been on the chopping block for as long as we can remember.  And if we are all honest with ourselves, even if we keep it, there simply is not going to be enough money to cover all of the deposits we have made all of our lives.  Part of this is due to the huge drain of the baby boomers by sheer number.  Part of it is due to bad economics.

There have been other measures taken for retirement like the infamous 401(k) or 457 for public employees.  But this isn’t going to work out for Gen X’ers either. The big problem with these retirement packages is too many workers don’t understand that they aren’t a straight forward retirement savings acct.  They are instead an investment and like all investments they are a gamble.  But, they aren’t ones that can be easily managed.  They are sold to workers as packages in varying levels of risk from high –with the traditional expectation of big returns should your stocks go well but equally big losses. – To lower risk investments which typically include things like government contracts and other slow growth stocks and bonds.  These were sold to workers as safe, if slow growing, but guess what?  They have done really shitty the last eight years too and so most people’s 401(k) accounts have shrunk a great deal.  People are lucky actually if they have stayed consistent at the level they invested.

Not only are American workers suffering from these losses but so are companies, counties and states because one of the big selling points of these investment retirement programs is the fact that your job will match whatever you invest.  So, they are losing money too.

But that’s not all, As early as 1986, only a few years after the widespread debut of the 401(k) and the idea that American workers should self-fund their own retirement accounts based on savings and stock market gains, Karen Ferguson who was then, as she is now, the head of the Pension Rights Institute, warned in an op-ed published in the New York Times, “Rank-and-file workers have nothing to spare from their paychecks to put into a voluntary plan.”

And this is entirely true.  With the majority of Americans including the diminished “middle class” living paycheck to paycheck, there isn’t a lot left to contribute to a 401(k).  It is likely one of the first cuts made when restructuring pay schedules in hard times.  Workers with families are definitely going to opt out of this instead of medical insurance if given the option.  Indeed when the housing crash occurred an inordinate number of people with 401(k)’s and 457 plans plead for a withdrawal of funds in those accounts to try to save their homes.  In many cases even when this was granted due to hardship it didn’t work, so homes and retirement was lost.

The frightening thing about this program of retirement is how many people still believe it will be enough for them to live off of.  This is mostly due to the incredible financial sector lobby who regularly reminds us that Americans have $20.8 trillion in retirement savings, divided between individual retirement accounts, defined contribution plans, defined benefit plans, government plans and annuity reserves.

What this doesn’t take into account is what the median amount individual families will actually have to live on, which is more like $100,000.00 if they retire somewhere between 55 and 65.  With people living well into their 80’s with regularity, does that seem like enough money for you to live off of without working?

We are continuing to be sold this snake oil because it is a big money maker for the financial sector.  No matter how good or bad the market is the financial services sector wins on these retirement accounts. It is however incredible hard to ascertain exactly how much they make, financial institutions being incredibly cagey about how much they earn. In 2008, Bloomberg magazine polled a group of pension consultants and came to the conclusion that 401(k) fees alone totaled $89.1 billion annually. Theresa Ghilarducci, who recently took a more all-encompassing look at American retirement assets, and included IRAs and pensions in her total, pegged the number at $500 billion.(source: http://www.pbs.org/wgbh/pages/frontline/business-economy-financial-crisis/retirement-gamble/teresa-ghilarducci-why-the-401k-is-a-failed-experiment/)

So what are the Gen X’ers, Gen Y’er and everyone else going to do to support themselves in their old age?  One of the biggest problems is that too many people are not bothering to figure this out.  We know finances are not there for us, are not likely to be there.  We aren’t stashing money away in accounts or mattresses or jars in the back garden; mostly because we have nothing extra.  Yet most of us are still thinking there will be a day when we will “retire” and travel or watch birds or do whatever it is people do without jobs.  We really watch too much Downton ‘Abbey, we want a lifestyle that really is unobtainable.

What we don’t understand is it never was really obtainable for most of the population.  There aren’t many Dowager Duchesses and the American middle class famously misunderstands the job and duties of nobility in any case.

As a recent article in Salon Magazine states, “The truth is this: the concept of a do-it-yourself retirement was a fraud. It was a fraud because to expect people to save up enough money to see themselves through a 20- or 30-year retirement was a dubious proposition in the best of circumstances. It was a fraud because it allowed hustlers in the financial sector to prey on ordinary people with little knowledge of sophisticated financial instruments and schemes. And it was a fraud because the mainstream media, which increasingly relies on the advertising dollars of the personal finance industry, sold expensive lies to an unsuspecting public. When combined with stagnating salaries, rising expenses and a stock market that did not perform like Rumpelstilskin and spin straw into gold, do-it-yourself retirement was all but guaranteed to lead future generations of Americans to a financially insecure old age. And so it has.”

So many of the articles and advice columns, well meaning though they may be, still set in our minds that this is” the first time in living memory, it seems likely that living standards for those over the age of 65 will begin to decline as compared to those who came before them” (source: http://www.salon.com/2013/08/06/big_finance_lied_401ks_will_not_save_aging_americans_partner/)

This simply is not so.  In fact WWI saw the first generation in which a “retirement” was even a “thing” before such time you may have slowed down or taken on different responsibilities as you aged such as caring for the younger generation or mentoring an apprentice, but you would not have retired from working until you were on your death bed.

And this is another thing to consider, our life span and the quality thereof.  Many studies point to the fact that an active life equals a longer life.  So, while you may not want to greet people at Wal-Mart or anyplace else.  Any type of work keeping you physically and socially engaged will ensure a longer and better quality of life.  People who stop doing anything suffer from a sort of failure to thrive.  When you no longer have a purpose, more of the normal breaking down of an older body and mind becomes harder to manage, because…why?

What this generation needs to think about more than how they are going to pay for their retirement is how they are going to engage themselves as they age.  Do they have skills to do a job they can manage in their golden years?  Are they doing what they love?  Or are they just doing a job that pays the bills?  Now would be the time to plan for continued activity in areas interesting to individuals.  It would also behoove people to figure out where and how they are going to house themselves.

Another habit we have fallen into is the ideal of being self sufficient and living alone.  We may need to think in terms of extended families whether those be blood relatives or families of our choosing.  We all need each other.  The elderly need young people and young people need the wisdom and experience of elders.  It’s time to change up our societal structure.

If we can do that, we can stop worrying about governments providing for us and 401(k)’s and we can get on with the business of living for real.  With intention and joy.

15 Comments on “The 401(k) Problem”

  1. I hate to say it but today we prefer to throw old people away, to not have to deal with all their old-people issues. I guess if staying active can forestall senility, it’s what everyone ought to do for their own sake.

  2. The independence we’ve been taught is an oxymoron because the virtues of self-sufficiency so laboriously extolled is an increasing dependence on a government that consistently lets us down and has become so intrusive it interferes with every aspect of our daily lives. We can change our societal structure and you can bet the government will find more ways to topple our solvency. If we have three generational homes, you can bet it will be an invitation for the government to stick in its long nose to make sure the home has all the (expensive) safety features for both the elderly and the babies.

    Try to start a business. You will need licensing, permits, regulatory controls, and oh yes. The property; even if it’s yours free and clear; must be zoned for business and must fall under the category of the type of business permitted.

    Whatever we try to do to provide for ourselves and our loved ones and keep from sinking into poverty, you can bet the government will find ways to intervene. The government does not want us independent of its “handouts”. Take away the number of people who work for the military, the state, or any other government subsidized job, and what do you have left? A handful of small to medium sized businesses, along with some industries and corporations who are quickly packing up their bags and moving to greener pastures.

    We are bankrupt. More than societal change, we need to dismantle a bloated government and reduce it to the simpler affairs of repairing our corroding infrastructure, which includes adequate sewage and waste disposal, cleaning our water ways, supporting fragile eco-systems and supporting renewable energy resources. I won’t mention health and education because both the education and health plans have become an abomination. If they are unable to perform a few of the simplest tasks without intervening in individual societies, regulating them and taxing them to death, we don’t need the government at all.

  3. @karlsie:

    I think this modern notion of wanting to eliminate “the government” is a dangerously ignorant attitude. It’s what the elitist corporations and bankers are striving for, that is, a for-profit government.

    When the wave of privatization began in Iran about eight years ago, the companies that were to be auctioned off were intentionally fucked up beforehand in order to justify their privatization and so as to make them cheaper for the pre-destined corporate buyers/investors.

    After this wave subsided, the Revolutionary Guard Corps (aka the Sepah Pasdaran) were the new private owners of much of Iran’s economic infrastructure, which had rested in the hands of a non-profit national state government previously. Today the Sepah has its hand in all the lucrative private businesses in Iran, from ISPs and telecoms to the military-industrial complex. The Sepah’s ambition is to become the new government.

    The situation in the US is a bit different in that there is no militant organization like the Sepah controlling the resources, but rather multinational banking establishments and their corporate cronies. Their goal is to dismantle The Government entirely, replacing it with a new financial order where every man and woman must perforce generate a predefined amount of interest through their labor or businesses. To not be able to generate this “interest” will be tantamount to starvation.

  4. Peter, thank you for a very thoughtful reply. I chaff, and I think the average U.S. American chaffs, at a government that has re-invented itself to cater to a corporate manifest and banking interests that have virtually eliminated the abilities of its people to become solvent. There is a conscientious effort to remove all common sense, whether you are a teacher with an unruly child, have chosen to join a co-op for organic food production, want to rent out your spare bedroom or have become a member of a community engaged in trade and barter. Clerks are obliged to ask ID for selling cigarettes, even to people obviously over sixty. A nurse may not give free, solicited advice on nursing care to a friend for fear of being sued. If you hold prayer meetings in your house to a group of devout friends, it can be regarded as suspicious activity.

    It’s not that I don’t want any form of government – I just don’t want this form of government – invasive, self-serving, manipulative, destroying initiatives to build healthy, co-operative societies. In order to thrive once more, we must be allowed the ability to think for ourselves. Mistakes are not terrible if you learn from them. Accidents can be prevented, but not all of them. Mistakes and accidents are a part of growing. If you’re not allowed to make them, you’re not living, only existing.

  5. More money for you and I, means less money for them.

    I knew a guy who had some land with a villa and an orchard that stretched down to a river on one side and a major road on another. A really beautiful and scenic place, it’s got this large patio on a cliff that overlooks the river rushing thirty feet down, and the whole surrounding area is lush woodland. A place tourists would just love. The guy wanted to put a sign up next to the road and serve beverages, ice-cream, etc. under the shade of his giant trees and maybe even sell his own fruit (cherries, nectarines, plums, peaches, walnuts, etc.) to tourists, which are abundant in the cool mountainous area in the summer. He thought this way he would make enough to smoothly run his orchard and also feed his family.

    He found out that he needed countless permits and signatures and whatnot. He tried to pursue the matter in earnest, but soon realized that the endless paperwork and running from office to office was just a subterfuge meant to dissuade people from starting businesses. They simply did not want for him to make use of his resources.

    Of course, all these permits are very easily obtainable by people with money and/or connections, here referred to as “them.” If there is a business opportunity, they will always be the first to exploit it. Like how half a mile upstream from the guy’s land there is a vast recreational park that covers both banks of the river, connected by a bridge. On one side they’ve got restaurants, coffeeshops, grocery stores, a hotel, a camping area, etc. and on the other countless villas for rent. The whole area has an entry fee, and everything is extremely overpriced. So, they obviously don’t want anyone competing with them.

    The government is a tool, essentially invented and funded by rich people in order to keep poor people in line. A government that does not directly control the wealth of its nation, and so depends on banks for financial support, is a poor government indeed.

  6. Excellent points about government-all.

    To get back to the problem of retirement, indeed in western cultures and more and more in other cultures too we are devaluing older people. It is to our detriment I think.

    The problem with the American retirement plans that were pushed and sold as a way to be more “self-sufficient” with the investing of your “own money” is the investment part. That is a scam of the worst sort. I won’t even call it snake oil because snake oil implies a placebo effect. This was a plan that was going to have the bottom drop out from the beginning. Like so many other things- the housing crisis, social security, etc; If the United states can insure its private banking institutions (and I’m not convinced it shouldn’t -that’s another discussion) It should insure it’s people’s investments.

    At the very least the United States government should pay back social security amounts paid by citizens if/when they cut it. I feel it’s only a matter of time.

  7. I think a bigger problem is that investment has, is and always be a think that requires constant attention. 401ks manifest themselves into managed portfolios that people throw money into and rely on investment managers to maintain. The Warren Buffets of the world don’t throw money blindly into investments, and they sure as hell don’t rely on others to manage money blindly. Early on on my genX life, I was doing the 401k blind drop – and of course we hit that 10 year malaise. It motivated me to start managing my investment choices in a separate account, in a few years my performance was vastly superior to the managed funds in the 401k. And I wouldn’t describe by selections as particularly riskier that the managed funds. I admit that is antidotal but I still contend investment strategy is undervalued by most.

    I think the lesson ( for me at least) is that people place too much reliance on the financial management industry. The old lessons of our grandparents about not putting all eggs in one basket has been lost because they think that the risk reducing asset classes are “safe” and spread out.

  8. btw, after I made my comments earlier I was thinking about Gordon Gecko. I think his fictional persona isn’t the problem on wallstreet, even if Oliver Stone set him up to be the ultimate boogie man. Gecko’s speech in the movie Wallstreet was actually on-point and is still relevant 17 years after the movie was made. Corporate America over-compensates executive management , even when companies perform poorly. Meanwhile, many employee’s have had relatively stagnate wages. Jeffrey Immelt, CEO of GE makes 14 million . GE employees 305,000 people. During his tenure, he has ceased most of their manufacturing and made GE a financial management company. The companies stock has taken a beating and the company has lost market share in all areas and has gone through several rounds of heavy layoffs. The real Gordon Geko’s of the world ( Carl Icahn is a classic example ) frequently badmouth CEOs and are quick to hatchet them the second they take over a company. Thats not to say that guys like Carl aren’t horrible bastards in their own right, but most of the time they are trying to SAVE the company as they have a vested ownership .

  9. I think for the average person, managing an investment portfolio is a complicated affair, and few have the expertise to do it on their own. Many of those who are reaching retirement age or have reached it and discovered their managed investment plans were poorly managed are at a loss for knowing how to recuperate.

    Peter’s last comment illustrates the frustrations in starting your own business. The system is set up for small enterprise failure, with only a few of the most innovative able to get through the door. The stagnant wages go hand in hand with America’s sure, steady plunge into bankruptcy. What cannot be afforded cannot be used to stimulate the economy.

    The unfortunate population entering their retirement years are the unfortunate first victims of the downsized economies. Their savings and their spending power have dwindled, as well as their employment prospects. Their devaluation has to do with decreased monetary assets for greasing the wheel. As long as human resources are reduced to numbers on an economic values chart, we have all lost our chance to demonstrate our personal values.

  10. I saw Nick Hanauer lecure on TED about the nature of labor to business in a broader discussion of macroeconomic job creation policy. He made it a point to stress: Labor is a liability to business. In a perfect world, business would have no labor and all profits. Just like any other capital investment needed to produce goods, labor is a necessary component until its usefulness has been fulfilled. In a nutshell, you are just a number when looking at a chart. Nick actually uses that as the basis for attacking the idea that capitalists are job creators as the rich have leveraged the argument to special privileges.

    There are a lot of theories on how to manage retirement. I think social security is important and needs to stay. Some think we should look to modeling retirement programs on European concepts where the government has more of a vested interest in supplying a full retirement income. In that situation, the 401k and IRA could revert back to its original purpose – as a compliment to retirement income rather than a total solution. I think difficult selling point in the USA will be the taxation issues.

  11. Stacy, I’m interested in why you think Social Security is important and needs to stay. I’m not naysaying you but, I would like to know your thoughts on its necessity.

  12. simply put: most humans become unproductive at some point and must rely on others – usually in the late stages of life. If we lived in a purely libertine fantasy universe, every individual would properly save, invest and insure themselves so that the state/family would not have to share in the expense of caring for the elderly . In this fantasy universe, people are hard working and smart and the universe has risk that can be planned for. In the real world however, markets are volatile. Life kicks people in the ass ( early strokes, divorce, drug addiction, financial ruin ect). And of course we have a healthy sizable population who make stupid decisions with their life and their money. People like to think of social security as an entitlement. I like to think of it as an insurance policy that protects the state and society from human fallibility. I say we keep it – warts and all.

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