Are 401(k) and IRAs a Fraud?

There’s been a steady rise in “victim mentality” propaganda.  We hear it a lot from certain politicians who want to convince us that the “system” is rigged or that “income inequality” keeps us from improving our lot in life.  Some talk about wanting to give us a fighting chance, as if America hasn’t already served that up to us in spades.

Recently, I received the following email from a reader named Eric:

I thought I would share this with you. This is one of the recent articles I was sent by my union. I wrote a long comment on the web page…On how I thought this propaganda was irresponsible and misleading. I thought it would be interesting to get your take on this and might be a good podcast idea.

The article Eric is referring to is 401k’s Are a Sham, by Helaine Olen. Eric and I are on the same page, which is to say that we’re both a little irritated by the claims made. The article describes many of the retirement issues being faced by Americans in recent years, notably that future retirees won’t be as well off as previous retirees. According to Olen, the blame falls squarely on . . . 401(k) accounts.

Here are the main points from the article:

  1. 401ks are bad because we don’t save enough;
  2. We don’t save enough because we can’t – it’s not that we don’t have the right spending priorities – we can’t because the system won’t allow us;
  3. 401ks are bad because of high fees;
  4. Target date retirement funds are bad because of high fees;
  5. IRAs are bad because most individuals use investment advisors who charge a lot in fees;
  6. Annuities are bad because they are confusing, and expensive; and
  7. Auto opt-in to a 401(k) is bad because, while it increases participation rates, it also increases 401k loans and withdrawals.

Her conclusion:

“The truth is this: the concept of a do-it-yourself retirement was a fraud. It was a fraud because to expect people to save up enough money to see themselves through a 20- or 30-year retirement was a dubious proposition in the best of circumstances. It was a fraud because it allowed hustlers in the financial sector to prey on ordinary people with little knowledge of sophisticated financial instruments and schemes. And it was a fraud because the mainstream media, which increasingly relies on the advertising dollars of the personal finance industry, sold expensive lies to an unsuspecting public. When combined with stagnating salaries, rising expenses and a stock market that did not perform like Rumpelstilskin and spin straw into gold, do-it-yourself retirement was all but guaranteed to lead future generations of Americans to a financially insecure old age. And so it has.”

That’s what got me fired up. To make her conclusion worse, she offers absolutely no solution, no advice. We’re doomed – and that’s it. Have a nice day.

It turns out the article is an excerpt from a book that she wrote.  I bought the book two years ago, but never read it. The book is Pound Foolish: Exposing the Dark Side of the Financial Service Industry, and Eric’s email motivated me to finally read the book.

Here’s the best part of the book:  “For every Suze Orman, there are several thousand personal finance and investment Web sites, ranging from the quirky, like The Dough Roller[!] to such behemoths as Seeking Alpha, The Motley Fool, and Bankrate, each of which rack up millions of unique views monthly.”

I’ll take quirky.  Now back to the point.

I want to address her 401(k) article at two different levels: the victim mentality worldview that it espouses, and the specific claims she makes about 401(k) accounts and defined contribution plans.

Listen to the Podcast of this Article

10 Things We Control

The next time somebody tries to convince you that the system is rigged or that you just can’t get ahead, consider this list of 10 things we all control.

1. Effort

We control how hard we work.  When faced with adversity, do we push through or give up?  That isn’t to say that life is always easy; surely it’s not.  We can’t control everything that happens to us.  We can control how we respond.

2. Education

We control our level of education, including not only college, but also certifications and other training. While education can be expensive, those who want it bad enough can find a way.  For example, if you can’t afford college, you can always opt for community college. In Virginia, you can attend community college for a couple thousand dollars a year, then transfer credits to top level schools such as Virginia Tech and William and Mary. You don’t have to pay $50,000 per year to get an education.

If you need some inspiration on how to get through college debt free, find out how a listener named Natalie did it.

3. Spending

We control our spending, at least beyond the bare necessities. To be clear, internet, smart phone, eating out and cable TV are not necessities. We can do without them in order to save if we so choose. The point isn’t that we should give up any of these luxuries.  That choice is of course up to each of us.  But we can’t claim to be unable to save for retirement while flipping through the 400 channels of our cable package.

4. Attitude

This is how we respond to the events in our lives – layoffs, health issues, being passed over for promotions. We can either get run over by them or we can decide to take a different course of action. That isn’t to say that any of these events are easy, but rather that we do have a strong measure of control over how they play out, and where we land as a result.

5. Learning

This is not about formal education, but about choosing to continue to learn.  Whether we learn how better to manage our money, about our careers, or personal development, we decide whether and how we further our own knowledge.

6. Contacts

We all have a choice over many of the people that enter our lives. Whether friends or colleagues, our relationships influence our lives in profound ways. Choosing the right relationships helps us to move in the right direction in all areas of life. As the saying goes, you’re the average of your five closest friends.  We have control over those five friends.

7. Where you work

Though it often feels as though we don’t have control over this, we actually have a lot of control. Unless you have the only job in town, working for the only employer in town, you always have choices. There may be times when our options are limited, but we can still make choices in this area.

8. Where you live

Where we live can have a significant impact not only on job opportunities but also on cost of living.  My wife and I choose to live in an expensive area just outside of Washington, DC.  But we always have the option of moving to a less expensive area.

9. How you invest

We can choose how we invest.  We choose whether to take advantage of a 401(k) or other tax-advantaged retirement account.  We choose whether to buy expensive and complicated insurance products.  We choose whether to invest on our own or hire an expensive investment advisor.

10. What you drive

So many of us drive a big part of our wealth. We spend far more on cars than is necessary. And it’s a choice that we make. If you aren’t saving for retirement but you’re driving an expensive car, you’ve made a choice to favor a car over greater savings. You can apply the same comparison to other areas of spending, but if you are spending more than 10% of your annual income on cars and aren’t saving for retirement, it may be time to reevaluate your priorities.  Not a sermon, just a thought.

Addressing the Specific Complaints in the Article

Considering all of the choices we have in just these ten categories, it’s hard to make a convincing argument that we’re victims when it comes to saving for retirement.

With that in mind, let me address the primary concerns raised in the article, one by one.

Target date retirement funds:  Olen uses as an example Legg Mason’s target date retirement funds.  These funds do have high fees, which is probably why she cherry picked Legg Mason as her example.  Fidelity and many others have much lower fees.  And Vanguard’s expense ratio on its target date retirement funds is dirt cheap.

IRA Fees:  Olen argues that IRA fees are even worse because “[b]rokers not working in the best interests of their clients make the vast majority of IRA investment recommendations.”  Wait a minute.  We don’t have to hire brokers to manage our IRA accounts.  Vanguard has extremely low costs, which is where my IRAs reside.  For those that need help, robo advisors like Betterment and WealthFront also offer very low fees.

Annuities are confusing and expensive: Yes they are.  They are generally best avoided.  But that’s easy enough to do–Just say no.

The 401k opt-in: Olen doesn’t even like opt-in plans that increase 401(k) participation rates.  She write, “Just take a look at what happened when companies began to adopt automatic enrollment plans for 401(k)s, that is, forcing people to opt-out of retirement plans instead of filling out papers to join up. Yes, the number of people contributing to deferred contribution accounts increased – but so too did what industry insiders call “the leakage” rate – that is, people borrowing against or withdrawing the monies in their accounts (and if that money isn’t repaid, the consumers withdrawing it need to pay penalties for accessing it). That number is now close to 25 percent.”

That doesn’t indict 401(k) or other defined contribution plans.  It indicts our own handling of money.  Yes, sometimes people tap retirement accounts for true emergencies.  But how much of this “leakage” was the result of self-induced pain?

Yes, bad things do happen to good people. But we do have choices even in the face of bad circumstances. We have more control than some would have us believe. If you believe you have no control, you give up. After all, why bother if the system is rigged? There’s no point in trying, which is a destructive mindset, and one you can’t afford to have.

What’s your take on this?

Topics: PodcastRetirement Planning

5 Responses to “Are 401(k) and IRAs a Fraud?”

  1. All due respect Rob, I don’t think you’re being very fair in summarizing the arguments in the article. In my opinion, a fair summary would be: 1) 401ks/IRAs are bad because they rely on participants to save and invest despite rising living costs and falling real wages, 2) even if they do manage to invest, fees, complex products, and the lack of fiduciary standards creates a briar patch for the average investor to navigate alone, 3) this financial 1-2 punch is leading us into a retirement crisis. I think given this more fair (perhaps overly fair) summary, many of your points still hold.

    Still, I take issue with your contention that she cherry-picked an expensive target date fund. She in fact lead off by citing an average fee of 1.08% before citing the Legg Mason fund as an outlier case for rhetorical effect. That said, I think her 1.08% number is old or inflated — the average used to be that high in say 2008, but the advent of passively managed target date funds has brought the average fee to around 0.84% today. Also, when she referenced 401k opt-in, it was not to indict 401ks, but rather to illustrate her point about the inability of participants to properly save (i.e., even when savings is on auto-pilot, participants don’t have enough cash to meet life expenses and therefore must borrow from their plan).

    I am very sympathetic to your and Erik’s opinion of the article, and I love the list of 10 Things We Control. It’s absolutely essential, given that the self-directed 401k/IRA is now the predominant form of retirement savings (replacing pension plans; and supplemental to Social Security), that the general population also embrace the personal responsibility that such an arrangement requires.

    The problem arises, however, in the realm of reality and practicality. The reality is that the average person makes poor choices when it comes to immediate gratification (having a shiny car today) vs. delayed gratification (having a shiny walker at age 90). Also, the average person simply lacks (or thinks they lack) the know-how to make good investment choices. Ask the average person on the street what the term “Vanguard” means to them, and they’ll probably say “that’s what you say before a sword fight, right?” This sucks. That poor choices are the norm sucks. Podcasts/blogs like yours are fighting the good fight in trying to turn this around, and God bless you for doing so. Call me a cynic, but I don’t think such behaviors/choices will change until we have a real, honest-to-goodness retirement crisis on our hands (e.g., extreme poverty, crowded shelters and elder-care facilities, etc). Unfortunately, one of the points of the article is that by the time this happens, it will already be too late for many of those approaching retirement to make up for past bad choices.

    • Scotty – if you’re seeing pop-ups on Rob’s site, you may have some unwanted adware on your computer. The adware sinks it’s claws into your web browser, intercepting otherwise ad-free web pages and displaying unwanted ads like banners, pop-ups, pop-unders, sponsored links, coupons, etc. Over the holidays, I spent half a day cleaning out a friend’s PC of all the adware that had been unknowingly installed (ok, fine, it was my parents’ laptop. Didn’t want to be a cliche). If you think this might be the problem, I suggest surveying the programs installed on your computer and doing a google search of any that look unfamiliar to you. If you have unwanted adware, uninstall them and then download and run a (free) program called Malwarebytes Anti-Malware 2.0 to quarantine any of the programs you may have missed.

      Good luck!

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