Question: Will you be writing of alternatives to 401ks in light of articles intimating the House is interested in the idea of nationalizing 401k assets? Bill, Golden Valley, MN
Answer: I've seen the phrase "nationalizing" retirement money in a number of different contexts. Still, this rumor seems to be getting some play for a number of reasons. For one thing, the list of "unthinkables" that have actually happened is long and growing. A conservative, Republican Administration engineering a more than $1 trillion bailout -so far--of the financial system. The government seizing control of mortgage giants Fannie Mae and Freddie Mac, and the global insurance giant AIG. The failures of investment banks Bear Stearns and Lehman Brothers. The quasi-nationalization of the banking system. The American taxpayer backstopping the $3.5 trillion money market mutual fund business. The possibility of another Great Depression.
For another, Argentina's government is out to nationalize some $30 billion in private pension funds. The stated reason is to protect retirees from falling stock and bond prices. But the real reason, it appears, is a desperate move by the government to shore up its deteriorating finances.
Last, charges are flying that Sen. Barak Obama will pursue a socialist agenda if he wins the race for the White House, as appears likely.
While all of us have to be careful when we say something will never happen, 401(k) assets and the like won't be seized by the government. No way. No how. Period.
To be sure, if the financial crisis continues the government may takeover or invest in more financial institutions that manage retirement assets--from insurance companies to banks-- but the U.S. government isn't the same as the Argentinean government. Congress and the White House aren't going to seize our retirement money. Barak Obama isn't a socialist and he has no socialist agenda.
That said, there are good reasons for wondering whether Wall Street should manage any of our long-term retirement savings funds. Put somewhat differently: Is the 401(k) plan, which has become the main retirement savings vehicle for the American worker over the past three decades, a mistake?
I think the case for rethinking the 401(k) as a pillar of retirement savings is compelling.
To be clear, the democratization of stock ownership is a welcome and powerful trend. Two hundred years after 24 New York brokers and merchants met on Wall Street to sign the "Buttonwood Agreement," a pact that established standard commissions for trading securities, investing now has all the characteristics of a mass social movement. People's Capitalism has helped fuel entrepreneurship and risk-taking. Despite abuses, stocks options, restricted stock, profit sharing plans, and similar equity-based compensation schemes are critical building blocks to innovation, the driving force behind economic growth. Thanks to the Internet and advanced telecommunications networks, it's cheaper than ever for individual investors to buy securities.
No, the question is focused on retirement savings, the money employees set aside during their working years to smooth out their standard of living in retirement. Employees bear all the responsibility if the worker make mistakes, and time to make up for investment mishaps shrinks as stomachs go slack and hair turns gray. It's an axiom of modern finance that the only way to create the possibility of higher returns is to take on greater risk. But the risks employees are absorbing today seem disproportionate to the potential rewards.
What's more, our retirement savings system is far too balkanized. There's 401(k)s for the private sector; 403(b)s for non-profits; 457s for state and local government employees; and SEP-IRAs for the self-employed. Then there are IRAs and Roth-IRAs. All have different rules, income limits, and restrictions. For example, you can put a maximum of $15,500 into a 401(k) while the contribution limit to an IRA is $5,000. The maximum into a SIMPLE IRA is $10,500. It makes no sense.
There is plenty of room for improvement. There have been hearings on Capital Hill recently, looking into retirement security. There should be more.
Pension experts are working on ideas that may make it easier for workers to save for the last stage of their lives. For example, a number of academic quant jocks are exploring creating annuity-like products that would guarantee workers a steady, inflation-protected income during their golden years but would be less expensive for companies to offer their employees than the traditional defined-benefit pension fund. The demand then would be on workers to take the responsibility of saving but they would avoid the burden of investing.
These ideas are worth exploring.
But as for seizing pension assets? Not a chance.