Review: PBS: Teresa Ghilarducci: Why the 401(k) is a “Failed Experiment”
Updated: Apr 14
PDF copy: <click here>
This article was a SCATHING review on the entire path of America's retirement savings systems. I couldn't have written something better... aside from their ending conversation and ultimate conclusions.
I'll post some of the larger quotes of the article, and then I want to go a bit deeper into it. I read the article, but sometimes reading articles is hard for me, so I did a "PDF Print" and highlighted some of the key things. The transition from traditional pensions to 401(k) plans is the FIRST legal scam against the American Public that I talk about... and what to do about it as a result.
Just remember that the article was originally published in April, 2013... just a couple of years after the biggest and fastest market drop in history in 2008:
“The 401(k) … is one of the only products that Americans buy that they don’t know the price of it. It’s also one of the products that Americans buy that they don’t even know its quality or know how to judge its quality. It’s one of the products that Americans buy that they don’t know its danger.”
“Most people don’t know that the 401(k) products are toxic and their behavior toward a 401(k) product is toxic because no one has been responsible for providing a safe product.”
“The 401(k) in October of 2008 had become a 201(k).”
“It’s not the fault of people that they don’t have enough savings in their individual retirement account or their 401(k)s. It’s the fault of the system, and the whole system needs to be reformed.”
The article talks a lot about the original intent and purpose for the 401(k) - that of being a way to save for retirement ON TOP OF traditional pension plans, lobbyists for banking and investment firms being "too powerful" to regulate these plans, etc., etc., etc. But on page 8 of the article (at least my PDF print of the article), is where they start talking about the fees within 401(k) plans. By the way, the Department of Labor - who has some additional regulatory oversight on these plans through ERISA - has a document about understanding your plan fees:
Teresa is very critical of financial advisors who also commonly represent the financial industry (duh): "So when you hire a guy, or you have a financial broker, that guy is most often attached to a big financial company. Many people are getting their financial advice from an American Express adviser. They’re getting their advice from somebody who they find in a small room at their local bank, who are selling products for their individual retirement account. Or they’re talking to a financial adviser that’s connected to Charles Schwab or Fidelity or another mutual fund aggregator. And this guy works for that financial company, just like the person who sold you a car works for the dealer or for the auto industry."
Now, on Page 14 of the PDF, Teresa begins to really hammer on IRAs, but of course, she calls them "Individual Retirement Accounts" not how they are truly named "Individual Retirement Arrangements" as I recently wrote about. She scrutinizes on IRAs because "At least the 401(k) has some scrutiny by an employer and has a more sophisticated buyer than an IRA has."
[question]The banks will say, “People are just not saving enough.”[/question]
The industry, the banks, the mutual fund industry pivot the concern of workers by saying: “Well, you victims have your own selves to blame for not knowing what a stock and a bond was early on in your life, for not realizing when you were a young worker forming a family that you also had to save for your retirement along with your house, along with your unemployment, along with your child’s education.” …
Teresa begins to offer her own ideas for how to solve this mess on pages 17-18:
But the 401(k) requirement is to amass it all in liquid accounts, and that’s nearly impossible. So what we need to do is to amass a million dollars’ worth of a promise of payment for the rest of your life into accounts that are more like insurance products.
[question]So you believe in annuities?[/question]
Annuities are products that provide a stream of income for the rest of your life. They’re provided by the government, and they’re also provided by employers in a traditional plan, and they’re also provided commercially in the private market.
They’re provided by the government through the Social Security system. When we put 6 percent of our pay, another 6 percent and some change [that] our employer puts on our behalf into the Social Security system, we are buying the right to an annuity for the rest of our life. We don’t call it an annuity; we call it a Social Security benefit.
When we work for an employer that has a traditional pension plan, we’re putting 5 percent of our pay, 7 percent, 10 percent of our money toward a promise to pay you for the rest of your life.
When we try to go buy an annuity from an insurance market, we’re trying to take a hunk of money, $50,000 or even a million dollars, and go out into the market and say: “Hey, insurance company, here’s a lump sum. In return, give me the promise that you’ll pay me a stream of income for the rest of [my] life.”
Now, before we as agents think she's endorsing the insurance industry... keep reading. She's still suspicious of everything.
The problem with going to the commercial annuity market with our 401(k) or IRA assets is that the insurance company doesn’t provide annuity to everybody else. They only provide annuities to people who want it, and they’re suspicious.
If you take your million dollars and want a stream of income for the rest of your life, they know that you know something they don’t. They know that you think that you’re going to live a very, very long time. People that have terminal cancer don’t go to an annuity company and say, “I want money for the rest of my life.” They know they’re going to die sooner than the average person.
So the private annuity company has to charge you for that risk of living too long, and therefore they’re giving you a bad deal because it’s a private annuity market. It’s a lot like sick people having to go out and having to buy private health insurance. The cost is way too high.
So I do not recommend that people take their 401(k) money or their IRA money and buy a commercial annuity. But what I’m saying is that everybody should have access to a low-priced, fair annuity product. But you can’t do that in the private market.
I'd have to ask: "Compared to what?"
What I think is kind of funny... is how the report is so scathing about these fees (and yes, the can certainly add up)... but they IGNORE the future taxation of these plans!
You see, the article ends with her solution - more Government solutions:
[question]Are you optimistic?[/question]
I am, because of all the attention paid to this problem by state legislatures and by governors and by state treasurers. In fact, just last month the California Legislature and the governor decided they can’t wait for the federal government to do something about it, and they just passed legislation that will make it easier for all workers to save in a guaranteed retirement account.
Now, those accounts will be a competitor for Wall Street. But these are systems that will make 401(k)’s and IRAs just much more high-performing vehicles, so everybody should benefit. … So if the federal government won’t do something about their citizens’ retirement crisis, there are other local governments and state governments that will.
Teresa is advocating for the SAME government, who is spending recklessly... to DIRECTLY manage our retirement funds? How well have they managed the CURRENT retirement promises of America - the Social Security trust fund? The Government is JUST TO BLAME as Wall Street is!
She wants THIS Government to manage your retirement? Does she not know that the spending habits of our Government also directly affect the taxation of these accounts when we go to pull them out in retirement?
Well, there are some people who believe that the private sector is the enemy and there are those who believe that the Government is the enemy. I say there's room to blame BOTH.
I will simply end with this: This whole article, while I don't necessarily agree with the conclusions and the end focus just being on fees... it does expose the problems.
"In Everything I Do, I Believe In Putting You In More Control Over Your Money And Wealth From The Forces That Seek To Legally And Systematically Rob It From You: Banks, Financial Institutions, Wall Street, And Especially, The Internal Revenue Service (IRS), So That You Can Keep The Interest You Would Have Otherwise Paid To The Banks, And, Through The Tax Code, You Can Retire With Massive Cash Flow That Is Off The Radar Of The IRS And Is NOT Required To File A Tax Return!"