I’m seeing a revival of undead themes again. This weeks’ winner comes from the left, claiming there’s danger ahead for 401k plans and retirement savings. I’ve written extensively on the right-wing version of this theme before; namely, that the government will take over your 401k (NOT!). Before that post, I wrote about the same topic, pre-election here, here, and even linked up some facts here.
Like the bogeyman that never dies, it’s baaaaaack. This time it goes like this, courtesy of James Ridgeway at Mother Jones:
Under the automatic IRA plan, 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.”
The author goes on to speculate that this would be a ‘gift to Wall Street’ and possibly open the door to privatized Social Security down the line.
Disclaimer: I’ve been a third-party pension and 401k administrator for nearly 30 years. I am not, nor have I been affiliated with any product-related company that handles 401k investments. With that out of the way, can we possibly step back the “every corporation is bad and we’re all screwed” rhetoric? Thank you.
What is the “automatic IRA”?
It is a retirement savings plan for employees whose employers do not offer a 401k plan. The intent is to encourage retirement savings by having a small percentage of pre-tax earnings deducted from employees’ paychecks and set apart for their retirement. If you’re really the wonky type, you can read a version of it here that did not pass in 2007.
Instead of opt-in triggers, it is opt-out, meaning that enrollment is automatic unless the employee chooses to opt out. But opting out is maybe not such a great idea, because participation in an automatic IRA as proposed by this administration comes with a 50% match from the government on the first $1,000 of employee savings. Simple enough: save $1,000, receive a 50% return on that investment, courtesy of the US government.
How is this a gift to Wall Street?
Like any gift, it’s only a gift if it’s given with one’s own free will. If you choose to invest these IRAs in equities traded by Wall Street, or by banks, or whatever, that’s your choice. No one is forcing you to.
The objection stems from a provision that says in the absence of any direction from the employee, funds will be invested automatically into some form of life cycle fund. This would be, I think, where the idea of gifting Wall Street comes from.
As I said, the only way you give Wall Street a gift is to hand it over. If you’re an employee and you’re given disclosures which explain exactly what your options are, and you choose not to act, that’s an affirmative act in itself, right?
Why mutual funds as default?
Here’s the thing: It would be criminal for an employer to withhold funds for your retirement and not deposit them somewhere. If you don’t designate investment choices, they’ve got to do something with that money or they’ll go to jail. Here are the choices:
- If the default were some sort of cash or money market account, the complaint would be that the rate of return prospects were so small that it was negligible.
- If the default were government bonds, conservatives would shout about government takeovers and mandatory investments.
- Defaulting to a blend of equities that follows an asset allocation model tracked to the age and average number of years until retirement is probably the very safest default there is. Investment in a mutual fund instead of an individual stock already drops the risk, and a conservative blend of fund makeup further reduces the risk. (although, honestly? I don’t like life cycle funds and would probably spend a good deal of time writing about other alternatives that are better)
Saving for retirement is good. All market investments are not the height of evil, folks.
Despite the somewhat hysterical tone in Ridgeway’s article, there are some facts that come into play here.
- Saving for retirement is a sound and prudent thing to do, no matter who you are. It can make the difference between poverty and comfort, push families toward financial security. It is by no means the only answer, but with that government match, it’s a pretty darn good answer to some daunting problems that may or may not arise later in life.
- All investments are not evil. Progressives should embrace the idea of investment in companies innovating in the areas of clean energy, for example. Without investment in industries that drive innovation, there won’t be innovation. Government cannot and should not be the sole investor in our future or the future of industry. This is where I take issue with the anti-corporatist banner progressives carry. Corporations are not all evil, especially the corporations you own. Stock ownership is ownership. It’s investment in industries you believe in.
- 401k plans are the single most popular retirement plan there is. They’re easy to understand, flexible, employees can access information in near-real time about their accounts on the telephone or the internet, and the employer match makes them extremely attractive to mid-level employees.
- Entry level and younger employees lack incentive to save. This is partly a function of where priorities are for younger people, partly how hard it is to stretch lower salaries across a greater spectrum of expenses, and partly because there is very high turnover in that employee group.The problem is, we’re not saving enough for retirement and we’re not putting enough in the bank for emergencies. Part of the reason this last crisis is as bad as it was? No one had any money in the bank and those of us that did were watching the values drop like a stone. Even though they’ve recovered some of their value, there’s still a long way back to the middle.When retirement savings happen later, there’s a whole lot less saved for retirement. Just like anything else, the younger you are when you start saving, the better off you are later.
If you truly object, invest in our country
I have long believed there should be a movement amongst progressives to take ownership over that which we believe is good. Conservatives win big when they decry big government and deficit reduction initiatives, because they’ve framed both as terrible horrible things, particularly government.
Yet, I don’t see a big movement on the part of progressives to make a reinvestment in a government they believe in, and that plays right into the ‘government is bad’ conservative chorus. Why aren’t we buying debt instead of letting China suck it up at a record pace? Why aren’t we investing in US bonds instead of Enron stocks?
The argument goes like this: Rates of return on government bonds barely keep pace with inflation, so it’s better to invest in public companies’ stocks and debt instruments in order to accumulate more at the end.
So….how’d that work for everyone in 2008? Not so great, eh? If we had invested in US bonds, we’d be earning very little, but we wouldn’t have lost anything either.
Why aren’t we making those bond investments? Why aren’t we all working together to take back ownership of our country and in the process, keep our money safe? If you were saving for retirement and didn’t want to give even one small dime to ‘corporatists’, I would argue directing your money into US debt instruments would be an expression of your belief in this country and desire to free it from financial bondage to the Chinese, Japanese, and oil barons.
All it would take is one checkbox on the election form and a signature on the dotted line. Don’t want to give any gifts to Wall Street? Fine. Invest in the USA instead. Government bonds are always a legal, available investment option.
Evil is what you make it
I understand the distrust of Wall Street. I understand distrusting banks. I do, too. I understand distrusting a proposal that appears to have been hatched by a Heritage Foundation fellow under the watchful eye of Robert Rubin (who sits on the oversight board of the Retirement Security Project).
Even so, with a little bit of research and careful consideration, Ridgeway could certainly have discovered that the very, very progressive (to the point where they even made me cringe a bit) ideas of Dr. Theresa Ghilarducci are married to the whole idea as it stands today. In 2008 she testified before Congress about the loss Americans had suffered to their retirement plans due to the market crash. She proposed the very same plan (except her plan was mandatory minimum retirement savings), but augmented and expanded it to require that all Americans invest funds in a Guaranteed Retirement Account (GRA) that would provide an annuity at retirement in addition to any 401k savings. Her testimony nearly gave the right-wing a heart attack, sending echoes of government-run pension plans all over the blogosphere.
It seems to me the version on the table right now strikes a nice balance between one extreme and the other. I might even go as far as to call it…bipartisan. Just don’t say that too loud, because if you do, it’s likely to fail in the Senate, 59-41.
