7/20/09

The 401(k): Welfare For Wall Street.

It is my belief that the 401(k) plan has devolved into little more than cleverly disguised tax designed to subsidize the bond and equity markets. In 2006, after significant lobbying, the financial services industry essentially purchased the Pension Protection Act of 2006 from Congress. Two of the more offensive aspects of the law are automatic enrollment and automatic escalation.

Automatic enrollment allows your employer to withhold 401(k) contributions from your pay without your consent and with no liability for loss. Prior to the first involuntary withholding, the employer is supposed to provide written notice 30 days in advance of the first involuntary contribution. Typically, the default investment, a.k.a. the qualified default investment alternative (QDIA) is a hybrid or target-date mutual fund, which
contains significant risk and have generally underperformed. It is very telling that the Department of Labor only allows money market or stable value funds as a QDIA for 120 days, demonstrating that this is a parasitic attempt to divert funds into the equities markets.

Automatic escalation is the practice of increasing an involuntary plan participant's contribution annually. The initial rate is 3% with a 1% increase in each subsequent plan year. The rationale given for automatic escalation is that 3% annual contributions will not generate sufficient retirement savings. In other words, since the involuntary participant has remained asleep the switch for a year, Wall Street might as well press the bet.

If nothing else, the PPA shows the dangers of being a passive participant in your retirement planning. For example, consider a
25 year old who was automatically enrolled on January 1, 2007. Assuming he was earning $45k/year, received a 5% raise annually, and was autoescalated in 1% increments in each subsequent year, his shares of his QDIA, the Fidelity Freedom 2040 Fund (FFFFX), would be worth $3,710 on June 1, 2009. Had he not been autoenrolled/autoescalated, he'd have $4372, which is about 15% more.

I have yet to see it proven that the 401(k) is the best means of retirement funding. Yet, the financial services industry and the government are willing to resort to deceptive and predatory practices to channel more of our discretionary income to Wall Street. Fidelity Investment's response to the PPA clearly indicates that deceit is intentional. In the response, Donna Hanlon suggests that the 30-day waiting period be replaced with a 5-day period because new hires might notice that their wages are being garnished:
Consequently, compliance with a thirty day advance notice advance notice requirement will require these plans to delay enrollment to the detriment of participants' retirement In automatic enrollment plans, this delay may highlight for participants the difference in net pay that participating in the plan entails, with the result that participants may be more motivated to opt out of participation, a consequence that is inconsistent with the policy choice underlying automatic enrollment.

The remainder of the comments provided by concerned parties are posted at the Department of Labor's site: http://www.dol.gov/ebsa/regs/cmt-defaultinvalt.html. I strongly encourage you to read them, since they provide a window into to actual motivations of the retirement fund industry. What I deduced is that nobody involved is terribly concerned with the welfare of the plan participants. If nobody is looking out for our best retirement interests, how long can we afford to remain oblivious?

18 comments:

  1. These are all great points. The pitiful choices for alternative investments--or even cash--in most 401(k) further supports your thesis.

    I also wonder what the withdrawal conditions will look like 10-20 yrs from now. Isn't there a good argument to be made that tax rates on retirement withdrawals will be much higher? I'm increasingly drawn to the idea of pulling retirement funds into the present. The 10% 'penalty' may pale in terms of future withdrawal taxes or just plain old dollar devaluation.

    ReplyDelete
  2. The standard 401(k) "menu" leaves much to be desired, for certain. My 401(k) allows for a self-directed brokerage account, otherwise I'd be 100% in the stable value option, just to get the employer match.

    Each bailout makes higher taxes more likely, but missing the employer match is leaving money on the table. Most plans allow you to take a loan, so you pay interest to yourself. My plan charges 3% interest, so if I had any major debt, I'd take the loan.

    ReplyDelete
  3. Good point about the employer match. Currently I'm contributing what's necessary to get the match, but no more.

    Sure wish my plan had a self-directed alternative...

    ReplyDelete
  4. Can you tell us more about this? I'd like to find out some additional information.
    My web site ... help me lose weight Miami

    ReplyDelete
  5. Wonderful goods from you, man. I have understand your stuff previous to and you're just too fantastic. I really like what you've acquired here,
    really like what you are stating and the way in
    which you say it. You make it enjoyable and you still care for
    to keep it sensible. I can't wait to read much more from you. This is really a tremendous web site.

    Also visit my site silk scarf

    ReplyDelete
  6. In your home builders in tennessee's contract and make sure you understand everything on the contract must be filed in Franklin County Circuit Court in Frankfort, Kentucky. Called A Guide to Who's
    Who in Atlanta, and" Atlanta's Most Affordable home builders in tennessee citing an average sales price is $170, 000 homes. Do not forget to include your contact details, and don't be afraid to get all of your improvements will be done at a professional level. In this article, we'll focus on how to be your own home builders in tennessee; I hope that I have.

    Feel free to surf to my blog post ... home builders in tn

    ReplyDelete
  7. Normally I don't read post on blogs, however I would like to say that this write-up very forced me to try and do it! Your writing taste has been surprised me. Thank you, quite nice article.

    My weblog: Teen Girls Naked

    ReplyDelete
  8. Howdy! Do you know if they make any plugins to safeguard against hackers?

    I'm kinda paranoid about losing everything I've worked hard on.

    Any tips?

    Here is my site party girl sex

    ReplyDelete
  9. It automobile populates the offered sensor readings (PIDs).
    In the subsequent posting visitors are going to learn much more about this solution.



    my web site ... auto scanners

    ReplyDelete
  10. Flavors: V2 Red, V2 Congress, V2 Sahara, V2 Menthol, V2 Peppermint,
    V2 Coffee, V2 Cherry, V2 Vanilla, V2 Chocolate and V2 Cola.
    E cigarettes are designed to appear and feel like genuine cigarette.
    Keep in mind that v2 electronic cigarettes have goods that
    call for no maintenance. As opposed to traditional cigarettes, E
    cigarette kit doesn't make any stains in the finger and teeth neither the breathing smell simply because it is not making nicotine. Howard on 25th Jun 2009 E.

    Have a look at my blog: v2 cigs coupon code 15

    ReplyDelete
  11. Important thing that must be considered when choosing this type of bathroom accessories is how it can stand up to regular use. The chrome and stainless steel varieties are known to be the less hassle to clean since they are defiant to dirt, kitchen tap and debris that can be wiped away easily with cloth. These types of materials for bath tap can maintain their luster and shine especially when regularly cleaned compared to other finishes that could become dull over time.

    ReplyDelete
  12. my ability to climb overhanging routes where a lot of body tension sunglasses is needed.
    It also hurts my ability to check out the route

    ReplyDelete
  13. This article gold taps explains the crucial queries that you simply must Antique Taps think about when purchasing new taps for your bathroom taps. The information is aimed at buyers Stainless Steel Taps in the United kingdom.http://www.uktap.co.uk

    ReplyDelete
  14. When you’re ready to unwind after a long day, there’s nothing as relaxing as lying back and soaking in the tub. When you’re ready to fill up the tub, you’ll want it done properly and in style. That’s why the tub isn’t a tub until you’ve considered what type of bathtub tap to add.http://www.plumpinguk.co.uk/bath-taps.html

    When shopping for a new bathtub tap (also sometimes referred to as Roman tub fillers), keep in mind that they’re typically offered in the lighter finishes (like chrome and nickel tones), but there are a few exceptions. Also, you probably won’t need to worry too much about spout reach if your tub can already accommodate a bathtub tap. Also, many models include a hand shower as an added convenience.

    ReplyDelete
  15. FindTaps - Top quality, Great value bathroom and kitchen sinks and taps from leading brands,Buy designer taps in our website,Amazing selections here, low prices and high quality!UK taps available from http://www.findtaps.co.uk

    ReplyDelete
  16. Our pneumatic factory was founded in 2000,CHECK HERE. In decades of serving China pneumatic industry, we have built our reputation on product knowledge, world class suppliers, application support, and value add services. Our commitment to our employees, customers and vendors is the core of our business beliefs. In our factory, there are more than 80 front-line workers, 3000 squares working shop.Our main products are air Pneumatic Cylinder, solenoid valve and also a lot of pneumatic fittings like Air Gun.

    ReplyDelete
  17. Choosing from a large selection of high quality taps at http://www.cheaptap.co.uk/ . Find new design of antique taps, LED taps, waterfall taps and so on.You must can find one suit for your house here. We also offering everyday update special price products. The more products you buy, the more discounts will be

    ReplyDelete
  18. Our collection of table and desk lamps combines both classic and contemporary designs. From the elegant Portabello lamp to the stylish Wharton Desk Lamp, our table lamps are available in a wide range of finishes. For the perfect combination of base and shade, why not use our lampshade builder to create your own bespoke design.
    http://www.lightingso.co.uk/13-lamps;
    La lampe de bureau palie astucieusement le manque de lumière naturelle. Vous avez l’embarras du choix, entre l’indémodable lampe de bureau architecte argentée ou la très contemporaine lampe à bureau à LED, noir et chrome. Pour une ambiance féminine, optez pour la lampe de bureau en métal effet dentelle ! Les adeptes du vintage ne résistent pas au charme de la lampe de bureau articulée en métal rouge.
    http://www.luminaireso.fr/8-lampes;
    Tischleuchten bei WohnLicht.com! viele Lampen sofort lieferbar 2% Rabatt bei Vorkasse · alle Typen auf Lager
    http://www.lampens.de/10-tischleuchten

    ReplyDelete