Tuesday, December 16, 2008

Hurry up and do something!

No matter what the cost!

I have worked, and currently am, in the retirement plan industry. It is a highly specialized business with lots of arcane rules and confusing terminology, replete with acronyms that no one outside of the business recognizes. It is full of huge players, like my former employer Fidelity Investments, The Principal Financial and the Vanguard Group, who oversees 401(k) plans with hundreds of billions invested. It has tons of other players: banks, giant insurance companies, small firms that handle small plans called TPA or Third Party Administrators (which is the kind of place I work now). We all work and compete in the market for retirement plan assets. That competition has forced all sorts of innovations which have benefitted plan participants. That is the good news.

Now the bad news. It is not news for anyone who is investing that the market correction has led to some dramatically reduced balances in their investments, and for most Americans the bulk of their investment money is in their employer sponsored defined contribution plan, a.k.a. their 401(k) plan (That is something of a misnomer, 401(k) is a section of the tax code but it is the most common designation for the defined contribution retirement plans). Because people are freaking out about their balances, there are calls for the gubmint to "do something!" (Note that these people were not calling in years when there were huge gains in the market. Funny how that works...) There are few things more dangerous than the public demanding that something be done about something and politicians and academics running to the rescue.

The Wall Street Journal ran an article on "How to Fix 401(k)s" . It is instructive. Some of the proposals and concerns make sense. Some are stupid. Some are flat out scary. Some of the good ideas: Automatic enrollment. More annuity options for life-long income. More fee disclosures. Default investments so young savers are not investing in money market funds. There are plenty of common sense improvements that can be made. There are also plenty of really bad ideas.

There are many people arguing that we should scrap the whole thing and turn it over to the government, because everyone knows how efficient the government is!

Still others call for the government to do even more, by guaranteeing a modest level of return on these accounts. "The financial crisis has driven home the point that people can't be exposed to these kinds of market fluctuations," says Boston College's Prof. Munnell. "Even if the market bounces back, people who sold at the bottom will have been harmed. All of us approaching retirement have been harmed emotionally in a way that is unnecessary, demoralizing, and inappropriate in a country as rich as this one."

Well certainly it is the role of Uncle Same to ensure we aren't harmed emotionally in a demoralizing way because of the return on our 401(k) statements! What kind of nonsense is that? The kind of nonsense you get from a college professor with a state sponsored pension that is probably underfunded by billions of dollars. More incredibly dumb statements...

Teresa Ghilarducci, a professor of economics at New York's New School for Social Research, argues that the government is far better equipped than most individuals to bear the risks associated with investing in the stock market. Her government-sponsored Guaranteed Retirement Accounts would provide a guaranteed rate of return of 3%, on top of inflation. Because that number is tied to the economy's long-term growth rate, "it doesn't present a big risk for the government," Prof. Ghilarducci contends.

Well here is the problem with that logic. The government is not self-funded, it is funded by individual taxpayers, i.e. you and me. You would think that we would have learned from the mistakes of the Social Security system, i.e. that the government is not really far better equipped to provide stable retirements for individuals. Ultimately why is it the role, the responsibility, the right of the Federal government to get involved in the savings of individual Americans?

Are there changes that need to be made? Sure. Things like automatic enrollment and automatic increases are a good start. Does the system that provides a vehicle savings in a convenient, tax-advantaged way need to be trashed in favor of a bloated government guarantee that no one can realistically think will not lead to higher taxes? Absolutely not.

It is always scary when you allow people with a political motivation to start tinkering with the private sector, especially when they promise to enrich you with your own money.

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