I realize this will be about my third post on this issue, but the things people are writing about 401(k)s just get more and more absurd, and it’s tough to sit by and let this go unchallenged.

Now the editors of The New York Times are claiming that “Even with recent stock market upswings, account balances are roughly 25 percent lower than before the crash.”

I’m not sure where this number comes from (no source is given), or even if it’s true, or if they think that by saying “roughly” they can get away with whatever round number they like. Nevertheless, even if there was a day before the downturn when balances were so high that they are still, at this point, down 25%, it’s precisely this type of peak-to-trough analysis that I was complaining about a couple weeks back.

Looked at from the end of 2007 through June of this year, the Employee Benefit Research Institute estimates that the median defined contribution plan balance was down by a less-dramatic 16.4%. With the stock market up even further since June 30, the current number is likely even lower. And all of this in the wake of the worst markets in more than 50 years.

Beyond being frustrated by incomplete and selective use of data that is used for effect—as opposed to analysis—I guess what I struggle with most in these pieces is understanding what exactly the folks writing this stuff think they are going to accomplish for people.

At one point, the editorial says that proposed 401(k) “reforms” would “shift risk that is currently borne by individuals onto corporations and the government.” I’m sorry, but who exactly do they think is backing the risks borne by corporations and the government? Have we learned nothing in the last year? It’s not like the shifting of risk is such that running it through corporate balance sheets or government accounts makes it disappear. Individuals are still ultimately going to bear it. The only question is which individuals.

Shifting risk doesn’t eliminate it; it just focuses it on a narrower group. Maybe that sounds like a good thing now, but when this narrow group of investors becomes far wealthier than other groups as a consequence of bearing these risks, we’ll have different issues.

The Times editorial also cites an analysis illustrating both the perils of saving at a rate of 4% as well as the inequities/differences in hypothetical 401(k) balances at retirement for investors who started saving in different years. What allows anyone to expect to accumulate a decent retirement account balance by saving only 4% of income is simply a mystery to me. What’s more, Vanguard’s data on 401(k) plans shows median deferral rates that are 50% higher—at roughly 6% of salary—and employer matches add another 3%.

And in terms of the “inequity” in balances when people retire: When will we recognize that no one’s financial situation in retirement is determined once and for all, in one fell swoop, on the day, or in the month or year, he retires?

The reality is that people who retired with any invested wealth in late 2007 or 2008 are very likely to have maintained an exposure to the market through today. Almost no one converts his or her 401(k) balance into an immediate annuity in one single transaction. Even people with traditional pension plans, who don’t have “balances,” generally prefer to take a lump sum at retirement—presumably to invest it. Retirees’ portfolios fell significantly in value last year, meaning less spending and some real pain for some people who needed to spend all of that money in early 2009. But most people didn’t spend all of their retirement wealth between October 2008 and March 2009. For example, if you were a moderately aggressive retiree in Vanguard Balanced Index Fund (which holds 60% of its assets in stocks) as of July 31, 2008, as of July 31, 2009, your total return for the year was –8.73%. For some investors who were a bit more conservative, results were even better.

Maybe the real risk we should worry about is investment-risk fearmongers frightening retirees into cashing in their assets at a single point in time and permanently locking in a low stream of income.

Last year did make it crystal-clear that Social Security plays a vital role in providing a financial backstop for retirees. It does a vital job of protecting people who because of financial or other misfortune find themselves in a situation in which their wealth has crumbled and cannot support them late in life. What’s more, it does this in a way that is standardized and relatively efficient. But it was never designed to be the sole source of income for retirees. In fact, Social Security is very well complemented by the 401(k) and other individually directed savings and investing programs that allow a broad section of the public to not just bear the risks that corporations and other entities take in their operations, but also to share directly in the rewards. Historically, these rewards have appeared on average and over time, and have been subject to broadly diversified risk.

In 2008 and early 2009, we all saw what that risk was all about, and it absolutely had real consequences for many people. But the “40% declines” in the stock market wildly overstate the change in the overall value of the wealth most retirees held, which included their Social Security benefits as well as their 401(k)s and their homes.

If we don’t think Social Security benefits are adequate, then by all means, let’s debate the merits of not only restoring long-run actuarial balance in the program but also potentially expanding it. But there’s absolutely no need to gut the 401(k) system to do this. I have yet to see any supposed benefit of “radical 401(k) reform” that would not be more efficiently achieved by changes that would somehow expand Social Security. So I am still at a loss as to what explains the fixation on “fixing” 401(k) plans—which simply aren’t in need of radical repair.

P.S. The comments on my last post reveal that I could have been clearer about the issue of the market crash and investor surprise. Of course, everyone was stunned by the market crash last year; no one expected such a disaster. My point was only that given those events, there weren’t many people who were shocked that their k-plan balances were also down. I love behavioral finance as much as the next guy, but I simply don’t accept the notion that a significant portion of 401(k) investors with stock market investments are unaware that they have an exposure to the market.


• Fund performance data mentioned here represent past performance, which is not a guarantee of future results. Investment returns and principal value will fluctuate, so that investors’ shares, when sold, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data cited. You can view standardized performance (1-, 5-, and 10-year returns) and expense ratio information for Vanguard Balanced Index Fund on Vanguard.com.

• Links to third-party websites mentioned in this blog post will open new browser windows. Vanguard accepts no responsibility for content on external sites.