End of the 401K?

(Note to CCBlog users: There seems to be a problem creating a link to the right post. If you are looking for "Is it art or ..." you'll find it here.)

Last night, 60 Minutes did a segment on the fiasco of the 401K. One interview emphasized a forgotten fact, which is that they were intended to be one leg of a three-legged retirement stool, with the other legs being Social Security and traditional guaranteed benefit employer retirement plans. The latter leg has virtually disappeared, however, leaving a very wobbly stool indeed.

The weakness of 401Ks has now been revealed for everyone to see, of course. But as the 401K industry lobbyist 60 Minutes interviewed bluntly implies, the problem goes beyond that one program. The problem is equity investing itself. The spokesman tried to deflect 401K criticism by saying participants shouldn't have been in stocks in the first place if they weren't prepared for the inherent risks. This conveniently ignores the fact that hitching onto the Wall Street rocket has always been the appeal of 401Ks.

Yes, everyone read the mandatory warnings in the various fund brochures that past performance could not be guaranteed. But surely the charts showing 1-year, 5-year, and 10-year returns got much more attention. And yes, everyone knew the market had hiccups and investment strategies needed to be "long term". But nothing was said about Wall Street having a seizure that would wipe out half or more of your retirement savings, resulting in "long term" being longer than many will be in the work force.

"Why I Fired My Broker", the cover story of the new May Atlantic, is another bracing dose of economic reality thearapy, helped down with a measure of gallows humor. Jeffrey Goldberg consults a variety of fiancial wizards in search for an answer to the question every staggered "average" investor is asking: "What do I do now?" After years of being told stocks were the path to financial security and a comfortable retirement, he finds the message has changed nearly 180 degrees.

Goldberg seeks out Robert Sorros, son of George Sorros and deputy chairman of the fund started by his father, who quickly disabuses him of the idea anyone on Wall Street has interests at heart:

“You think a brokerage should be a place you go to pay commissions for fair and unbiased advice, right?” he asked.
“Yes,” I said.
“It’s not. It never has been.” He then cited another saying of Buffett’s: “‘Wall Street is a place where whatever can be sold will be sold.’ You are the consumer of their dreck. What they can sell to you, they will sell to you.”
“But they told us—”
“They lied.”
He went on: “You should be disheartened and disappointed. But don’t kid yourself. You’re a naive capitalist. They were never your advisers. Do not for a moment think that a brokerage firm is your friend.”
“So who’s my friend?”
“You don’t have one. This is the market.”

From Seth Klarman, a highly successful fund manager, he gets much the same wisdom:

He agreed with Robert Soros that the financial-services industry treats the small investor not as a client but as a source of ready cash. “The average person can’t really trust anybody. They can’t trust a broker, because the broker is interested in churning commissions. They can’t trust a mutual fund, because the mutual fund is interested in gathering a lot of assets and keeping them. And now it’s even worse because even the most sophisticated people have no idea what’s going on.”

All of which causes Goldberg to reflect, "After 15 years of pabulum, I was enjoying, in a perverse sort of way, receiving straight talk from masters of finance."

One of the reasons the market won't be coming back, at least not to anything near wear it was, is that investors won't be coming back. Even without having Goldberg's conversations, people are figuring out for themselves that Wall Street and all its affiliated components have been taking "average investors" for a ride. The billions paid in investment fund fees and commissions over the years have left most people right where they started, with the money they paid in--and sometimes not even that.

For Goldberg this is a reality check, a painful but necessary crashing back to earth. Truth is always to be preferred to fantasy.

I no longer expect to get rich. It makes me happy to realize this. It also makes it easier to give more money to charity. In retrospect, I can’t imagine what led all of us to believe that we could regularly expect double-digit annual returns on our money, for doing no work.