PBS Drops Another Bombshell: #WallStreet Is Gobbling Up Two-Thirds of Your 401(k)

[JDPriestly]

30. Why does the tax deferral look so good on paper?

Because the income of an ordinary person falls so drastically after retirement. And that sudden crash in income means you have to prepare in more meaningful ways than putting money into a 401(K).

I know that housing prices fell. But for those who paid off their mortgages before retiring, it wasn't such a big problem. It's the folks who put money into their 401(K)s and lost it right when they needed it to pay off a mortgage that got hurt.

Better for working people to pay off their mortgages than to set aside "savings" in a 401(K). You do not want to have to take rent money out of your Social Security. And most people can't do both on their average incomes.

Everyone should save, but having a roof over your head when you no longer have income is far, far more important. I know lots of people in their 50s who lost their jobs and homes and are trying to start over again. It would have been better for them to pay their mortgages and forget their 401(K). Balance is best, but if you have to make a choice, the mortgage and property insurance should come first in my experience. That is particularly true for people who have paid a lot on their mortgages and are almost at the end.

But "nobody could have known" that the stock market would crash just as baby boomers were about to retire.

Fact is, it did crash just as baby boomers were about to retire. And if anyone trusts what is going on now with the unknowns about the outstanding derivatives in default and the computerized trading, I still have that bargain on a bridge.

Fact is when you are 25 you can afford to wait for the stock market to rev itself up to its highs once again. But when you are in your 60s, your financial advisers will tell you to invest conservatively. If you retired or were fired right at the beginning of the financial crash, those with 401(K)s probably moved their money into conservative investments. Do you know what the interest rate is right now from a conservative investment like a bank account? And that is where the money of seniors who put in their 10% of $50,000 or less per year are. They could not save in the hundreds of thousands. Their 401(K)s will not be sources of income. They will be forced by rising prices to spend down their capital and take what they need to cover extra medical costs like dental work, eyeglasses and hearing aids from the capital in their retirement funds -- until that is gone. A hearing aid, not covered by Medicare, can cost $3,000.

The overpriced stock market may offer hope to people with pension plans managed by professionals -- people like public employees or union members -- but they are no solace to the individual investor trying to pick stocks or mutual funds in between kids baseball games and visits to mom in the nursing home. For most people, managing investments is a sure way to lose money. And that is what the average 401(K) "investor" faces.

The growth in the market is wonderful for the trust fund kids, but not so good for the waitress at McDonalds. What the stock market does is relevant to rich people but for the rest of us it is just a confusing maze of tricks and devious charts.

How so -- did you read post #11 where Xcel Energy pays the management fee, offers lots of funds with expense ratios between 0.10% and 0.20% and matches employee contributions up to 5% of wage/salary? If that's getting fucked, I'm gurgling in ecstasy.

That said, I don't doubt some employers are screwing their employees by using a high-cost 401k management firm that offers only high-expense ratio funds, and getting a kick-back.

Management fees are a terrific problem. The problem is that most Americans do not want to read and cannot understand financial documents. I don't want to stereotype. I used to do the budgets for a company I worked for and was deeply insulted when a prospective employer sat me down and advised me (in my 50s) that I just didn't look like a person who could read a corporate financial statement.

Unfortunately, most people can't read them. I know enough about them to know that what you see is often not what you get. The banks would never have begged for a bail-out if you could trust their financial disclosures. You needed to be able to read code to understand the financial statements of the retirement funds in the months prior to 11/08. For most "investor," suddenly there is a crisis -- and the folks with kids on the soccer team and new babies and heart problems and cancer will be the last to know.

And that gets us to a big flaw in the 401(K) system -- aging. I know a woman in her 90s who is blessed or cursed, depending on how you look at it, with a certain amount of financial independence and a brilliant mind. She panics every time she has to make a minor financial decision. She cannot understand why, when she sends a check to New Jersey, she gets an answer from someone in Philadelphia. And why was the bill mailed from Texas? You try explaining that to her. It's perplexing.

Forget sending seniors their statements via the internet and e-mail. How in the world are an elderly person's children supposed to know all of mom's passwords for her accounts. And many, many elderly people do not use the internet. Many don't know how to use it. 401(K)s are not flexible enough to deal with the needs of the elderly or disabled.

What does Social Security have to do with 401(K)s. 401(K)s are a good approximation of what we would get if Social Security were privatized. And that appears to be the dream of folks like Pete Peterson, George W. Bush, Erskine Bowles and Alan Simpson to say nothing of the younger crop of Republicans and Wall Street hedge fund managers.

When we (today's younger retirees) were first working in the 1950s and 1960s, an annual salary of $12,000 was considered really good. I was well paid at $7,000 per year and willing to work for far less. I remember a minimum wage of $1.25 somewhere in there.

Inflation since that time has been tremendous. A house in the Southwest in an unremarkable location and city that was worth a little over $13,000 in the 1960s is now worth $170,000 plus. It's worth 13 times what you bought it for, and, extra bonus, you can live in it rent-free. You have maintenance and taxes, but you pay them even when you pay rent to a landlord. If your retirement income is based on amounts saved during those years and laundered, rinsed and hung out to dry by who knows how many young and clever hedge fund managers since, hard to say how much of the stock market growth will profit you.

Overall, there are better investments than a 401(K). It is not an accident that Pete Peterson's own Blackstone Group is buying foreclosed properties.

But if you take your money out of your 401(K) before the official date, you pay a penalty. And many people have needed to cash out their retirement funds early in recent years thanks to the mismanagement of our banks and Wall Street and job losses.

The "recovery" on Wall Street is a slap in the face, a terrible affront to the many people who lost their homes in the Wall Street mortgage fiasco.

Sorry to go into such a rant, but I have seen people who have suffered in the past few years from the irresponsibility of the banks and Wall Street investors. I do not trust them for 10 seconds. It is unbelievable to me that virtually none of the banks and managers of the people's money on Wall Street have had to answer personally for the fact that their salaries have burgeoned while ordinary savers in their senior years receive almost no interest on their conservative accounts.

The issue here is how 401(K)s fit in with cuts to Social Security and whether seniors should have to accept those cuts in order support the bonuses and bail-outs of Wall Street brokers. I favor Social Security. Wall Street is full of talented mathematicians who should be working on problems of more social benefit than enriching themselves with other people's money.

Raising the cap on payroll taxes is a great idea for Social Security provided that the limits on maximum benefits remain in place. Social Security is an insurance plan. There should be a maximum pay-out regardless how much you put in. Otherwise raising the cap is not a solution.

And back to the 401(K)s, what concerns me the most is the simple fact that if the baby boomer demographic bulge is likely to create a future shortfall in Social Security funds, what is it going to do to the stock market?

What happens if baby boomers actually have to start withdrawing and spending their savings? What happens to the value of stocks? Will the hedge funds and computer traders continue to manipulate stock values so that they appear higher than the material values and investment returns they should reflect?

I'd like to see the conversation turn from the dangers the baby boomers pose to the solvency of Social Security to the dangers that same generation proses to the solvency of our banks and Wall Street.