Political Returns

Washington wants to manage your 401(k) account.

Michael W. Lynch from the April 2002 issue

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If employees want to keep the value of their portfolios constant during freezes-which occur, on average, once every 15 years per plan-they can switch their balances to money market funds. Make companies responsible, as Bush wants to do, and they'll simply force employees to make such a switch. Stock prices go up as well as down. Should the government force people to get out of the market? Employers can already offer their employees financial advice, and one in five large employers does, usually by contracting with an independent source. Firms with a financial interest in the choices employees make, however, are prohibited from advising possible customers.

401(k) accounts are a wonderful accident, a product of the loophole exploitation Washington officially deplores. That section of the tax code was inserted in 1978 to let people contribute bonuses to retirement accounts and defer the tax until they took the money out. As a recent New Yorker article chronicles, an employee benefits consultant figured that if cash bonuses could be deposited, cash income could too. He designed such a plan, and the Internal Revenue Service gave it the green light. The result has been a spectacular savings vehicle, one well-suited for an age when fewer and fewer people work for large, traditional, pension-sponsoring institutions. Today 43 million people have $1.7 trillion in such plans, according to the Profit Sharing/401(k) Council. Less than 1 percent of plans offer the employee's company stock as an investment option.

Enron's 401(k) meltdown is a crisis that contains its own cure, even as it provides endless opportunities for grandstanding politicians. It shows there is no such thing as risk-free investing and broadcasts coast to coast the importance of portfolio diversification. It also undermines the so-called deep wisdom of Wall Street analysts and lavishly compensated money managers, few of whom saw through Enron's schemes.

"In a perverted way, it's been a wonderful thing for all of the other 401(k) investors," says Steve Butler, author of the 1999 book 401(k) Today and president of the Pension Dynamics Corporation, which installs and administers 401(k) plans. "It prompts everybody to focus on their own investment decisions. It also shows that you are really on your own. In the end, there's no substitute for having financial education yourself."�