The Parts of The 401(k) Disaster Story 60 Minutes DIDN'T Report

Steve Kroft's "60 Minutes" report Sunday, "401-K Recession," good as it was, covered only a small portion of the whole retirees-are-now-officially-screwed story. It's a fascinating and infuriating story, with far too many angles for a 13-minute segment.

Boy, do we ever have a good show on this financial tragedy for you to watch. (See link below).

The whole sordid 401(k) saga largely involves big corporations dumping their pension plans and pushing 401(k)'s and then brazenly gaming the bankruptcy laws. The story has, sadly, largely gone unnoticed and unreported these past few months during the stock-market meltdown and housing/bank scandals.

How did we even come to have 401(k)'s in the first place? Why didn't we just keep company pensions, which worked fine for most people for years?

The questions get even more interesting (and "60 Minutes" didn't address this big one):

Why and how was much of the cost of employee retirement savings dumped on individual workers - and then taken off companies' books -- in the 1980's?

And finally: Why would anyone assume that most people have the time, inclination or talent to be savvy investors?

The answers can be found in an absorbing report called "Can You Afford to Retire?" It originally aired on PBS's estimable "Frontline" investigative series in May, 2006, and the reporter was veteran New York Times journalist Hedrick Smith. (Smith's new "Frontline" report this week, on widespread and dangerous PCB pollution of the Chesapeake Bay and Puget Sound, "Poisoned Waters," as usual, got strong reviews).

Anyone with a 401(k) -- cratered-out or otherwise -- or a pension plan, or anyone whose company may go bankrupt, should try to watch Smith's piece, which is still there in its entirety at "Frontline's" web site.

Caveat: Be prepared to shake your head in amazement and swear a lot.

When this award-winning "Frontline" piece on the creation of 401(k)'s first aired, I cited it in my annual year-end newspaper TV column as one of the top 10 shows on TV all year. It still stands up; please watch it.

A familiar character shows up on both Smith's 2006 report and on Kroft's story this week -- David Ray, a cheerleader/apologist for the huge 401(k) industry.
A couple of highlights of Smith's amazingly prescient story:

--CBS's Kroft was right when he said the 401 (k) was never designed to be a retirement plan for millions of Americans. Kroft reported they were created in the late 1970's "as a tax shelter for ordinary Americans." But Smith revealed that 401(k) were originally a piece of obscure special-interest legislation, an arcane paragraph in the 1978 Federal Tax Code. It was a technical fix -- to protect a tax shelter for Kodak and Xerox execs.

Under corporate prodding , Smith reports, in 1981 the IRS ruled that savings from regular workers also qualified for the 401 (k) tax shelter. That opened the floodgates.

It "electrified" the financial-services industry, says Smith, and huge mutual-fund companies started promoting the hell out of the 401(k).

--But, explained Smith, "what got lost in all the euphoria" about "empowering" the small investor was "the enormous shift in who was now paying for retirement." That''s the biggest story here. Corporations, said Smith, quickly realized that 401(k)'s would save them a shitload of money (here I employ an obscure accounting term). It would only cost them 50% of what pensions had cost before.

Sweet!

So, Smith says, companies started pitching employees to "take charge of your future" and put the money in the stock market, which was a roaring bull then and seemed to have no limit. Sound familiar?.

We financial novices were quite the investing wizards in those heady Dow-runup days, weren't we?

In 1978, Smith reported, workers put in only 11 percent of total contributions to retirement plans while corporations put in 89 percent. By 2000, the employee share had jumped way up to 51 percent - and the company share had fallen to 49 percent. That's a tidy cost savings of 40%. for companies. So who needed pensions? They were so...outdated.

Among the most fascinating sections of Smith's first-rate reporting for "Frontline" involved this now-all-too-obvious fact: Most of us aren't very good investors. Really understanding stocks, bonds and other investments doesn't come easy to most working people. (I write a column for Dow Jones' big investment website, MarketWatch, and understanding a lot of this financial stuff still intimidates the hell out of me. Who has time to learn what EBITDA is or means?)

The state of Nebraska, Smith reported, had an illuminating, 40-year experience with 401(k) plans. It was a "unique laboratory" said Smith.

For years, Nebraska state employees could choose from two different kinds of retirement plans - a self-directed plan like a 401(k), or a traditional pension.

A state study found that retirees did far better with the pension plan over the years. So Nebraska dropped the 401(k) plan for all new state workers.

"For people who are not investment professionals," a retirement pro told Smith, "a defined-benefit plan works far better." Quel surprise!

You don't suppose all the companies who dumped pensions and saved billions of dollars knew this all along, do you?

Comments

[Dolphinfan65]

I saw the Front-line show about 401 ks.
The way the American leaders allow, theses companies to rob us of our contracted!!!!!!! retirement plans is CRIMINAL. Because of the 401 ks, Corporate leaders can now steal, more money from the company, using theses scams, to claim, they can't afford to pay retirement plans. Of course not, you stole it from the ORIGINAL PLAN, therefore there is no money LEFT OVER!!!!!!!. The company's KNOW, whats needed to pay retirement plans, but continue to ignore this, and pay the TOP, MORE, then the company can't afford it and then BLAME'S, the employees!!
And the sad part is, our government, is with this garbage!!!! for growth sake!.....­....BUNK!!­!
The 60 minutes piece, I didn't see, and can't comment on.

[lostpl8]

A little food for thought, in 1960 dow was about 625, in 1970 dow was around 700, in 1980 the dow was round 800. If you look at the dow charts, from then on its a what biologist call a J curve. were an animal species over populate then die off in mass numbers, and it looks like since 1980 we have had two j curves already.

But here is reason why, you take money out of pension funds, start putting them into markets, one person might not be a good investor, but if lots of people put their money in, yes you are going to see higher prices, its simple economics, so you can sell this bill of 401 bliss, to people because alot of people putting money into markets yes prices are going to go up. But as all those baby boomers retire, and start pulling money out of markets to live off, its is only going to make the markets go down, the only way of stoping this is convincing the next generation that they need to buy the same stocks, and more of them,then their perents are selling to live off of.

Another though, if there had not been the change to 401, how many people would have changed jobs?I bet most people would have worked for the same company for 25 years get their gold watch, and retire happy.

[PS9]

You ignore the fact that the workforce is more mobile than it was fifty years ago. How many people do you know who work thirty years for the same company?

Switching jobs in a defined benefit environment would be incredibly harmful to employees.

[sonofsamphm1c]

Remember, your CDs are only safe because they receive an astonishing federal subsidy. Really want to swim with the sharks, get your CDs where there is no federal deposit insurance.

[The Ghost]

CAPITALISM: DESIGNED TO CHEAT YOU.

[Arthur954]

Why dont we have national retirement like so many other countries ?
In the US everything is so complicated !

[HMDMSR]

The US, pinnacle of free market efficiency, wants its retirement plans to be like its health plans.

[McBushMcSame]

Ineffective?

[lastcallmd]

I've read these comments and the entitlement mentality is amazing. No rugged individualism here. If you want a comfortable retirement, then SAVE. Throughout your working career. Take responsibility for your own future. I don't want to support you deadbeats in your old age through a "national retirement" program. Besides, you already have social security. Not enough money to live on? Bummer, did that occur to you anytime in your 20s, 30s, 40s, 50s? Geez people, you want your own personal lifetime babysitters too?

[DXM]

I am definitely all for self responsibility and have tried to do so all my adult life. A couple of decades ago, I worked for a (now-defunct but at the time #2 in the world) computer company with a pension plan. After leaving there for my present job, I have poured increasing amounts of money into their 401k plan ever since I was eligible to participate. Only until a few years ago did it start to approach the maximum allowable contribution, but it has far exceeded the national average. I have also saved several percent of my income in put it in absolutely safe CDs and have lived well within my means for years. Up until a few years ago, I thought I might even be able to retire early in my late-50's. Despite the fact I have done EVERYTHING I was suppose to for decades, I'm still screwed.

Because of a change in Fed rules, I was bought out of my pension for not much more than a year's worth of payments. My hours at work have been cut more and more over the past couple of years so now I have to use my savings to pay the bills. In the mean time, my 401k is now worth half of what it was at its peak. Despite doing all the right things for years, a retirement even at 65 is problematic.

[vippy]

Where have you been? We have had stagnant wages but everything else keeps going up. Check around and see what people make these days. We have deleted most fulltime positions for not only parttime positions but intermittent such is the case in retail and food service industry. Some employees hold 3 jobs, hard to justify the cost of transportation alone. The availability of credit has distorted this fact for a while.
But it is not fair to judge most people by your situation. Observe like I did.

[TomFox]

You're right about the entitlement mentality. I say let's yank every tax benefit business is getting and let them pay for the whole shooting match. In fact, we'll toward having strict environmental regulations the world over and unionization across the globe so there will be no incentive for companies to lay off their workers to outsource or do business in a country where they can freely wreck the environment. There won't be a free ride to pollute in another country because the externalized costs won't be borne by the tax payer, they will be paid for by the firm doing the polluting.

And all these little tax bennies that small businesses get? Yep, let's yank 'em. Then let's talk about the entitlement mentality.

Can you imagine the chaos we would be in right now if Bush had successfully pulled off the privatization of social security?

Since you are a rugged individualist, when you come down with a catastrophic illness, don't bother seeing a doctor. You should be able to fix it yourself. You're not "entitled" to a specialist any more than non-finance people should be "entitled" to a financial specialist to manage their retirement plans.

[twofish]

Wages have been stagnant for years, medical care (and insurance) costs have gone through the roof, housing takes more and more of your income, college costs are growing by leaps and bounds. What exactly are we supposed to save for our old age? People have been taking the equity out of their houses, for Christ's sake, to keep shopping, which the government keeps reminding us drives the economy. Now several bubbles have burst and that whole game is over. Social security is all many people have left.

[skymuffin]

It's all Vegas, baby, all the time.

Government subsidized "risk" for the corporations and the rich and the rest of us get thrown to the sharks.

I suggest John Bogle's Vanguard Index Funds. Stay away from fund managers! Dollar-cost average, the whole bit...low expenses!

[DoesItReallyMatter]

There is kind of a open secret about investing, any investing, and that is past performance is no guarantee of future profitability. A wise broker once advised me to ignore the value of my investments, up or down, until the day I actually sold them. Boy was he right! After thirty years of investing in the market, if the Dow should again hit around 8300, then the value of my portfolio will be approximately the same amount as I've put in all these years, ie, no gain! With the pace of transformation going on in the world ( I'm talking to you, former Blue Chips), there is no such thing as long-term investing for a profit, which means that the individual 401K investor is, in my opinion, essentially gambling.

[RightWingMarine]

when the company is able to reduce it's costs it then has the money to hire more workers and expand. Would these new workers be better off or worse off if they didn't have a job or had to work elsewhere for less pay?

the 60 minutes hit piece on 401(k)s included some people in unfortunate situations but it is not entirely clear how the 401(k) is to blame. There was a woman that worked as a secretary that complained that young pretty girls were getting hired instead of her. What is the 401(k) connection? She also lamented that her 401(k) had signifigant losses but she is the one that chose the investments. Many people try to hide behind the line that they don't understand investing but since it is their money and their retirement it seems to me that it would behoove them to find out. And even it if became apparent that they just weren't smart enough to learn how to invest there are websites that offer free tutorials and some financial companies will offer advice for free. This is just another example of people not wanting to take responsibility for anything, it's not their fault they aren't to be blamed.

[sonofsamphm1c]

The only person who was selling an investment that is impervious to a total market collapse was Bernie Madoff, and he was committing fraud.

Warren Buffett lost money because of the credit crisis. Nobody can really out study him. There is no investment that can breath underwater. There is no place to put money away for retirement that is perfectly safe.

That is why the very intelligent men behind Social Security originally designed it as a pay-as-you-go system.

[yappnmutt]

when you don't know about plumbing you hire a plumber. many people hired financial advisers to manage their money. they bought knowledge. very few of these advisers were able to avoid this mess.

i have followed the market for almost 40 years now. the aftermath of this debacle will complete the basis of my education because i have watched from the top of one major cycle(dow1000, the peak of the post depression market that bottomed at dow

[yappnmutt]

less than 50) to the bottom(dow400) and back to the top (dow14000). the bottom of this market remains to be seen although dow6666 may be the low. i only have a clue as to what is going to happen next. i don't know what is going to happen with certainty. someone who has not followed the market or has only followed it for a short time has no clue.

[marinade]

The economy has become an unrecognizable monster.

Participation in it is toxic.

[sonofsamphm1c]

One of the greatest economists of all time lost almost his entire fortune in a market crash. He became wealthy again because he kept participating.

[schatsie]

Taking away the pensions directly affected the bottom line and WOULD YOU BELIEVE justitied the CEOs increase in pay...

BARTLETT AND STEELE did wonderful work on this as well as the wonderful work they did on the RED CROSS.... They saw is happening in the 80s, I remember reading about it in Cherry Hill.
Bartlett and Steele are National Treasures!

[Bill Mann - Huffpost Blogger]

What I probably should have explained in more detail is that a major driver behind the shift in retirement plans is a corporate bankruptcy strategy that allows companies to terminate lifetime pension plans through Chapter 11. It's become a routine, effective tool for re-organizing a business. A bankruptcy lawyer's nonchalance about this in Smith's PBS piece is disgusting.

[marijam]

Absolutely. Just look at the airline industry. How many times did Continental go bankrupt and what was the outcome for the workers vs the CEOs?

[steelmill]

I was talking to Don Barlett last week,they are both working on another book about the economy.I tried to get them hooked up with this site,but I guess the Post wasn't interested,they haven't heard anything yet.

[steelmill]

SCHATSIE,Don and James are true journalists,we don't have journalists like that anymore.It doesn't say much about Time Magazine letting them go.I know Time toke some heat for that,I hear from Don once in awhile.I got to know him when they did the book"America;What Went Wrong" when I worked in the steel mill years ago.

[LeLoup]

The roots of this problem lies in DC and nowhere else, doesn't it? It is incumbent upon the legislative branch to regulate (or not) how pensions are managed and structured.

As a society, we have refused to pay for elections. Politicians are like anyone else; they'd like to keep their job. Alas, keeping their job means campaigning and this is expensive; so, lobbyists helps the politicians.

Is it any surprise that politicians listen to those who pay for the means to keep their jobs? Corporations wanted to maximize the amount of money they can pay themselves. If that meant dumping pensions and obligations, so be it. All they had to do was to go to Washington to make sure the law would be on their side. Wall Street, smelling a fantastic opportunity, was more than eager to help.

Quite frankly, on THAT one, we have only ourselves to blame. We got what we paid for.

[schatsie]

You are so correct, we need publicly financed elections. SELF REGULATION does not WORK and has NEVER WORKED.... See the great book on Manias...

[funkalicious]

Had Obama taken Public funding we would probably be stuck with Johnny Mac as president.
chew on that for a bit.

[yappnmutt]

the solution is simple. work until you die. afterall, retirement is a privilege, not a right.

[marinade]

So true. Americans are supposed to shut up, work for low wages, pay taxes and buy crap. They can save for retirement only if they invest their money to prop up the bogus stock market.

[SimJack]

Another angle some corps use is putting vesting schedule in place. Funds contributed by the company this year to your plan may take 4-5 years to fully vest. If you leave the company, withdraw the funds for emergency use, etc. before the funds are fully vested you receive a percentage of the total, the remainder is retained by the company. They get to write off the total amount in the year of the contribution, but retain what wasn't vested when you leave.

[mlpia]

The employer does not get to retain what wasn't vested - it stays in the plan. You are mistaken. It must be used to offset plan expense, offset future contributions or be reallocated to all eligible participants that are in the plan.

[billybunter]

All animals are equal,but some animals are more equal then other animals !

[Steven Duke]

If I am a corporation and force my employee's to invest in me it drives up my share price thus proving how much I deserve my extravagant salary and bonus structure.

Is no one familiar with "the privilege of working for me tax"?

The shills try to explain it away, "you can chose were the money goes" yes, tell that to the thousands of Enron emplyee's, tell that to the Employee/s of Kroger, Great Scott, Kresge's, Wolworth's
This is and has been the plan for the Auto Industry all along, look at what Delphi attempted to do.
Look at what the Airlines have done repeatedly over the last 30 years.

It is thievery, Wake up!

[schatsie]

But they keep fixing it and the same people who are responsible for auditing enforcing did such a great job on Wall Street...

We have made things so complicated here that there is NO ENFORCEABILITY specially when the money is being thrown into Swiss bank accounts..­. Germany has more regulation and more entreprenueur ship and more exports per person... and 6 weeks of vacation and early retirement­...

We have been ROYALLY SUCKERED..­..Lot of Baby Boomers are finally pissed and the next generation is screwed as well...

[PS9]

Enron employees had options other than Enron stock.