Another diss directed at 401k defined contribution plans with the same tired tropes routinely debunked.
Jacob Hacker is a professor of political science (not math or econ) at Yale University and author of The Great Risk Shift: The New Economic Insecurity and the Decline of the American Dream.
We suspect the reason for his argument is to hawk his book, but damage can be done when participants produce his piece to challange advisors at the next education and enrollment meeting, something that, thankfully, a little light lifting can quickly deconstruct.
“How much money do you have saved in your 401k?” he writes at—of all places—Vox.com. “In 50 years, no one will ask. Even better, no one will have to provide the usual answer: way too little.”
An unflattering history of the 401k follows, complete with yesteryear nostalgia for defined benefit plans that never existed, as Ted Benna repeatedly reminds us.
“Today, vanishingly few private employers provide a defined-benefit plan, and they’re mostly legacy offerings covering older workers,” Hacker notes, with no explanation of why it’s happening—growing life spans that now see many people retired for longer periods than they worked.
He then decries a lack of plan coverage with, again, no mention of how quickly access is increasing thanks to the “auto” revolution, state-sponsored initiatives and a MEP executive order for the sole purpose of expanding coverage.
And as Andrew Biggs, former deputy commissioner at the Social Security Administration, argues, the retirement coverage gap is “vastly exaggerated” anyway:
As Social Security Administration research shows, many workers who are actually participating in a plan tell surveys that they’re not. This isn’t unexpected: “behavioral economics” research finds that employees don’t pay much attention to their employer’s retirement plan offerings, so it shouldn’t be surprising that many employees answer even simple questions incorrectly.
Hacker mentions high fees with no acknowledgment of how quickly they’ve fallen and complains that tax-deferral incentives disproportionately favor higher incomes (seriously).
“Because they are subsidized through delayed taxes, 401ks are worth the most to households in the highest tax brackets.”
For the zillionth time, those who pay more in taxes disproportionally benefit from incentives and cuts. It’s not a nefarious scheme to stomp the little guy—it’s simple math.
“The obvious solution is a strengthened Social Security system, and fortunately measures to boost Social Security’s benefits are back on the national agenda (and enjoy overwhelming public support),” he concludes.
Great, but if he thinks Social Security is a solution to the supposed retirement savings crisis then he’s apparently unaware of the aging demographic dynamics that encouraged defined contribution’s rise in the first place.
Given the veracity of his argument, we wouldn’t be surprised. Maybe 401ks won’t be around in 50 years, but some variation of the defined contribution plan certainly will. Responsibility for one’s own (affordable) quality of life in retirement is increasing, and it’s not a bad thing.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
