From Alaska to Florida, America’s state and local governments have long been pushing their workers out of pensions into 401(k)-type retirement plans in response to looming budget deficits—misleadingly claiming the retirement benefits are comparable. Nearly two decades later, state workers have awakened to discover they were hoodwinked by their employers and retained financial advisors. Warnings that 401(k)-style plans provide significantly smaller benefits than pensions should have been heeded.
In April 2011, I stood with over 200 City of Atlanta, Georgia police officers jammed into a crowded Committee Room at City Hall for a workshop held by the Finance Committee of the City Council. By the end of the tense four-and-a-half-hour marathon session, hundreds of other city employees had lined the corridors watching the closed-circuit broadcast on television monitors throughout the building.
The workshop was an opportunity for the police to present their response to a proposal by the Mayor to “freeze” pension benefits and force city workers into a 401(k)-type retirement plan. In other words, city officials had come up with a scheme to reduce the pension benefits promised to workers in response to looming budget cuts.
The police had passed around a hat and collected donations to pay for me to fly to Atlanta and speak on their behalf at the Committee meeting—as their expert specifically about the 401(k) aspect of the proposal. The Atlanta police knew that since 2001, I had written a series of increasingly stern warnings regarding the nation’s failed 401k system. For example: 401ks: Far More Dangerous Than IRAs (March 2001); An End To 401ks (February 2002); 401k Abuses: The Mutual Fund Industry’s Next Nightmare (July 2004); Explaining Poorly Designed 401ks (January 2005); An Extreme Makeover Due for Defined Contribution Plans (June 2007); and Challenges to 401ks Continue (February 2008).
I explained to the City Council that America was facing a retirement crisis and that corporations closing their pensions and forcing workers into flawed 401(k) defined contribution plans was largely to blame.
“401(k)s cannot and will not provide meaningful retirement security for the overwhelming number of America’s workers and certainly not the employees of the City of Atlanta. So if you do vote to force your city’s employees into a 401(k)-type system, at least be honest about it and admit from the get-go that this is no retirement plan.”
Last week, in Alaska, a new analysis from the state Division of Retirement and Benefits concluded that the state’s 401(k)-style retirement system for new employees is providing significantly smaller benefits than the pension-style system discontinued in 2006.
“There is a gap between defined benefit and defined contributions,” said Ajay Desai, director of the Division of Retirement and Benefits.
According to the study, for a typical employee, there’s a 40% loss from the old pension system to the new 401(k) system, but Desai said the eventual gap should be smaller than that because of a variety of factors, including the way investments compound over time.
The estimates presented showed the gap shrinks over time, as long as markets perform as predicted.
That assumption caused Sen. Jesse Kiehl, D-Juneau to say, “This is put together by Miss Rose E. Scenario,” Kiehl said after the presentation, “and it still fails over and over.”
It should come as no surprise today—approximately 50 years after the introduction of 401(k)s—to hear that shifting responsibility for retirement planning onto workers has been disastrous for workers but great for the bottom lines of retirement plan sponsors, both public and corporate, as well as Wall Street.
The 401(k) defined contribution plans which employers and Wall Street sold to workers have failed dismally I wrote in my bestselling 2020 book, Who Stole My Pension? “With median account balances for 65-year-olds at $70,000 or less, it’s no secret that the great 401(k) “experiment” has failed in the United States.”
The failure of 401(k) innovation was foreseen decades ago by experts—including me—and was avoidable had legislators and regulators acted in the best interest of investors and had the financial services industry curbed its greed.
Instead, Wall Street firms made money—and were the big winners. Retirement savers who paid higher fees to Wall Street for poor performing mutual funds—were big-time losers.
I was involved, as an expert, in leading class action lawsuits alleging mismanagement of the investments in many of America’s largest 401(k) plans, including Walmart
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Coincidentally, 2006 was the very year Alaska recklessly abandoned its pension system in favor of a flawed 401(k)-style plan.
If I were an Alaskan government employee or retiree, I’d sure want to know who was responsible for undermining my retirement security, as well as hold them accountable for this foreseen and avoidable disaster.