Now that the old year has concluded -- mercifully for the great bulk of investors, who have been taken to the cleaners -- the new year is unfolding. Post-mortems abound, with some attention being devoted by journalists and the investment industry (talk about dying industries!) to the retirement needs of 401K'ers and IRA'ers. Now, it is hardly a secret that 401K owners, heavily invested in equities (remember that investment industry dream mantra: "invest for the long haul"?)have taken a terrible beating. In more candid terminology, the bulk of American workers, now dependent for their retirement on "defined contribution plans" have now been reduced to a position where the "golden years" will not, in fact, materialize. With longer lifespans to look forward to, and severely diminished resources with which to finance them, "retirement" will exist for only the favored few. For the rest, the illusion of the defined contribution route to retirement has been unmasked as the fraud it has always been. For, even in the sunniest of markets, these plans have never been adequately funded. And that folks may be the understatement of the decade. Accumulating a retirement nest egg via the very small contributions which ordinary folk could make to these plans was never viable, given the severe constraints of limited incomes to begin with, and amplified by excessive debt, very high real interest rates on credit cards, consumer loans, and mortgages, rising medical costs, and smaller employer cost-sharing for medical insurance. Moreover, even full funding of the 401K would have required annual AFTER-INFLATION returns of 8% or better, year in and year out. Even in the best of times, such returns required 100% asset allocation to stocks, a cast iron stomach, and adequate performance vis-a-vis the market by money managers. Even if this remarkable confluence of circumstances occurred and persisted, bull runs inevitably come to an end. Case in point: over the past dozen years, the equity market has gone absolutely nowhere. The annual return is around zero, give or take. The only gain has been from dividends, unless one were lured into "growth" stocks, which pay no dividends, but which do provide plenty of excitement and terror. Now, the post-mortems on the 401k debacle of 2008 -- where the average balance has fallen 20% INCLUDING new contributions (i.e., it has fallen more than 20% in fact), and where many individuals have sustained losses of 30, 40, 50%) -- pay scant attention to the fundamental flaws of the 401K -- particularly the absurd, fairy tale assumptions about returns likely to be garnered over a three or four decade period. Rather, they recount individual stories, provide meaningless generalities, and, where they do say something substantive, focus on the need for "investor education." Now this is the bologna we wish to address. Most 401K'ers, being forced to manage their own investment portfolios, have made bad choices, or so we are advised. And what, precisely, are these bad choices? Well, the main criticism seems to be that they have NOT invested ENOUGH in stocks. (Only stocks, of course, can produce fairy tale returns, not to mention calamity beyond measure). 401K'ers lack "professional" knowledge, and thus invest too much in cash and bonds. (Boy, how many astute professionals, such as Wall Street managed university endowments, philanthropic institutions, pension funds, etc etc wish they had invested a substantial portion of their assets in bonds in 2008, instead of placing less than 5-10% in these lower risk securities in many cases, with the result that these ultra-sophisticated investors have sustained overall portfolio losses of 20, 30, 40% or more). BY implication, once the 401K'ers learn to invest like professionals, all will be on the road to recovery. Given the investment prowess of Wall Street's greatest, most revered investment firms -- Merrill Lynch, Bear Stearns, Lehman Brothers, Citigroup, Washington Mutual, Countrywide, Bank of America, etc etc -- which have managed to "professionally invest" themselves into bankruptcy or countless hundreds of billions, if not trillions, in losses -- we somehow doubt that "learning" to think and act like investment professionals will prove to be the salvation of the little guy. In fact, the herdlike behavior of the great investing institutions, their repeated leveraging to the maximum when prices of the favored asset class had reached euphoric peaks, bespeaks a stupidity, an avariciousness, a lack of common sense, and a wilful disregard of financial history which truly defies credibility. No, we do not think the 401K, however "reformed" "professionalized" or "re-structured" will prove anything but a ticket to a working life coterminous with the worker's chronological life. For those unable to sustain the burdens of work in their 70s, 80s, or 90s "retirement" will consist of the poorhouse, moving in with their childrens' families, or government welfare and a threadbare existence. Moneysage 2009 - copyright |
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