Berk's Blog

Democrats Gunning For The 401(k): Stocks Are Risky Because They Went Down?

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This morning Chairman Bernanke is testifying before the Senate Banking Committee chaired by none other than Chris Dodd – the man who thinks it is OK to slip compensation limits into a 1000 page bill in the middle of the night. But that is another post. (See my colleague Marc Hodak’s comments here and here)

Today, right after Senator Dodd’s five-minute questioning of the chairman, he asked whether or not they were lucky that Social Security was not privatized. I assume he meant that our Social Security would have been cut in half just like the 401(k)s that were 100% invested in stocks on average would have been cut in half since the peak. There is no other issue that demonstrates the ignorance of Congress related to the markets than this one.

Most people with 401(k)s are in their savings accumulation phase of their life cycles. They are putting away money every week or every month and their employers are sometimes matching that number tax-free. Too many people including Congress think that having enough money at retirement means having some lump-sum principal amount. But it doesn’t. Retirement is about Income; Having enough income In retirement to live in dignity and to overcome the most pernicious obstacle – inflation.

On the contrary,If Christopher Dodd had a sensible bone in his body, or an ounce of common sense, instead of deriding the stock market investments In 401(k) plans at this moment in time he should embrace them.

After all, Warren Buffett has told us that this is the second great buying opportunity for his personal account in his lifetime. But Senator Dodd and others (see below) want to deny retirees of the incredibly low prices of the great American companies today. The risky thing is for retirees and for savers to be out of the stock market now. Not to be out of the stock market, especially at a time when we are near generational lows.

No wonder in the short term the stock marketBelieves that America will never recover.We’ve got congressional leadersThey’re telling American retireesBut the stock market is too riskyFor them to invest inAt exactlyThe right timeTo invest in the stock market. Don’t listen! Look at the story the Bloomberg story below – the Democrats seem to be gunning for your 401(k). What’s going to replace them? Social Security accounts in which Americans will get fixed payments that will not compemsate for the ever present rise in the cost of living? Hold on to your wallets and your savings folks. Here come government run savings acounts, see below.

Feb. 24 (Bloomberg) — House Education and Labor Committee Chairman George Miller said 401(k) retirement plans do not provide sufficient retirement security for many Americans and must be revamped.

Miller, a California Democrat, recommended better disclosure of 401(k) fees and more objective marketing of retirement products to investors at a Washington hearing today on the effectiveness of existing retirement savings plans.

Investors had $2.7 trillion in 401(k) accounts as of Sept. 30, according to the Washington-based Investment Company Institute, which represents mutual funds. The Congressional Budget Office estimated that workers lost $2 trillion over a span of 15 months from declining stock markets at an October hearing of the House Education and Labor Committee.

“For too many Americans, 401(k) plans have become little more than a high-stakes crap shoot,” said Miller. “We are realizing that Wall Street’s guarantees of predictable benefits and peace of mind throughout retirement was nothing more than a hallow promise.”

Miller questioned at the October hearing whether the U.S. had gotten its money’s worth from the estimated $80 billion in tax subsidies the retirement accounts receive each year. At the hearing, Teresa Ghilarducci, a professor at the New School for Social Research in New York, proposed replacing 401(k) plans with government-run retirement savings accounts. (My emphasis – here is the plan now hawked by the Democrats they want to limit your prosperity in retirement too by managing your 401(K) and giving you a 3% fixed payment return),

‘Preserve and Strengthen’

Today, Miller said “we must preserve and strengthen 401(k)s.” About 55 million private-sector employees have defined-contribution retirement plans, in which workers are responsible for managing their own funds, according to the Center for Retirement Research in Boston. The 401(k) plans, which generally are tax-deferred savings accounts, are one of the most common retirement plans.

John Bogle, founder of fund manager Vanguard Group, echoed Miller, saying, “the 401(k) plan is an idea whose time is come” yet “our existing defined contribution system is failing investors” because of high fees, low levels of saving, excess flexibility that permits cashing out and too much borrowing and inappropriate asset allocation. Bogle recommended a single defined contribution structure using low-cost annuities, among other options. (Bogle is right the current system rips off investors, we at Berk Advisory have a solution – low cost, separately managed accounts without layers and layers of fees and commissions.- DB)

Retirement savings are too exposed to market risk, according to Dean Baker, co-director of the Center for Economic and Policy Research in Washington and another witness at today’s hearing. Baker proposed a government-run pension system providing a modest guaranteed rate of return, according to a statement released last night.

Employees must work longer to extend retirement savings and social security could be stabilized and supplemented by target- date funds, said Alicia Munell, director of the Center for Retirement Research at Boston College, in prepared remarks. Target-date funds shift moneyinto more conservative investments as an investor approaches retirement.