Tag Archives: 401K

Live Poor or Die: The New American Retirement

The very idea of retiring in America had become a mirage–tantalizing, but always sliding into the distance. Those visions of golden years spent playing golf in Tucson or bridge in Boca Raton, promoted by AARP magazine and purveyors of retirement investments, are now nothing more than a chimera for most Americans. The exception, of course, is a wealthy minority, who for the past decade has been squirreling away money they should have been paying in taxes. For everyone else, old age been reduced to three alternatives: Those of us lucky enough to have jobs can keep working indefinitely; the rest can live poor or die.

Anyone who doubts this blunt truth should take a look at a few few recent trends. Start with something called the Retirement Income Deficit. Retirement USA, a consortium of non-profits and unions, which came up with the term,  describes the deficit as follows:

Retirement USA asked the respected non-partisan Center for Retirement Research at Boston College to calculate the figure that represents our current retirement income deficit – that is, the gap between the pensions and retirement savings that American households have today and what they should have today to maintain their standard of living.   Using the data from the Federal Reserve Board’s Survey of Consumer Finances, the Retirement Research Center has calculated that figure at $6.6 trillion.The deficit figure covers households in their peak earning and saving years—those in the 32-64 age range—excluding younger workers who are just beginning to save for retirement as well as most retirees.  It takes into account all major sources of retirement income and assets:  Social Security, traditional pension plans, 401(k)-style plans, and other forms of saving, and housing. 

The measure assumes people will continue to work, save, and accumulate additional pension and Social Security benefits until they retire at age 65, later than most people currently retire.  It also assumes that retirees will spend down all their wealth in retirement, including home equity.  The deficit is thus in many respects a conservative number.

This gap is due, in large part, to the demise of the old-fashoned, fixed-income pension system. According to the Pension Rights Center, total employment in the nation today stands at 130 million, of which 108 million people are employed by private business and 22 million public. The traditional fixed-benefit  plans now cover only about 20 percent of the private workforce, and 79 percent of public workers. Half the entire private workforce today has no retirement system at all. And those with 401ks are at the mercy of the mutual fund companies, with their futures staked on the stock market. In the recession, those plans took a dive, losing one quarter to one third their assets.

Even public employees lack the retirement security they once had. There are recent reports that states, because of their own budget deficits, can’t pay retirement monies to their pubic services workers. The news is hyped by politicians and way overstated, said Keith Brainard of the Public Fund Survey, an outfit sponsored by the National Association of State Retirement Administrators and the National Council on Teacher Retirement. Still, pension plans that cover public service workers and teachers in New Jersey, Illinois, and the city of Philadelphia may be at risk, according to Brainard. About 70 percent of state employees are covered by Social Security, but a good 30 percent would be left out in the cold if the plans went down.

But that’s not the end of it. The big financial institutions that run the 401k plans have been busy applauding the comeback of the stock market, suggesting that it redeems the whole 401k concept. Unfortunately, as the recession wears on, a whole lot of people are withdrawing money from their 401ks, instead of (or in addition to) contributing to them. Fidelity Investments included the following in a recent report on developments in the second quarter of 2010:

While the majority of 401(k) participants continued to save during the quarter, the percentage of participants either initiating a loan or a hardship withdrawal increased.  Loans initiated over the past 12 months grew to 11% of total active participants from about 9% one year prior.  The portion of participants with loans outstanding also increased two full percentage points in the second quarter to 22%.  The average initial loan amount as of the end of the second quarter was $8,650 with an average loan duration of three and half years….

During the second quarter of this year, 62,000 participants initiated a hardship withdrawal, as compared to 45,000 participants who initiated one during the prior quarter.  As of the second quarter, 2.2% of Fidelity’s active participants took a hardship withdrawal, up from 2.0% one year prior.  Additionally, 45% of participants who took hardship withdrawals one year prior also took a hardship withdrawal in the 12 month period ending in the second quarter of this year.  Plan sponsors report that the top reasons why participants are taking hardship withdrawals are to prevent foreclosure or eviction, pay for college, and the purchase of a primary residence.

Fidelity has found that the average age of those taking a loan or hardship withdrawal is between 35 and 55 years old – a worker’s peak earning years – when individuals often have to deal with multiple, competing, financial challenges.  Distributions from a 401(k) or 403(b) are taxed as ordinary income, plus if you are under age 59½ you may be subject to a 10% early withdrawal penalty.

I don’t know much about the pitfalls of 401k loans, so I called up Rebecca Davis, Legislative Counsel at the Pension Rights Center. She explained that if you have a 401K worth $100,000, you can borrow up to half that amount. Before getting the money you need to work out a repayment plan that includes an interest payment to yourself. And that’s where the hitches begin.

To start with, the 401k plan may well charge you a fee for all this; that fee varies from plan to plan. Moreover, when you take the loan from your own plan you must immediately pay the government a flat 10 percent tax—because the money you have withdrawn becomes taxable income. Finally, if you quit your job or get laid off, the loan to yourself from your own plan becomes due immediately–just at the moment when you probably won’t be able to pay it back. And if you don’t pay it back, you’re subject to early withdrawal penalties.

Then comes this important bit of information: The money in your 401k is normally protected from creditors. If you go bankrupt, for example, the creditors can’t get at the money. But once the money is removed from the protective cover of a 401k, pension, or IRA, then it can be seized. So now you’re broke and jobless, and you have to use your retirement funds to pay your debts.  In other words, you are screwed from every possible direction. And if you think things are bad now, just wait until you get old.

Did I mention that Republicans and Democrats alike now want to cut Social Security? Probably not for today’s geezers, but for the old folks of the future–in other words, for precisely the same people who stand to have disappearing pensions and depleted 401ks.  

Ripping Off Workers’ Pay to Increase Executive Pensions

You just can’t win. Here’s news from the always helpful Pension Rights Center on how executives deliberately structure pension plans in in a way that shortchanges rank-and-file workers, so that high riding executives get more money. In other words: stealing from the poor to give (even more) to the rich.

Certain rules in the Internal Revenue Code are designed to prevent employers from discriminating against non-highly paid employees in their pension plans. Unfortunately for the retirement security of their employees, some employers look for ways to get around the nondiscrimination rules.

Instead of sponsoring pension plans that treat all participants equally, some employers circumvent the rules by creating “carve-out” pension plans. These plans often provide rich benefits for senior, well paid employees-often the company’s owners and officers-while covering only a relatively small percentage (or in some cases none) of the non-highly paid employees. While these plans may comply technically with the tax rules as they are now interpreted they are fundamentally unfair. 

Case in point: An article in Physicians News Digest promotes the use of carve-out plans, noting that they allow doctors to “focus the majority of an employer’s contribution to a select group of employees, usually key or highly compensated employees.” In other words, a medical practice can save big bucks by providing one plan for its doctors, while offering many of its lower-paid employees a different, less valuable plan:

By including the key or highly-compensated employees in a defined benefit plan and the remaining employees in a more affordable 401(k) plan, you can keep your retirement plan in compliance with non-discrimination regulations, while keeping expenses at a minimum.

We have discussed the merits of a traditional pension over a 401(k) plan several times in the past. The truly insidious aspect of carve-outs is the fact that the higher-paid employees – the ones who are more likely to be able to save for retirement on their own – are given the better plan, while the lower-paid workers – the ones who can least afford to save for retirement – are stuck with an inferior one. 

Have these employers forgotten that the success of their business is not just a one-(wo)man show?  Or do they just not care?

Moreover, the IRS could probably limit somewhat the discriminatory impact of these plans by issuing new regulations on the technical rules that employers exploit to make carve-outs possible. 

State of the Union: Obama’s “Automatic IRA” Plan Could Make Bush’s Wildest Dreams Come True

In tonight’s State of the Union address, President Barack Obama is expected to propose what’s generally being called an “automatic IRA.” Under this scheme, the government would help set up a system of individual retirement accounts in which workers would be automatically enrolled if their employers don’t offer their own 401Ks. A minimum amount of pre-tax earnings–under current proposals, 3 percent–would automatically be deducted from employees’ pay and direct-deposited into their accounts. Individuals could increase the amount of the automatic deposits, or they could opt-out altogether. They would also have some choice about where to place their investments; otherwise, it would automatically be placed in what planners are calling a “diversified portfolio.” 

On the surface, it sounds like a sensible plan. AARP is supporting it, and says it could help some 50 million of the 75 million Americans whose employers offer no retirement plan.  It’s being touted as a “third way” or “common sense” approach to the retirement crisis–a rare bipartisan initiative, developed through a rapprochement between left and right. The idea emanates from a group called the Retirement Security Project (RSP), led by David John of the Heritage Foundation, who hammered out a joint scheme with William Gale of the Brookings Institution. It’s supported by the White House, and expected to breeze through Congress. The publication Life and Pensions reported earlier this week:

John, who is a senior research fellow with Washington, DC-based think-tank the Heritage Foundation, as well as holding a position on the RSP, said he welcomed the initiative’s inclusion in the state of the union address. Having the President speak about it on Wednesday will give it a far higher profile than it would otherwise get,” he said.

John said he expected the bill to have a fairly easy passage, given the lack of opposition. It was included in the 2009 budget, but the time taken over the controversial healthcare reform bill meant it slipped off the legislative agenda.

The presence of David John as the proposal’s spokesperson and primary architect ought to be enough to make progressives take a closer look at a proposal that’s promoted as an obvious no-brainer. With the exception of the automatic IRA, John is a sharp critic of Obama’s economic approach, including all of the other proposals the president is expected to outline tonight. “He’s basically giving tax money to people regardless [if] they have actually paid any taxes or not,”  John said yesterday. “And many of these [proposals] sound much better as they’re intended to than they would actually work in practice — so I think that some of those are going to have some severe handicaps.”

In addition–as a quick glance at his writing on the Heritage Foundation web site reveals–John was a huge booster of privatizing Social Security. The idea of privatizing this New Deal program, and turning over its billions to Wall Street, has been the fondest hope of the right since the days of the Reagan administration. Remember that it was just five years ago, in 2005, that George W. Bush made privatizing a portion of Social Security a centerpiece of his State of the Union address. Conservatives fought hard for this initiative, which would have diverted 2.5 % of Social Security withholdings into individual retirement accounts similar to those now proposed, and invested the funds in a similar “diversified portfolio” of Wall Street products. But the pubic, wisely, distrusted Bush’s motives, and by the end of the year, it was clear that he would never win broad support for the privatization plan. In the early months of 2006, the Retirement Security Project, under John’s leadership, began actively promoting the automatic IRA scheme. 

Is it paranoid to see the automatic IRA as a back door attack on Social Security–a foot in the door in the quest to cut entitlements? Maybe not. Unlike Bush’s plan, the automatic IRA would not take funds out of Social Security, but rather directly out of workers’ paychecks. But imagine, if you will, that at the same time, cuts are made to Social Security. Tonight Obama is expected to pitch his version of the fast-track “deficit reduction commission” recently proposed (and defeated) in the Senate, which clearly would set its sights largely on entitlements, including Social Security. So we could see Americans’ Social Security cut by a small percentage (remembering that raising the retirement age is, effectively, a cut), while simultaneously, a small percentage of their pay is deducted and invested in the private sector. And suddenly–presto–George W. Bush’s wildest dreams have come true.

There’s yet another facet to the automatic IRA plan, which would effectively channel not only worker earnings but also government funds into private retirement accounts. On Monday, Obama and Vice President Joe Biden addressed the Middle Class Task Force set up a year ago. Biden pitched the automatic IRA proposal, saying “It’s a simple proposition, but it’s a big deal,” and then outlined the plan for a government “match” of individual savings:

It also means simplifying and expanding the saver’s credit, which helped working families save for retirement by providing a 50 percent match on the first $1,000 of retirement savings.  So if you put a thousand bucks into a retirement account, your government is going to add even more — another $500.  It’s an incentive, but long term it saves the government a lot more money than the 500 hundred bucks put in if in fact we find we have a generation that’s able to care for themselves and not have to look to the government to provide some basic needs they need.  This will not only help build up a nest egg for existing savers, but it’s going to encourage workers who currently have no retirement accounts to start to save.

The matching tax credit, too, might sound like a nice plan, until you think about what it actually means: Instead of going into the U.S. Treasury, this money, too, will go straight to Wall Street, in the form of IRA investments in private retirement funds. And suddenly–presto–it’s yet another government handout to Wall Street. Even without the tax credit, there’s no doubt that the automatic IRA could be the best thing to happen to Wall Street since the creation of the pre-tax 401K.

It’s hard to fathom why Americans would want to dump more money into an IRA that will end up in unguaranteed mutual funds, so soon after seeing our private retirement investments take a beating in the recession. Just a year ago, we were all kicking ourselves for trusting Wall Street with our nest egss, and thanking our lucky stars that at least we hadn’t privatized Social Security. 

Nonetheless, the automatic IRA plan seems destined to forge ahead, steamrolling over other, more secure options. One such proposal was made by pension expert Teresa Ghilarducci, who suggested setting up accounts that would have a guaranteed government return and be run by the Social Security administration. (I outline her plan in my recent Mother Jones article on 401Ks.) But once again, the American government prefers to skirt direct responsibility for looking after its elders, and instead pass us off into the greedy, grasping hands of Wall Street–which will no doubt be laughing all the way to the bank.

How CEOs Rip Off Pensions

What’s left of the American pension system is a  pit of unexplored corruption.  Corporate management has used the pension fund as a piggy bank to make speculative investments, and cover its ass in any number of ways. The pensions themselves are supposed to be guaranteed by a government insurance fund, but during the Bush administration there was much speculation it was being used by its leaders to speculate in stocks and bonds.

As for the  happy-go-lucky “seniors”  enjoying their  so-called “golden years”–well,  a lot of them are scrounging around trying to make ends meet due to their companies having dumped them into loser 401k plans. Those that were left with old fashioned pensions are getting screwed by their CEOs who rip off the company for millions, leaving the pension in arrears, then bundle everything up and sling it to the government  backed pension insurance fund. 

USA Today provides some particularly grotesque examples:

Top executives at four companies that jettisoned their employee pension plans received $49.5 million in retirement and severance benefits in the years before the companies filed for bankruptcy, while retirees saw their benefits cut by as much as two thirds, congressional investigators conclude in a report released Thursday….

The Government Accountability Office (GAO) reports that pensions at the companies, United Airlines, US Airways, Polaroid and Reliance Insurance, were underfunded by more than $11 billion when the companies turned them over to a government-backed insurance fund. The report says executives at those four companies and six others that abandoned their pension plans took in a total of $350 million in pay and perks in the years leading up to the bankruptcies.

“If the pension is getting deeper into trouble and the executives are getting richer, there’s something wrong with that picture,” said House Education and Labor Committee Chairman George Miller, D-Calif.

No kidding.

The Ugly Truth About the 401(k)

Back in the spring, Mother Jones published an issue with cover line was “Who Ran Away With Your 401(k)?” and a series of articles about America’s broken retirement system (including one by me).  This week Time magazine has a cover story by Stephen Gandel that’s well worth reading, even though by now it’s stating the painfully obvious: It’s called “Why It’s Time to Retire the 401(k)”:

The ugly truth…is that the 401(k) is a lousy idea, a financial flop, a rotten repository for our retirement reserves. In the past two years, that has become all too clear. From the end of 2007 to the end of March 2009, the average 401(k) balance fell 31%, according to Fidelity. The accounts have rebounded, along with the rest of the market, but that’s little help for those who retired — or were forced to — during the recession. In a system in which one year’s gains build on the next, the disaster of 2008 will dent retirement savings long after the recession ends.

 In what must seem like a cruel joke to many, the accounts proved the most dangerous for those closest to retirement. During the market downturn, the 401(k)s of 55-to-65-year-olds lost a quarter more than those of their 35-to-45-year-old colleagues. That’s because in your early years, your 401(k)’s growth is driven mostly by contributions. You control your own destiny. But the longer you hold a 401(k), the more market-exposed it becomes. It’s a twist that breaks the most basic rule of financial planning.

And don’t think that the problem is solved by the stock market’s partial rebound, or pronouncements that the recession is over. As the Economic Policy Institute has pointed out, the retirement crisis preceded the recession, and will endure long after it’s over:

Only half of full-time workers have a retirement plan through their employer, and coverage is much lower for part-time workers. Participating in a plan doesn’t mean a worker is adequately preparing for retirement. The median 401(k) account balance was only $25,000 in 2006-$40,000 for workers approaching retirement age. In other words, half of those who had a 401(k) were nearing retirement with less than $40,000 in their account.

Even before the stock market slide, the average person with a 401(k) was on track to retire with only 20-40% of what they need to maintain their standard of living.

The Economic Policy Institute, Pension Rights Center, and others are part of a new initiative called Retirement USA, which says it “is working for a universal, secure, and adequate retirement system to supplement Social Security for those workers who are not in plans that provide equally secure and adequate benefits.” Based on the current effort to achieve universal health insurance, it’s clear they have a long road ahead of them. (Death panels, anyone?)

Big New Fear: Can Demented Geezers Wreck the Economy?

As we grow older more and more of us will suffer from dementia. A new research study by David Laibson, a Harvard professor (and colleagues at NYU, the Federal Reserve Bank of Chicago and Federal Reserve Board in Washington), reports dementia doubles every 5 years after age 60 until by age 85 some 30 percent of the population is dotty. And even old people without dementia have “substantial cognitive impairment.” All told, nearly half the population between 80-89 is either demented or has cognitive impairment, according to the report.

The researchers are worried about all of this because people suffering from these maladies just aren’t up to handling their finances. Even taking into account the 401K crash, there’s a lot of money among the elderly, and if some old screwball starts fooling around, it could all go down the drain. Think about it: Geezers could wreck the Wall Street rally.

So what these professors and economists propose in their paper, entitled “The Age of Reason: Financial Decisions over the Life-Cycle with Implications for Regulation,” is a series of options. As reported in Pensions & Investments, an online service that follows the ups and downs of pensions, these include:

….Improved disclosure is less paternalistic, although the authors doubt such actions will effectively improve financial choices. “Even for cognitively healthy populations, there is scant evidence that increases in disclosure improve decision making,” the paper said…

A more paternalistic option, the report said, is “gentle nudges” from plan executives to steer older participants into the proper investments. But while the authors said they weren’t opposed to the nudges, they said older adults with “significant cognitive impairment may be no match for highly incentivized parties with malevolent interests and ample opportunities to nudge in the wrong direction.”

Other policy options in the paper: laissez faire; requiring participants to pass a “licensing” test if they want to opt out of a safe harbor investment or make other significant investment decisions; requiring older adults to develop a financial “advanced directive,” such as appointing a standard fiduciary, before reaching age 70; regulating financial products like “dietary supplements,” with safety and quality standards; and requiring “explicit regulatory approval” of financial products.

Bottom line: Tons more business for the mutual fund industry, which already provides investment advice—much of it bad– to 401Ks, but now can argue that it needs to protect the nation’s wealth by becoming fiduciaries for old zombies. And who’s going to make that happen? The Congress,which will enact regulations that allow private companies with their superior knowledge to handle the money.

Now to be fair about all this, rip off is not what Laibson has in mind. But given the existing political climate, with a Congress and a series of administrations that came to the verge of turning all or part of the Social Security system over to Wall Street, that’s what is more than likely to happen.

Big Meaning: Here’s how, in the name of the nation’s public financial health, a new sort of “rationing’’ can lead to the greatest robbery of the elderly in the nation’s history. First Wall Street tells us to take charge of our own investments and get big brother off our back. Now, with dementia as its guide, Wall Street can opt for a solution some might label “socialism”–if only private industries weren’t making so much money off of it.

The Federal Government Decides to Let Old Folks Keep Their Own Money–What’s Left of It

As one of its final acts in the worst economic year since the Great Depression, the federal government passed legislation suspending for 2009 the rule requiring old people to withdraw a minimum amount of money from their 401Ks, IRAs, or other individual retirement accounts. The current rule imposes a 50 percent tax penalty on anyone over age 70 1/2 who fails to take their so-called mandatory distributions by the end of the year.

That’s right, fellow oldsters–as a parting gift to all of us, the 110th Congress and George W. Bush, who failed to prevent or contain the financial meltdown that has cost some of us a third or more of our life savings, is now giving us permission not to spend some of what’s left. 

The idea behind the legislation is that seniors shouldn’t be forced to sell off their investments at a loss. Unfortunately, however, it applies to 2009, not 2008–which is, of course, when our retirement accounts got gutted. According to the New York Times, some members of Congress urged Henry Paulson’s Treasury Department to apply the same change to 2008, but it declined to do so.

In a letter to members of Congress, the Treasury Department said any steps it could take to address the issue would be “substantially more limited than the relief enacted by Congress and could not be made uniformly to all individuals subject to required minimum distributions.” It also said carrying out the changes would be “complicated and confusing for individuals and plan sponsors.”

Well, by all means, let’s not confuse the old farts; we’re having a tough enough time figuring out how how it is that we did everything we were supposed to do–worked, planned, saved, invested–and still got so royally screwed. And let’s not complicate things for the financial institutions, who are already overburdened figuring out how to spend their $700 billion handout.

In any case, the legislation only helps those who can afford to live without taking any money out of their retirement savings (assuming they have any to begin with). This would apply mostly to the well-off, and to those of us who still have jobs.

And we working geezers, apparently, would be wise to hold onto what we can. The last month of 2008 also brought reports of companies large and small reducing or suspending their contributions to employees’ retirement plans. These cuts, notes the New York Timesare “putting a new strain on America’s tattered safety net at the very moment when many workers are watching their accounts plummet along with the stock market.”

To many retirement policy specialists, the lost contributions are one more sign of America’s failure as a society to face up to the graying of the population and the profound economic forces it will unleash.

Traditional pensions are disappearing, and Washington has yet to ensure that Social Security will remain solvent as baby boomers retire and more workers are needed to support each retiree.

The company cutbacks may mean that some employees put less money into their retirement accounts. Even if they do not, the cuts, while temporary, will have a permanent effect by costing many workers years of future compounding on the missed contributions. No one knows how long credit will remain scarce for companies, or whether companies will start making their matching contributions again when credit loosens and business improves.

“We have had a 30-year experiment with requiring workers to be more responsible for saving and investing for their retirement,” said Teresa Ghilarducci, a professor of economics at the New School. “It has been a grand experiment, and it has failed.” 

It may well be that, as Shamus Cooke writes on the Dollars & Sense blog, “Unless things change fast, human history will show that the phenomenon of  ‘retirement’ was limited to one generation.”