There are only two reasons you appear on the cover of Time magazine—either you are receiving plaudits from the media, or you’re about to be tarred and feathered. 401(k)s are featured on the cover of Time this week, and it’s not because they’ve been named “plan of the year.”
One phrase captures the spirit of the cover story: 401(k)s are a “lousy idea, a financial flop.” And that was perhaps the high moment of the article! I have read Time over the years and have enjoyed its presentation of national and world events. Yet this article is emblematic of the uneven, at times unfair, coverage of 401(k)s during the market decline.
Start with a persistent idea in the article—that there once was a world where most Americans retired with a secure and generous private pension. Even in their heyday, the mid-1970s, traditional pensions covered only 40% of private workers. Benefits varied widely—from meager plans paying little to very generous ones. Today, the median private pension payment per household is about $8,400 a year or $700 a month (source: Congressional Research Service). Only 3 in 10 older Americans receive a private pension.
A second criticism concerned the risks of 401(k)s, particularly for retirees. But there was no mention that retirees don’t have all of their life savings in the stock market (most have chunks in safer investments), and no mention that retirees also receive guaranteed Social Security income, which diversifies their risk. In keeping with a skewed view of the landscape, there was no mention of the inflation risk affecting pensions. At a low 3% inflation rate, their real value is cut in half in 20 years. In the high inflation of the late 1970s, the decline was worse. At least 401(k)s offer the opportunity to address inflation by maintaining some equity exposure.
A third problem: The article noted that 401(k) balances are low, and worried that many are under $10,000. Yet participants often roll assets out to an IRA when they change jobs or retire. So large accounts are often moving out of 401(k)s into IRAs, and job changers start with a zero balance.
The most recent statistics from the Federal Reserve, which try to pull together all of these pots of money, suggest pre-retirees with retirement accounts (about 6 in 10 Americans) had a median balance of nearly $100,000 in 2007. That value has dipped from market highs in late 2007, but has also begun a meaningful recovery from the lows of March 2009. These balances are expected to only grow in size and importance.
Another problem: The article implied that 40% of boomers are at risk of an insecure retirement due to 401(k) plans. Actually, somewhere between 20% and 40% of Americans are likely facing a problematic retirement (I gave testimony on this recently for a government panel). But one important reason is that many of these households have no retirement savings or benefits of any kind. Also, the Obama administration has proposed workplace savings accounts modeled on 401(k) plans to help this group.
A further irksome point: The article put forth the absolute nonsense that 401(k)s were a tax dodge for executives. (The magazine’s editor repeated this inaccuracy on MSNBC.) But the fact is, pre-tax 401(k)s were a tax provision introduced in the Revenue Act of 1978, signed by President Jimmy Carter, to settle a long-standing tax dispute between the IRS and plan sponsors over what were known as cash or deferred (CODA) plans. Far from being an executive tax dodge, the law specifically included a provision, known as nondiscrimination testing, to ensure that benefits were not used exclusively for higher-ups—completely at odds with the article’s claim.
One commentator in the article, economist James Poterba from MIT, made an important and sensible point. In retirement plan terms, 401(k)s have only been around for a relatively limited time—most people have been saving in them for only part of a working career. With more time, along with regular contributions and compound interest, their value and role in ensuring retirement security will become more apparent.
So perhaps what we need is less Time, and more time, to gauge the merits of 401(k) plans.
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