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Time Magazine 401(k) Article: Advocacy Dressed Up In Journalism


Our opponents must be extremely disappointed with the performance of the 401(k) system over the last year. In the late 1980s many argued that a future economic correction would result in a collapse of the system. Some went so far as to suggest that participant anger would lead to unionization of workforces covered by 401(k) plans. Instead, we have the opposite. Participants are not blaming their employers for market performance and continue to save in their plans, benefiting from the recent improvement in equity markets.

Rather then admit they are wrong, those who dislike the 401(k) system continue to resort to misrepresentation and distortions like those reported in the October 9 Time article "Why it's time to retire the 401(k)."; For example, as in the article, they continually refer to average account balance size, failing to point out that the typical 401(k) participant has only eight or nine years of participation with their current employer. They don't mention the hundreds of billions of dollars rolled over from 401(k)s into IRAs every year. They don’t report that 401(k) participants have 15 million accounts worth hundreds of billions of dollars with former employers.

As in the article, opponents use extreme market points to evaluate 401(k) performance. They fail to report that employer contributions, dollar cost averaging and market returns over time make 401(k) plans the safest place in America to save. Even using unfavorable points in time, few 401(k) participants have experienced a decline in value of their own contributions. Comparing 401(k) values at market peaks with market bottoms is ridiculous. The 401(k) is a long-term savings and investment program. Participant returns should be calculated by subtracting total personal contributions from the account balance and calculating a return using the difference.

The article touts the benefit of traditional pension plans. It fails to point out that even at their peak defined benefit plans covered less than half the American workforce. More importantly, a significant percentage of those covered did not work their entire career with the sponsoring company and thus received little or no retirement benefit. This was especially true for women, whose attachment to the workforce was, and is, more intermittent than for men.

In the interest of keeping this blog of reasonable length I will add just one final criticism of the article. It repeats the many times repeated distortion of why 401(k)s came to be. Section 401(k) was added to the code in 1978 to correct an omission in ERISA which inadvertently did not address the continuation of cash and deferred profit sharing plans, a highly beneficial program for rank-and-file workers. Then, as now, the rules governing 401(k) and other defined contribution plans were far less favorable to the highly compensated than traditional pension plans. The article’s indication that they were a perk for highly compensated executives is laughable. At the time, the maximum contribution for an individual in an employer sponsored defined contribution plan was $25,000. Compare this with traditional pension plan arrangements where annual contributions on behalf of highly paid employees approached $1 million.

We are at the dawning of a 401(k) age. Because of 401(k) there will be more employer-sponsored retirement plans, and the plans will continue to be better designed. There will be more retirement savings, and those savings will continue to be better invested. Because of 401(k) more people will have more money in retirement than ever before. Polemics like the one in the Time article are on the wrong side of history.