Why 401(k)s Are a Ripoff

I have written a lot about this over the years. Companies don't offer these do-it-yourself savings plans--they are NOT pensions--because they want their employees to get rich. They do it because it is far cheaper than having traditional pensions. They shift ALL the risk on the employee, where in pensions the risk is on the employer. Pensions are also federally insured and guaranteed. 401(k)s are not.

How did these scams begin? Elizabeth Warren provides some information in an interview from 2006:

How much [were] the changes in the ERISA law -- because it was amended a number of times through the '80s and '90s -- and the way the 401(k) law was interpreted driven by the financial interests of CEOs and CFOs as they saw their own pensions being affected? Is there any evidence in the legislative history of the 401(k) provision that people ... understood that it might become the basis of a mass national savings plan? ...

Much of the law governing 401(k)s and much of the push toward 401(k)s was not driven by ordinary workers who were looking for a way to set a few dollars aside for their retirements. It was driven by CEOs who were looking for tax protection in order to maximize the value of their retirements. ... If you read the legislative history ... of the 401(k), it's clear this was a little tax break and special protection for people on a very high margin, the folks who made lots and lots of money. ... That's the irony. What it was designed for and what it's being put to use for are totally different from each other. ...

So it wasn't designed as a middle-class retirement program.


No, it was not. ... It's being harnessed for that because that's the only alternative now. There is nothing left on the table. If the defined pension benefit plan goes away, as it is quickly doing -- it is melting like a snowball in Texas in July -- all that's left is Social Security and the 401(k). Middle-class America knows it can't live on Social Security, and so everyone's attention is now riveted on what an employee can do and can't do through a 401(k) to protect himself through the retirement years. ...

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People have absolutely no idea how much money they would have to save to have equal to what they would have gotten in a defined benefit plan or pension. Even my piddling $300 a month pension, taken nine years early, would have required my saving well over $100,000 if the money was to last me the rest of my life, which would be around 30 years minimum. The pension also snowballs so that my $300 will not remain at the same amount over a period of 30 years, so even more money would have had to have been saved. Social Security is much the same way, except it is taxed out of one's paycheck if the employer pays into it (I know the tax pays for current retirees, but I am just saying the system works similar to defined benefit programs).

You can safely figure that you aren't going to get any more out of a 401(k) than what you put into it. "Extra" money from investing in the stock market is just a illusion. You're better off with a savings account, which is at least insured by FDIC, than an annuity.