04/23/2009 03:40 pm ET | Updated May 25, 2011

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.


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?