An Article That Doesn’t Make Much Sense…

 For reasons that elude me—other than perhaps because it has a “click bait” headline—the folks at Bloomberg recently published an “op-ed” titled, “401(k) Plans No Longer Make Much Sense for Savers.” Sadly, it’s gotten some attention, aided and abetted even by industry publications, some of which incredibly reported on it as a straight news item. 

Much as it pains me to give more “oxygen” to this, the author, a “former risk manager” (he now apparently writes books), basically makes a tax argument. His essential premise is that once upon a time, the tax benefits of 401(k) made that investment worthwhile, but that tax rates have dropped, and they’re not likely to be lower in the future, so you’d be better off taking that money and investing it elsewhere (more on that in a minute). Oh, and he wants the federal government to forego its deferred taxation on those 401(k) monies so that you can pull that money out and invest it elsewhere without pause (we’ll not hold our breath waiting for that one).

There are many issues with this former risk manager’s perspective on 401(k)s—not the least of which is that his primary argument is based on tax rate data that appears to be both flawed and skewed to exacerbate the impact (picking both the highest and lowest tax rates, depending on the point he’s trying to make). Then, as is the case with many mathematical “arguments,” having predicated his case on a flawed assumption, he “just” does the math—producing a result that is mathematically accurate but distorted. 

But, for the sake of argument, let’s concede that tax rates are lower now than in 1980, and may well be higher that they are today in the future. The true myopia in his argument lies with his apparent lack of understanding of the 401(k) he so blithely dismisses.

401(k) Fables?

Part of his purported “fix” for 401(k)s in this changed tax environment is to make new contributions and accumulated returns from them tax-free when withdrawn in retirement (albeit only by below-median-income households), ostensibly to help provide relief against fears that post-retirement tax rates will be higher than today’s—though it seems primarily designed to encourage the flow of funds from the 401(k) to IRAs. Perhaps someone should alert him to the Roth 401(k)—a feature that some two-thirds of 401(k) plans already make available to workers. 

And then he suggests that in 1980, a “typical” investor would have paid about the same whether savings were in a 401(k) or an IRA, 3.5%—which suggests to me that he had no experience with either. 

Moreover, while he (grudgingly) concedes that 401(k) fees have declined since then (though he will only admit to 1.5%, and manages, in a passing comment, to note that “others are stuck around the 3.5% level,” inferring that is still commonplace), he actually opines that a stand-alone IRA investment is a better deal, with fees of 0.5%. Again, one has to wonder where he is finding that “stuck” 401(k)—not to mention that bargain retail IRA.

Match Less?

And that’s not the only 401(k) feature of which he appears woefully ignorant. Perhaps his fixation on tax rates blinds him to a significant advantage of 401(k) plans; that while workers doubtless appreciate the ability to postpone paying taxes on the pay they’ve not yet taken, that doesn’t seem to be a primary motivation for their participation. 

More likely, and yet completely ignored in his “analysis” is the impact and incentive of the employer match. A match which, according to the most recent Plan Sponsor Council of America survey, is at record levels. Try getting that in your retail IRA. 

Moreover, his affinity for IRAs also seems woefully misplaced in view of data that has established that even modest income workers are 12 times[i] more likely to save when they have access to an employer-sponsored plan than left to their own with an IRA. 

What’s The Point?

In view of all this contradictory evidence, one might well wonder why a published author and former risk manager would choose to simply ignore it—and then, based on half-baked assessments, draw conclusions that 401(k)s have outlived their usefulness. 

It’s entirely possible, of course, that he’s been living under that proverbial rock, that he’s completely missed a generation worth of innovation, that he’s oblivious to the realities of behavioral finance, that he’s never actually participated in a 401(k) nor benefited from the encouragement of an employer match. 

Or maybe he’s one of those who would use the visibility of a posting in a reputable publication to lend credibility to an argument that is, at its heart, clearly designed to encourage hard-working Americans to pull their money out of the shelter and support of that 401(k) plan…

Regardless, it’s a non-sensical article that doesn’t make much sense for savers… or anyone else. 

- Nevin E. Adams, JD

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[i]Vanguard, How America Saves 2018 (DC plan participation), EBRI estimate based on 2014 IRS SOI tabulation (IRA-only participation).