Time To Recall America’s Structurally Flawed 401ks

The great 401k experiment of the past 50 years has failed generations of America’s workers. As controversial as that statement may sound, today there is broad consensus 401ks have not, and cannot, provide meaningful retirement security.

Not too long ago, it was heresy to suggest 401ks were fundamentally flawed.    

What if financial products, like harmful consumer products, were subject to safety recalls? To stimulate national debate, in 2008 I drafted the “recall notice” below using a children’s toy recall issued by the Consumer Product Safety Commission as my template and sent it out as a press release.

No recall by any agency of government ensued following the market meltdown twelve years ago but at least now it is widely acknowledged these savings plans are flawed and have undermined the retirement security of American workers. Since 2008, the industry has been quietly addressing some of the most grievous abuses, without drawing attention to the defects inherent in the mass-marketed 401(k) “product.” (Most recently, however, Trump’s DOL and SEC have been busy ramping up the fees and risks related to 401ks by permitting private equity in plans.)   

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NEWS from Benchmark Financial Services: 401k Recall

FOR IMMEDIATE RELEASE October 9, 2008 Release #01-008

Recall of Most of Nation’s 401k Plans

Benchmark Financial Services, Inc, with anticipated cooperation of the firms referenced below, today announced a voluntary recall of the following consumer products. Consumers should stop using recalled products immediately unless otherwise instructed.

Name of Products: 401k plans; So-called “Retirement” Plans

Units: Trillions in assets

Manufacturers: Financial services firms globally, assisted by employers

Hazard: Consumer will likely incur excessive fees and poor performance resulting in injury to their financial well-being.

Incidents/Injuries: We have received reports from tens of millions of consumers of injury to adults (especially older adults approaching retirement), resulting in anxiety, loss of sleep, housing foreclosures and postponement of retirement plans. Hazardous effects of these plans are generally irreversible in older adults.

Description: This recall involves a financial product marketed to America’s workers (of all ages) which claimed to provide for their “retirement security.” While the product may have some value as a savings vehicle, it will almost certainly not provide for financial security in retirement. Statements that the product will provide retirement security are gross misrepresentations which consumers should disregard. Generally the investment options within the product were sold unaccompanied by the delivery of an owner’s manual (a “prospectus”) that would have disclosed the risks related to these products. Furthermore, even the prospectuses that related to the investment options falsely represented that they were subject to comprehensive federal regulation that would protect the interests of consumers. In fact, the federal agencies that regulate these products (Securities and Exchange Commission and Department of Labor) have been found to be compromised by conflicts of interest. Employers offering the products (401k plans) to their workers generally failed to educate themselves regarding its properties and failed to offer more viable alternatives for their retirement planning.

Sold at: Financial services firms globally; however, predominantly in the United States to American workers.

Manufactured in: Globally by many of the leading financial services firms. Remedy: Consumers should immediately take the recalled 401k plan products to their employers or the manufacturers of these products for refund.

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I published the recall again in Forbes in September 2010 and also published an extensive research paper, Secrets of the 401k industry: How Employers and Mutual fund Advisers Prospered as Workers’ Dreams of Retirement Security Evaporated, which documented the unsavory industry practices that played a significant role in creating the defined contribution retirement crisis the nation faces today. The demise of 401ks was no accident and, indeed, was predictable, I wrote.

My research found that 80% of employers believed 401ks were effective in recruiting employees to come work for them but only 13% of employers believed that the 401k plans they offered would provide retirement security for their workers. In other words, employers understood that offering plans that purported to provide for workers’ retirement security, without obligating employers to pay retirement benefits, was helpful in building their businesses. However, employers privately acknowledged that these plans were not sufficient to provide for workers’ retirement. On the other hand, employers believed that guaranteed retirement income, such as a traditional pension plan, would be far more costly to provide.

So, I asked, “Do employers tell their workers there really is no retirement security provided if they stay in their jobs and thereby risk losing employees to competitors? Or do employers maintain the charade that they offer retirement security? Has your employer told you it is virtually inconceivable that the defined contribution plan he offers will provide sufficient retirement income?”

It’s time to stop calling 401ks “retirement” plans and offer workers meaningful alternatives thoughtfully crafted. It’s really not hard to improve retirement plans—provided it’s not left up to Wall Street to propose solutions.

For more on fixing retirement plans, see Who Stole My Pension?