Many, many moons ago, back when I was a wee lil’ Mad Biologist, back when I was so young I thought retirement was something you did, not something for which you planned, a long time reader who is a tax attorney, and who in a different geological era (heh) was, according to tax historians*, a “legal architect” of one of the major tax reform bills, gave me the straight dope on 401(k) retirement plans. He told me, if memory serves me right, “It’s just another way to reward wealthy people with a tax break for something they would have done anyway.” For those of you who missed the late 1970s and 1980s, this was a common Congressional activity.
So it’s good to see people, a couple of decades later, finally figuring this out (boldface mine):
Households save where the subsidy is, but don’t save more because of the subsidy. It turns out the best way to get households to save more is … to make them save more. In other words, automatically take a percentage of each person’s paycheck and put it in a retirement account, as a default….
A system of forced, or nudged, saving wouldn’t replace this social insurance, but rather the wasteful dinosaur that is the 401(k). It’s mostly the well-off, who have retirement savings to move around, who move their savings to where the subsidies are. The 401(k) doesn’t do much if your goal is to get people who don’t save much to save more, and it doesn’t do this at quite the cost.
This is yet another reason why we can’t have nice things.
*There are tax historians. Who knew?
I have always considered a 401K as a Casino where you put your money and hoped people like Blankfein and Dimon didn’t steal it. I’ve had enough friends who’s 401K’s turned into 200 1/2 K’s and had to either delay or come OUT of retirement that I don’t regret not throwing my money away one bit.
In a lot of ways the 401k was a consolation prize for those who lost defined benefits plans. Of course defined benefit plans, at least the larger ones, had benefit managers who, as befits one who controls major chunks of change, had clout in the investment world. That clout kept the brokers honest and the ballast provided by major funds collectively helped keep the entire market honest.
Benefits managers acted as shepherds protecting the flock of individual retirements and savings accounts against the wolves. Any wolf that got too aggressive was beat down.
With 401s there are no huge players on your side to extract justice from unscrupulous brokers. If you get screwed, you are on your own. The individual sheep have to navigate through a valley of wolves without the protection of any shepherd.
Of course you can always try to pay off a wolf for protection but there is guarantee that your escort hasn’t just taken a payment from a pack of wolves to deliver you up.