In Alaska, a new analysis found that the state’s 401(k)-type retirement system for new … [+]
From Alaska to Florida, U.S. states and local governments have long pushed their workers away from pensions to 401(k)-style retirement plans in response to looming budget shortfalls, falsely claiming that retirement benefits are comparable. Nearly two decades later, state workers woke up to find they had been tricked by their employers and had hired financial advisers. Warnings that 401(k)-style plans offer significantly lower benefits than pensions should have been heeded.
In April 2011, I was with more than 200 police officers from the city of Atlanta, Georgia, squeezed into a crowded committee room at city hall for a workshop organized by the city council’s finance committee. By the end of the tense four-and-a-half-hour marathon session, hundreds of other city workers had lined the halls watching the closed-circuit broadcast on television screens throughout the building.
The workshop was an opportunity for police to present their response to a proposal by the mayor to “freeze” retirement benefits and force city workers to adopt a 401(k)-style retirement plan. In other words, city officials had devised a plan to reduce the retirement benefits promised to workers in response to impending budget cuts.
The police had distributed a hat and collected donations to pay me to travel to Atlanta and speak on their behalf at the Committee meeting — as an expert specifically on the 401(k) aspect of the proposal. The Atlanta police knew that since 2001 I had written a series of increasingly severe warnings about the country’s failing 401k system. For example: 401ks: much more dangerous than IRAs (March 2001); An end to 401ks (February 2002); 401k Abuse: The Mutual Fund Industry’s Next Nightmare (July 2004); Explaining Poorly Designed 401ks (January 2005); An extreme makeover for defined contribution plans (June 2007); and Challenges to 401ks Continue (February 2008).
I explained to the City Council that America was facing a retirement crisis and that companies shutting down their pensions and forcing workers into flawed 401(k) defined contribution plans were largely to blame.
“401(k)s cannot and will not provide meaningful retirement security for America’s overwhelming number of working people and certainly not for City of Atlanta employees. So if you vote to force employees in your city to adopt a 401(k) type system, at least be honest about it and recognize from the start that this is not a retirement plan.
In Alaska last week, a new analysis from the state’s Pension and Benefits Division found that the state’s 401(k)-style retirement system for new hires offers significantly lower benefits. to those of the pension-type system abandoned in 2006.
“There is a gap between defined benefit and defined contribution,” said Ajay Desai, director of the Pension and Benefits Division.
According to the study, for a typical employee, there is a 40% loss between the old retirement system and the new 401(k) system, but Desai said the eventual gap should be less than that because various factors, including how investments compound over time.
The estimates presented showed that the spread narrows over time, as long as the markets behave as expected.
This assumption caused Senator Jesse Kiehl, D-Juneau to say, “This is set up by Miss Rose E. Script,” Kiehl said after the presentation, “and it fails again and again.”
It should come as no surprise today – some 50 years after the 401(k) was introduced – to learn that shifting responsibility for retirement planning to workers has been disastrous for workers, but great for the results of sponsors of pension plans, both public and public. companies, as well as Wall Street.
The 401(k) defined contribution plans that employers and Wall Street sold to workers failed miserably, I wrote in my bestselling 2020 book, Who Stole My Pension? “With median account balances for people age 65 at $70,000 or less, it’s no secret that the great 401(k) ‘experiment’ has failed in the United States.”
The failure of 401(k) innovation was predicted decades ago by experts — including me — and could have been avoided if lawmakers and regulators had acted in the best interests of investors and if the banking industry financial services had curbed his greed.
Instead, Wall Street companies made money and were big winners. Retirement savers who paid higher fees on Wall Street for underperforming mutual funds were big losers.
I have been involved, as an expert, in conducting class action lawsuits alleging investment mismanagement in many of the largest US 401(k) plans, including Walmart
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Coincidentally, 2006 was the very year Alaska recklessly ditched its retirement system in favor of a flawed 401(k)-style plan.
If I were an employee or retiree of the Alaska government, I would definitely want to know who is responsible for undermining my retirement security, as well as holding them accountable for this predicted and preventable disaster.