"The 401(k) system has to be fixed, and I don't know anybody who can fix it but the federal government."
- John Bogle
Late last week the federal government began floating proposals for reforming America's broken retirement system. The proposed reform centers around the idea of getting people to invest more conservatively and withdraw the money more slowly so that they don't outlive their savings.
The U.S. Treasury and Labor Departments will ask for public comment as soon as next week on ways to promote the conversion of 401(k) savings and Individual Retirement Accounts into annuities or other steady payment streams, according to Assistant Labor Secretary Phyllis C. Borzi and Deputy Assistant Treasury Secretary Mark Iwry, who are leading the effort.
Secretary Iwry developed this idea when he was working at the Brooking Institute in 2008 in conjunction with the Heritage Foundation. The concept involves rolling people's 401(k) savings into directed distribution plans unless they specifically elect not to participate.
This probably sounds like a reasonable idea until you dig beneath the surface.
"The 401(k) system today in the United States has been an acknowledged failure."
- Alicia Munnell, director of the Center for Retirement Research at Boston College's Carroll School of Management
To put this into perspective, consider that Congress reformed the 401(k) system three years ago. The idea back then was the exact opposite of the current proposal.
The fact that the concept of reforming the 401(k) system has shifted 180 degrees in just three years, from moving people into high-yield, riskier investments to moving people into low-yield, relatively safer investments, should be all the reason you need to become suspicious. The terminology of "inertia" keeping people from actively managing their retirements, and people needing to be saved from making "poor choices" are exactly the same in both reforms, yet they come to opposite conclusions.
Late Thursday night, Congress passed a pension-reform bill that will transform significant aspects of how these plans can operate. Named for the section of the tax law that created them, 401(k) plans let workers sock away part of their paycheck tax-free until retirement. The problem is, too many people are making bad decisions, such as leaving their money parked in low-yielding investments instead of more suitable choices.
Meanwhile, the Labor Department, which regulates the plans, is on track to let employers automatically put their employees' money into riskier, but higher-yielding, stock and bond funds rather than low-yielding money-market funds that have long been the default option.
The reason for this shift in ideas has to do largely with market timing.
"We are the prey"
When the 401(k) system was being reformed in the spring of 2007 the stock market had been on a four year bull market. Stocks were getting very expensive and overpriced. Wall Street insiders, which were holding these stocks needed someone to sell them to before the stock market began declining just six months later.
In this environment, Congress "magically" decided that 401(k) holders needed to buy more stocks, and Wall Street obliged. The 401(k) holders would have been much better off if they had instead been in money market funds, like they wanted to be, but that's not what the reformers in Congress decided. What happened instead was Wall Street insiders unloaded much of their overpriced stocks on 401(k) sheeple before the market crashed.
Today's market is very different. Interest rates are at historic lows, thus bond prices are at historic highs. The government is flooding the market with record treasury issuance and mortgage-backed security yields are only being kept down by massive intervention by the Federal Reserve. Interest rates have nowhere to go but up, which means that bond prices have nowhere to go but down.
Now Congress wants to reform the 401(k) system again, this time getting people to invest in fixed-income financial products, and Wall Street is sure to oblige again. Even Secretary Iwry's proposal admits that these lifetime income products are "inflexible and expensive" with annuity fees averaging around 6% annually, as opposed to the 3% annual fees from a 401(k).
"Our rulers deliver favors to their clients...For in a predatory regime, nothing is done for public reasons. Indeed, the men in charge do not recognize that "public purposes" exist. They have friends, and enemies, and as for the rest--we're the prey."
- James K. Galbraith
If you don't believe in coincidences, you might be incline to think that financial reforms are merely efforts to help Wall Street fleece the American public further.
Sen. Dick Durbin (D-Ill.) has been battling the banks the last few weeks in an effort to get 60 votes lined up for bankruptcy reform. He's losing.
"And the banks -- hard to believe in a time when we're facing a banking crisis that many of the banks created -- are still the most powerful lobby on Capitol Hill. And they frankly own the place."
Lessons from Argentina
A giveaway to Wall Street isn't the only reason why the federal government wants to move us into overpriced fixed income assets. The massive federal deficits of the next two years will become increasingly difficult to fund.
Our credit card with China has been cut off.
The government needs another pool of money to tap in order to continue to run these massive deficits, and that means your retirement savings. Once locked into these annuities, your money will be largely directed to treasuries and agency bonds (now with unlimited federal backing).
This game plan has been done before. If you want a roadmap of how this can turn out, just look to the Southern Hemisphere of 2008.
Here is a warning to us all. The Argentine state is taking control of the country's privately-managed pension funds in a drastic move to raise cash.
My fear is that governments in the US, Britain, and Europe will display similar reflexes. Indeed, they have already done so. The forced-feeding of banks with fresh capital -- whether they want it or not -- and the seizure of the Fannie/Freddie mortgage giants before they were in fact in trouble (in order to prevent a Chinese buying strike of US bonds and prevent a spike in US mortgage rates), shows that private property can be co-opted - or eliminated - with little due process if that is required to serve the collective welfare. This is a slippery slope.
The thing you have got to understand is that Argentina was also once considered a rich nation just like us. It was brought low over the course of many decades from ruthless and corrupt politicians and financial elite.
Like America, Argentina sold off its public enterprises for pennies on the dollar in privatization schemes. Like America, Argentina had an artificially inflated currency which crushed its industrial base and led to an over-sized trade deficit. Like America, Argentina tried to disguise these problems by borrowing from foreign creditors.
In the end, the Argentine government seized the retirements savings of their own citizens in order to continue to function after foreign creditors abandoned them. They shoved that savings into treasury-like bonds and then massively devalued their currency. In so doing, 70% of the retirement savings of the Argentinian people was wiped out overnight.
Check out this excellent video about the collapse.
What does this have to do with America? Check out this picture from an Argentina protest at the time.
It's the same damn banks! The people who screwed the Argentinian people back then are the ones screwing us right now! They bought off the corrupt politicians of Buenos Aires to get what they wanted, just like they've purchased the corrupt politicians of Washington today. They won't hesitate for a single minute to treat you exactly the same.
Too late the people of Argentina stood up for themselves, and even then the results were mixed at best. Their government simply didn't listen or care until people took to the streets. That's when their government collapsed and stopped robbing from them.
We can learn from this lesson and take to the streets right now, or we can ignore this lesson, arrogantly assume that because we are Americans "they wouldn't dare," and tempt our fates.
If we don't act, then one day we might find our neighborhood ATM is empty.