Nothing but upper ups?
In the halcyon days of the early Peanuts comic strip, Charlie brown was trying to console the perpetually-aggrieved Lucy via a bit of soothing wisdom: “Life has its ups and downs, you know.”
My dear, your being down is in the nature of things
“I don’t want downs!” shrieked Lucy. “I want only ups! I want to go from an up to an upper up!”
So it is with investors and risk; we’re delighted to take the ups – we even congratulate ourselves on our sagacity and daring – but we become apoplectic at the downs.
Does the word begin with F?
So, it seems, are the editors of the New York Times, who have authored a nothing-but-upper-ups editorial
If you have a 401(k) retirement plan at work, you don’t need us to tell you that you’ve taken a hit in the past year. The really bad news is that the damage to your retirement security is likely worse than what the numbers say on your statement.
Many Americans didn’t have enough savings coming into the downturn.
Okay, stipulating that to be true arguendo, whose fault is it that they don’t?
And employers are increasingly cutting back or suspending their 401(k) match. FedEx, Eastman Kodak, Motorola, General Motors and Ford, among others, have announced such moves.
There’s also no guarantee that today’s battered 401(k)’s will rebound powerfully.
There’s no guarantee of anything.
People close to retirement don’t have time for a do-over.
Lest those reading the editorial not be themselves close to retirement, the Times wants you to feel afraid too:
I fear the wrath of Times
Even for those still far from retirement, there’s no telling how stocks will perform in the future.
That’s always been the case. You could have invested your 401(k) in bonds or treasuries. Or you could have a defined-benefit plan (which was the old model) – but then you face the risk, as my grandfather had it, that your company will go bust before you retire. He worked for over two decades at the Saturday Evening Post, and built up a very nice pension. Unfortunately, the Post went under, and with it his pension. From that financial implosion and several others we enacted legislation – ERISA, the Employee Retirement Income Security Act –to safeguard pension money from plunder or corporate collapse, and then enacted 401(k) because it was a better investment alternative for individuals.
Here’s Wikipedia’s summary of the history:
In 1978, Congress amended the Internal Revenue Code by adding section 401(k), whereby employees are not taxed on income they choose to receive as deferred compensation rather than direct compensation. By 1984 there were 17,303 companies offering 401(k) plans. In 1998, Congress passed legislation that allowed employers to have all employees contribute a certain amount into a 401(k) plan unless the employee expressly elects not to contribute. By 2003, there were 438,000 companies with 401(k) plans.
Originally intended for executives, the section 401(k) plan proved popular with workers at all levels because it:
Had higher yearly contribution limits than the IRA
Usually came with a company match
Provided greater flexibility than the IRA, often providing loans
If applicable, offered the employer’s stock as an investment choice.
It is, in short, a better mousetrap.
Is that my retirement cheese?
The danger of the 401(k) plan is if the contributions are not diversified, particularly if the company had strongly encouraged its workers to invest their plans in their employer itself. Congress inserted trust law fiduciary liability upon employers who did not prudently diversify plan assets.
Today 401(k)’s are the retirement savings vehicle of choice, because they incentivize savings, are easy to administer, give employers a reliable expenditure stream, and give recipients wide choice in their investment strategy.
Most people, quite rationally, put their 401(k)’s into equities. Which go down, as the Times bemoans, but also up:
I want only upper ups!
They could post impressive gains, especially in the near term, from their current low levels. But they could also struggle. The last 25 years was a time of low inflation rates and low interest rates, which boosted stock prices. Going forward, inflation and interest rates have nowhere to go but up, which would be bad for stocks.
This is populist nonsense. In general, inflation is the young’s revenge on the old for their over-spending. As the world’s foremost consulting housing financial theorists, Sherlock Holmes, put it:
“If revenge is a dish best served cold,” said Holmes, “then inflation is a dish long marinated. Inflation is the young’s revenge on their elders for over-spending. In fact” – he twirled his fingers and the image appeared – “we may express it as a law.”
“Fortunately or otherwise,” Holmes said with a thin smile, “once money was invented, inflation came along with it. As opposed to pure barter, where commodities and services are exchanged directly – money is always an abstract representation of a unit of value.”
Meaning that the value of money is what you can buy with it. So inflation, if it comes back – which it will, with a vengeance – devalues debt instruments, increases the value of commodities and equities. Stock will come back when inflation does – probably before.
It wasn’t supposed to be this way. Over the last several decades, businesses and government used matching contributions and tax breaks to encourage the proliferation of 401(k)’s. They lauded them as a way to harness the market to create wealth and increasingly viewed them as replacements for traditional corporate pensions.
Well, they were. Indeed, they encouraged people to save, tax-free. Remembe the Times bewailing that Americans didn’t save enough? It wasn’t for lack of incentives or vehicles. Nothing could have been easier that to put away more of one’s paycheck.
My company uses 401(k)’s. We believe in them; we fund a match.
In 1983, 62% of workers with retirement coverage had a traditional pension only, while a mere 12% had 401(k)’s. Today, approximately 20% have a traditional pension and about two-thirds have only 401(k)’s.
Because they’re better. Because defined-benefit is a different fool’s game. Because there ain’t no such thing as a free risk premium.
The shift to 401(k)’s also shifted investing risks and responsibilities from employers to employees, but as long as participants generally made money and recovered losses quickly, the risks seemed reasonable.
Seemed? I know not seemed. The risks were reasonable. Investing in a 401(k) didn’t compel you to put your money into equities. Most companies offered a range of funds, from heavily debt-oriented to mostly equities. So each investor could decide where he or she wanted to be on the risk curve.\
Don’t say you didn’t have choices
Choices within choices
Now many Americans are inevitably having second thoughts.
Would it be too cynical to say they are now having first thoughts?
Perhaps you should have thought through your actions first?
So far, the cumulative wipe-out of household retirement savings totals about $2 trillion, and no one believes that the downturn is anywhere near over. As a result, participants in 401(k)’s are in greater danger than ever of coming up short in retirement.
Yes, let no one doubt that the global de-leveraging will hit everybody – that’s the definition of a financial pandemic – among them the soon-to-be-retirees of my boomer generation, who always spent as if there would be no tomorrow.
That grim reality calls for an expanded approach by policy makers to retirement issues.
I’m from the Department of Post-Mortem Investments and I’m here to expand my approach
Well, does it?
Traditionally — and correctly — an important focus has been on lower-income Americans who lack the means to save and tend to work for employers who do not offer retirement plans.
Yes, and one could argue that they are the only part of the spectrum with whom government should concern itself. Caveat emptor applies to all of us.
During the campaign, President Obama supported a better savers’ tax credit to encourage savings among lower-income Americans.
Fine, although this has nothing to do with the Times’ editorial thesis, that we need to reform how savings are invested and what options people should be allowed in investing their retirement savings.
He also supported universal IRA’s, which would make a 401(k)-like account available to all workers. Those good ideas should be pursued.
Can you hear the approaching but … ?
There are also good ideas for improving 401(k)’s that deserve attention, such as helping people manage their retirement withdrawals so that the money lasts a lifetime.
More should be made of this throwaway comment.
Money, though conceptually simple, is in its deployment and management fiendishly complex. Financial literacy doesn’t mean merely understanding how a mortgage loan works or how to balance your checkbook (at least in theory, or via input into Quicken or the like). We’ve seen that savings precedes borrowing, that buying a home requires consulting help and asks you whom do you trust, and creates opportunities for complex fraud.
“A woman’s handshake is not legally binding.”
Doesn’t the reverse hold as well?
If the home is people’s largest financial asset, aren’t their retirement savings the second largest? When vastly wealthy people gave Bernie Madoff their investment money, relying on otherguy due diligence, we clucked at their naivete. When my grandfather’s savings were wiped out, we patched the funding hole with ERISA. In turn, he pulled up his socks and got a job at Newsweek, worked a few years longer than he had planned, and go through.
The wipeout in 401(k)’s has made it clear that it is not enough to get more people to save more. There needs to be a better way to reasonably ensure that a lifetime of savings can’t be undone by forces beyond one’s control.
Like Lucy Van Pelt, the Times wants no downs, only ups and upper ups.
I can’t help those who deny reality
The Center for Retirement Research at
Whoa!
You mean I can share my downs but not my ups?
[The proposal does not leap to the eyes from a quick peek at the CRR’s web site; any reader who can find the reference is invited to email me. – Ed.]
To insulate retirees from the consequences of their overspending, the Times would like to parcel out their risks to:
1. Current workers, who are already paying for employees’ retirement through their Social Security payments. I don’t know anybody under the age of forty who sees Social Security as anything other than a contemporaneous transfer of taxes from themselves to their parents’ and grandparents’ generation.
2. The government, which is just us in another guise.
Got it? The pain will be shared among retirees, current workers, and current workers. Two out of three of these are innocent.
Two of the three of us are apoplectic
To insulate people of my generation who overspent, they would tax those who didn’t – the young, who will already bear the burden as we dig our way out of this little mess – either directly (probably by taking a payroll deduction at source and funneling into retirees’ accountants – that’ll be popular), or indirectly (by taxing all of us).
“Don’t tax you and don’t tax me, tax that man behind the tree.”
– Senator Russell Long
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