The Rise and Fall of 401k – Blame it on the Little Guy!

The Rise and Fall of 401k - Blame it on the Little Guy!

The long term profit track record of 401k plans is unimpressive.  How did the 401k get so popular?  A large factor was the joy ride of profits Wall Street was enjoying throughout the 1990’s.  Hard working people saw their 401k balance rising with the ever higher numbers posted on the big boards and believed the investment options they were offered were good funds.

Employers loved the plans because their own contributions were much smaller than in their previous (and often now unfunded) pension plans. Workers liked the idea of tax deferred savings and being a “Wall Street investor” and also felt they were getting a bit more for their work due to the employer match of contributions.

For years, attempts to provide transparency, disclosure and regulation of fees by financial institutions managing the Plans have been blocked by the mutual fund industry and employer groups.   The downfall of 401k plans is being blamed by financial gurus on the public (unsophisticated investors playing in the stock market) – an insult to those who saved and trusted the investment options they were given were good ones (they weren’t).

Most of the experts seem reluctant to mention the pressure some corporations put on employees to invest their tax deferred savings into the company.  Enron was one of those who promoted this idea and the result was catastrophic for its employees.  Also seldom mentioned is that 401k plans were designed to provide an additional retirement income that would supplement employer pension funds and Social Security.  In the past 10 years especially, companies have increasingly eliminated their pension plans and encouraged the view of the 401k as THE pension plan.  CEO’s loved it as company contributions were much smaller than previously.

Only now in the current crisis are economic gurus pointing out that the investment options offered by financial institutions managing millions of 401k accounts were often “dogs”.  They were not the best mutual funds, the best stock portfolios – in fact, they were often some of the worst or created only for investment by those in 401k’s.  

Top management companies made spectacular profits selling mediocre investments and charging hidden fees to an unsuspecting working public.  At the same time, these same management institutions were indulging in highly risky sales of derivatives and making huge profits funding bad mortgage loans.  It is hard to understand how the financial institutions responsible for so much harm to the American public is now bailed out as “too big to fail” while those who lost their retirement savings are blamed for their loss.

The problem with 401k’s is not the plan itself but the failure to regulate employers and fund management companies.  They are the reason this supplemental savings plan has become a disaster in the current marketplace yet the current talking points are to blame the worker for making “bad” investments.

That message is only now being spread through the media.  Until the manipulation and abuses of some 401k management companies is fully exposed, many workers are putting themselves at further risk by increasing their plan contributions in the hope the stock market will recover.  Recovery of Wall Street does not guarantee the fund options in those 401k plans will also recover.