Your 401(k) Is Kinda Bullshit

The fact that I feel a sense of pride when I say things like, "I contribute to my 401(k)," is perhaps the biggest indication that I am not, in fact, a grown-up. The real marker of adulthood is doing things that seem "adult" without feeling self-congratulatory about it. Additionally, any illusion that I have any idea what the fuck I'm doing when it comes to my retirement would fall apart under even the slightest scrutiny. What if, for instance, someone asked what return I got in 2016? What kind of funds I was invested in? Or who was even managing my money?

Regardless of my maturity level, the fact remains that I am at least getting biologically older. As I inch ever closer to 30, the chances that some family member might ask me these exact questions (and soon) is higher than absolute zero. With that in mind, I decided to take action. More specifically, I made a plan to "take control of my retirement"—a phrase I'm probably cribbing from an actor wearing Dockers in a commercial I overheard once in a laundromat, but whatever. You have to start somewhere.

The first thing I learned is that retirement is a relatively new concept. In the olden days, people didn't need as much of a cushion between the end of employment and death. I don't think I fully understood that when the Social Security Act was signed in 1935, the average life expectancy in the US was only 61. Meanwhile, in 2017, we're inching toward a reality in which people might live as many years after 61 as they spent in the workforce.

Financial planners have traditionally used a three-legged stool as a metaphor for how one should plan for this ever-expanding stage of life. Social Security, a pension, and other investments or savings are supposed to carry you through your golden years. But the problem, as I immediately identified it, was that I did not have a pension. Nor did anyone I know besides a handful of teachers—something that data backs up. According to the Employee Benefit Research Institute, in 1980, about 28 percent of private-sector employees had pensions only. By 2014, that number had dropped to 2 percent.

Seeking clarity, I called up Nevin Adams, the chief of marketing and communications at the American Retirement Association. He explained to me how 401(k)s came to replace the idea of pensions at most companies, and why that wasn't necessarily a disaster.

Basically, the modern retirement system started with a bunch of executives at Eastman Kodak Co. and Xerox who wanted tax havens for their bonuses. They lobbied Congress for a mechanism with which they could stockpile money and not pay taxes on it until they retired, and a 28-year-old junior lawyer named Richard Stanger was the technical expert primarily tasked with crafting 401(k) as a new subsection of the Internal Revenue Code in 1978. Two years later, a benefits manager named Ted Benna figured out that the then-obscure 869-word insert could be utilized by all employees at a company—not just the ones with corner offices.

The idea was that those employees could give a certain pre-tax amount of their paycheck to their bosses, who would hand it over to a third-party money manager. In some cases, the employer would even match the amount being invested up to 10 percent. For instance, if a worker wanted to put 3 percent of his or her pay away, they would end up with double that amount in a managed fund that would ostensibly increase until retirement. If the money is pulled out before age 59.5, it's subject both to income tax and to an excise tax of 10 percent. But for people who can wait to touch the money, they end up not paying capital gains taxes for whatever profits they've made from their investments. Instead, a person cashing out their 401(k) just pays income tax on it like they would if they were getting a paycheck for the same amount.

Realizing it would cost them less than providing pensions, companies were eager to make the switch. The 401(k) was also promoted to consumers as a vehicle toward self-sufficiency and fulfillment during the Reagan years—a DIY retirement plan that relied on contributions from individuals as opposed to gifted benefits from employers that were guaranteed by the government.

Adams says this was an incredibly positive development for workers. In his telling, it's giving financially illiterate people "free money." And if the market plunges, that dip will likely be offset by the employer match, he assured me. He also points to the fact that people today are more transient as evidence for why pensions should have fallen out of favor. For instance, he worked at his first job for 9.5 years—not enough to get a pension from the employer later in life. If he had a 401(k) instead, he reasons, he would have at least gotten something to show for his near-decade there.

Plus, he adds: "You get access to investment funds that are cheaper than if you were out doing this on your own, though you have to keep an eye on it."

Keeping an eye on your 401(k) is tricky if you barely understand what it is. For help, I called Daniel Solin, a securities attorney turned financial advisor and author who instructed me to only focus on two factors. One was something called the expense ratio, or the amount I was paying in management fees. Less than 1 percent is considered good, and it looked like I had one of .21 percent in 2016 and was projected to have one of .72 percent this year—a big jump, but still not terrible.

The other thing he said to look for was what category of advisor I had, of which there are two. Those known as "ERISA 3(38) fiduciaries"—named after the Employee Retirement Income Security Act—which aren't allowed to have conflicts of interest and aren't entitled to any portion of the revenue they make by investing your money. Essentially, this means they have to always do what's in the best interest of plan participants. Meanwhile, non-fiduciaries are a group of brokers and insurance firms that can have conflicts of interest and don't even have to tell you about them. Alarmingly, though he doesn't know for sure, Solin estimates that "about 90 percent" or so of 401(k) plans are advised by the latter category. All of this led him to have a very different take on the financial instrument I had just heard praised by Adams.

"Many of us believe that 401(k) plans are a wealth transfer scheme that transfers a large percentage of the profits belonging to people participating in plans to those who are advising them," he said, ominously.

Perhaps for good reason, figuring out who was managing my money was not easy; my benefits manager had no idea what I was talking about and there was no obvious way to find this information through a search engine. Ultimately, I found myself on a website called FEEX.com, which allows you to input some basic stats and figure out how much you're paying in fees both over the course of the year and until you retire.

While interesting to see, FEEX doesn't break down how much of those fees are for managing the fund or shady advisors pocketing my gains. Given that it's almost impossible to know if you're being swindled, Solin recommends only putting as much into your 401(k) as your employer is willing to match. Anything additional you have left to save should go into an individual retirement account (IRA) through a low-cost provider with a lower expense ratio. (The giant investment management company Vanguard has a similar fund with a ratio of less than 0.16 percent, in my case.)

"Put all your money in that, and don’t look back, and you’ll be in the top five or 10 percent of all professionally managed funds," he told me.

Throughout the two days that I did this research, I did not feel like someone who belonged to a country club and talked about the diversity of their portfolio in between mouthfuls of well-done steak; I did not feel like I had "taken control of my retirement." And for that I blame conflicting advice. On one hand, Adams, the guy who loved the 401(k), expounded the virtue of a retirement tool that required zero brainpower from its participants. On the other hand, detractor Solin claimed that 401(k)s were horrible because "a lave operator" couldn't be expected to pick out the best possible option from a list of ones available as part of their 401(k) plan. Then, as a solution, he told me to take care of it myself instead by picking out a fund from a basically infinite list. What the fuck?

After a bit of Googling, I saw that Stanger, the expert who helped write the code, told Bloomberg decades later that he thought the former. In the same article, a former treasury official named Daniel Halperin said, "there are certainly times when I think it may have been a terrible mistake." Meanwhile, Benna, the man who proselytized for it to benefits managers across the country went on to famously call the 401(k) "a monster" that should be "blown up" because it had morphed into something way too complex for most workers to understand.

All of this made me wonder if there was another way to avoid choice entirely. Can we just go back to pensions, like the UK did with its mandatory program in 2012? I'm not optimistic. Obama tried to revamp the 401(k) system in 2015 by creating a rule that would require all advisors to retirement plans to become the ERISA 3(38) fiduciaries that aren't allowed to steal your money. Then, when Trump took office, the implementation of that rule was stalled. If we can't even make 401(k)s not be bullshit, it seems unlikely that we'll be able to get rid of them altogether in order to guarantee that our generation won't run out of money before they die.

"The good news it that you'll have a long life," Adams told me about the state of retirement in 2017. "The bad news is that you'll have to pay for it."

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