The Great 401(k) Hoax
Bloomberg Personal Finance (06/02) Vol. 7, No. 5 p.27; Wolman, William

DaimlerChrysler, Wyndham International, Bethlehem Steel, and other companies suspended their 401(k) matches to save money during the recent recession, and Enron's collapse shed light on how 401(k) plans can injure their participants, but what these situations do not emphasize are the innate flaws within the system. A study to be published by the Economic Policy Institute indicated that the wealth of households in the middle of the income bracket saw their 401(k) retirement savings plummet 13 percent between 1983 and 1998, while the top 5 percent of household incomes increased their retirement savings by 176 percent. When companies made the switch from defined-benefit plans--which guaranteed retirees a monthly check--to defined-contribution plans, they were able to reduce administrative costs, contribute company stock which could be deducted from their corporate income tax, and deny enrollment to part-time and flextime workers, who are mostly women. Because these plans were meant to lower costs, businesses concentrate on striking the least costly deals with investment advisors and administrators, which reduces the quality of investment management and performance within the plans. Chief economic writer for BusinessWeek William Wolman suggests that owners of 401(k) plans place the management of those plans in the hands of financial institutions that derive most of their profits from such endeavors. Moreover, employees with the knowledge to make their own investments should be allowed to do so at any time, including selling their employer's stock contributions. And lastly, for employees without the knowledge to make proper investments, a panel of 401(k) professional managers run by an impartial government agency should be available to manage the plan on behalf of the employee--perhaps within the Department of Labor.


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