Was the 401(k) a Mistake?

From the New York Times, I'm Michael. Aubaro. This is the daily. [music]. Over the past few weeks, the US stock. market has been [music] on a tear, soaring to record levels and delivering. a shot in the arm to [music] retirement. accounts. The trouble is millions of. Americans don't have such accounts and. even if they do have little or no money. [music] inside of them. My colleague.

Michael Steinberger has been trying to. figure [music] out why Americans are. retiring so poorly and traces much of it. back to our [music] growing reliance on. the 401k. [music]. It's Monday, May 20th. Michael, we are going to talk to you. today about what doesn't look on paper. like the world's sexiest subject, but I.

think actually is a very sexy subject, which is retirement in the United. States. and you began your journalistic. inquiry into the subject of retirement. in America with a very provocative. question. You asked, "Was the 401k. a mistake? Has this vast system of. personal retirement plans that we now. all rely on pretty much, has it failed.

us?" And I wonder why exactly you. decided to ask that provocative question. right now. I asked that question right now because. we are having an unprecedented number of. Americans reaching retirement age. This. year alone, it's estimated that 4.1. million Americans will turn 65. Wow. It's a record number. What the AP calls. the silver tsunami. And this is the. first cohort of Americans, the first. generation of Americans who entered the.

workforce 40 years ago when 401ks became. sort of the dominant vehicle for. establishing a retirement nest egg. 401ks, just for the sake of clarity, are. employer provided retirement savings. plans. Basically, you set aside a. certain portion of your paycheck to an. investment account of your choosing and. the hope is that those contributions. with the help of the financial markets. will grow substantially over time.

Right? And so this generation of American. workers that's now entering retirement. age are the products of a 40-year. experiment with self-directed retirement. financing. And now we get to see whether. it worked. And we know it worked well. for a lot of people. The concern is that. it didn't work as well for many others. and that a lot of Americans are now. reaching retirement age without having. adequate money put aside for their. retirements. Mhm. Just how inadequate is that.

retirement picture? One estimate is that 49% of people in. the 55 to 65 age bracket have nothing. put aside for retirement. The numbers. are quite stark. Half of the population. of those at or near retirement have. nothing put away. That's what the numbers indicate. And. depending on the estimate, we're looking. at you maybe 10 to 20% of all seniors. already are living in poverty. And so. for many, retirement is an unobtainable.

aspiration. H. and there's a strong case to be made. that 401ks. are largely responsible for the fact. that so many Americans don't have. adequate savings. Well, this feels like. the moment in a daily episode where I. think we have to roll back the tape a. bit and have you explain how this. 40-year-old 401k experiment ever began. So let's start with the story of how we. have come to rely so much on the 401k in.

the first place. Well, I think it would be good to start. that story with the system that existed. before 401ks came along back in the. 50s,60s and into the 70s. A lot of. companies offered their workers pensions. and pensions were basically the company. would create a pool of assets who would. manage the money, invest the money and. manage it on behalf of employees. than. if you worked for a company long enough, you were guaranteed a fixed retirement. income provided by the company for the. rest of your life.

Right? And the key word there is. guaranteed. Companies guaranteed that. your pension would be at a certain level. essentially in perpetuity. Exactly. If you worked for a major steel. or auto company and you spent 30 years, 40 years working on the assembly line at. that company, you knew that when you. retired, you were going to be getting a. fixed monthly income from the company. You knew what the amount would be and it. was a huge benefit to working for these. companies. It was a different era of.

course um there was an era of lifetime. employment. people often [clears throat]. spent their entire careers with the same. company. and people also didn't live as long from. a company's point of view. Pensions were. affordable and it was just a very. different time. Mhm. And you know it it should be said that. even in the heyday of pensions only. around half of all private sector. workers had them. So they weren't as. broad-based as as people might think. And these days there's a bit of. mythologizing about that era. But if you.

had one, it was something you cherished. and it was an era in which the country. seemed to do a better job of taking care. of the working person. Well, then who would willingly give up. that cherished system of the pension? Well, 401ks came along as almost an. historical accident. In the 60s and 70s, many companies were looking for ways to. reward their executives. and specifically they were looking for.

ways that they could award bonuses to. executives and not have that money. taxed. The top marginal tax rate at the. time was quite high, right? And so some. companies began offering tax deferred. savings plans to executives to help them. minimize their tax hit. Basically, the. way these worked was that the company. would pay bonuses directly into these. accounts. And the executives could only. take the money out when they left the. company, either to take another job or. to retire. But there was always a. certain murkiness surrounding these. plans. It was never entirely clear the.

IRS approved of them. It was never. entirely clear that the IRS would. continue to approve of them. And in. [snorts] 1978, Congress stepped into. this vacuum when it passed a broad piece. of legislation that included a short. provision called section 401k that. attempted to provide greater clarity to. how these profit sharing schemes could. be established. And the people who wrote. the legislation didn't think that. section 401k was significant at all.

They thought it was just a sort of. inconsequential tweak. However, a. retirement benefits specialist in. suburban Philadelphia thought otherwise. [music]. In 1979, a gentleman named Ted Benna, he. had been asked by a local bank to try to. devise a profit sharing program that it. could offer to executives. Got it. So in other words, they were. doing that same old thing of trying to. figure out how to shield the taxes of.

highly paid executives. Exactly. And so there he was sitting in. his office on a weekend afternoon in. 1979. and he started reading quite closely. this section 401k. [music]. and the light bulb went off. He realized that there [music] was. possibly a way to preserve this sort of. system legally. Instead of the company. making payments directly into these. accounts, you could offer them as.

retirement plans [music] that employees. could pay into themselves. The thinking. was that if you paid executives big. bonuses, they could choose to put that. money into the plan [music] pre-tax. And he sort of realized he was on to. something quite big. [music]. The catch was section 401k indicated. that this plan had to be made available. to rank and file employees at a company. [music] And that struck Bennett as a. challenge because it was one thing for a.

highly paid executive to be willing to. put aside some of his income in such a. way, but to ask a bank teller, people [music] who tended to need the. money more immediately, that was going. to be a big ask. And solving that piece. of the puzzle was a big challenge. [music]. And so what was his solution? His solution, and it was an ingenious. one, was that the bank could offer to. match a portion of the contribution that. an employee made. So instantly would.

grow their money, right? There's kind of a free money. quality to that proposal. and that this was the sweetener that. could get rank and file employees to go. [music] along with it. And in that. moment, in that flash of inspiration, Ted Bennett created the modern 401k, which would go on to change the American. economic retirement system. A funny footnote to this is that the. bank that had asked Bennett to come up. with the plan rejected the plan.

[laughter]. It was concerned that the IRS would. ultimately rule the scheme illegal. But. Bennett was undeterred and decided that. he would offer the plan to his own. company. Benna's colleagues and employees loved. the plan and happily contributed to it. And you know through word of mouth and. articles in local newspapers, the idea. took hold and the timing turned out to. be very fortuitous. How so? Well, for a couple reasons. One, a lot.

of corporations were, you know, had come. to regard pensions as albatrosses. Certainly in two industries that were. best known for their pension programs, auto and steel. These were industries. that were in decline and their pension. obligations were killing them. Right. Because as you told us earlier, they literally guarantee a certain level. of retirement. Absolutely. and meeting those guarantees. had become increasingly ownorous and. particularly for companies that were in. dying or fading industries.

And so you have companies looking to get. away from this pension system. and the politics of that era was also a. significant factor. I mean this was when. Ronald Reagan is president and. regonomics as it was called was centered. around the idea of individual. responsibility, individual economic. empowerment and 401ks shifted. responsibility for retirement saving. from the employer to the employee. It. was really up to the employee to figure.

out how he or she wanted the money. invested. And to people who were. enthusiasts of 401ks, it was also, you. know, an emancipatory vehicle, a chance. to give Americans, individuals, you. know, the freedom to sort of chart their. own destiny. And so the 401ks fit very. neatly into the politics of that moment. Well, I wonder if you can walk us. through the ideal version of how a 401k.

would have been working for a worker in. this era when it was being more and more. adopted and workers were starting to. really like what they saw in this. alternative to the pension. Let's imagine the guy who entered the. workforce in the 1980s and in honor of. the father of the 401k, Ted Bennett, let's call this imaginary figure Ted. Mhm. Perfect. [music]. Ted gets hired by a company. Company.

offers a 401k plan. And Ted is. disciplined. His father and mother have. told him for years that if you want a. proper retirement, you need to save. You. can't spend everything. Showing a little. financial restraint is a good thing at a. young age. And you know, they've given. him books like The Wealthy Barber, [laughter]. which documents the magic of compound. [music] interest. So having realized. that you know savings is important, Ted. happily establishes a 401k account.

through his [music] company, maxes out. his contribution, you know, faithfully. and the company also provides a generous. match and you know his income keeps. rising as the years go by. So he's. contributing more and more to his 401k. and because he's earning a good amount. of money as it is, he never needs to. touch that money. um he can leave it. there for retirement. Let the stock. market work its magic and the market did. work its magic. There have been. downturns over the last 20 or 30 years,

but basically yeah, sticking with the. stock market has proven to be a very. wise bet. And today, as he nears retirement, Ted. is one of hundreds of thousands of. Americans who has more than a million. dollars in his 401k. Right? This is the very promise of the. 401k that if you contribute early and. consistently, you can build a very. serious nest egg over the course of your. career and you can do it on your own.

terms. Exactly. But. from the start, there were people who. wondered whether this was really a good. idea. You saving for retirement is essential. Did it make sense to put so much of the. burden on workers? Is saving for. retirement really a do-it-yourself. endeavor? [music]. We'll be right back.

So, Michael, who specifically was. warning us pretty preently, as it turned. out, that a growing reliance on the 401k. for retirement was a dangerous. experiment? Well, one person who was warning us was. an economist named Terresa Gillarduchi. who teaches now at the News School in. New York. And what's interesting about. her is that she entered the workforce at. around the time 401ks came along. So, she has tracked this for the duration of.

her career. and has been warning about the downsides. of 401ks pretty much for the duration of. her career. And what exactly was her worry? Well, for one thing, she worried that a lot of. people would never even have access to. 401ks, particularly lower and middle. inome Americans. She worried that many. employers would simply not offer them. She also felt that even if those workers. were offered 401ks, they would not have.

the resources or the financial knowledge. to take advantage of these plans. But. she also saw this in moral terms. She. thought that the 401k represented an. abdication of the social contract. She. believed that workers deserve to be able. to retire with dignity and some degree. of economic security that it was. something that we owed them as a society. and she saw the 401k as a betrayal of. that. Well, help us understand the kind. of downside risk of the 401k that people. like Giler Duchcci are starting to worry. about. And I wonder if you can do that.

by providing a counter example to Ted. who clearly represented the upside of. the 401k and instead give us an example. that really embodies the risks of the. 401k. I think that would help us. understand this skepticism that begins. as the 401k is being adopted across the. American workplace. Okay, let's imagine a worker named Paul.

The first few companies he worked for. did not offer 401ks, but his current. employer does. The problem though is. that Paul doesn't make enough money to. contribute to it on a sustained basis. makes a mid five figure salary, but he's. got kids, he's got lots of expenses, and. he can't really take advantage of this. 401k. He puts what he can into it, a. couple thousand here and there, and there is an employer match, but it. doesn't add up to very much because he. can't contribute a lot to it.

And life can throw lots of curveballs at. people. And in Paul's case, one of his. kids has a medical emergency. health. insurance won't cover everything. And. he's got this money sitting there that's. put aside for retirement, but he needs. the money now. And Paul does exactly what all the. retirement experts [music] say you. shouldn't do and raids his retirement. fund and the 401k ends up being a source. of emergency funds for him.

Mhm. He replenished it to a certain. degree over the next 20 years, but he's. now reaching retirement age, and his. 401k has maybe 20 or $30,000 in it, which is hardly enough to get him. through a year, let alone to sustain him. for the length of his retirement. And. he'll have social security, too. But it. does not add up to anything like the. kind of nest egg one needs these days to. retire [music] on.

So this is the nightmare version of the. 401k where circumstances like this. emergency Paul experiences as well as a. lack of financial savvy and ultimately a. lack of resources means that the 401k is. not providing a comfortable retirement. In fact, it doesn't seem like much of a. retirement at all. No, that's exactly right. Teresa feared. from the start that the 401k system. would disproportionately. benefit people who were already.

wellto-do and would leave millions of. other Americans with basically nothing. put aside [clears throat] for. retirement. And it seems that that's. where we've ended up now. It's not just. that millions of people who have access. to 401ks struggle to save. Millions of. other Americans don't even have access. to 401ks. It's estimated that around half of all. private sector employees do not have. retirement savings plans through their.

employers. You have a lot of TEDs in America, people who earned enough and had the. financial knowledge to put aside a lot. of money and who have massive nest eggs. built up through their 401ks and other. investment vehicles. But you also have. millions of Pauls who've got basically. nothing and are facing, you know, in in. many cases dire circumstances as they. approach retirement, right? What she feared and what it. sounds like has happened is that the.

401k has just reinforced the income. inequality that is so present in. American society. And there would seem. to be a little bit of an irony to all of. this, Michael, which is that as you said. when you described the birth of the. 401k, it was created to shield high paid. executives bonuses from being taxed. So. perhaps it's not all that surprising. that even as it took off and became the. retirement tool of the rank and file. worker, the 401k remains most effective.

at building the wealth of those who. already have a fair amount of wealth. That's a great point. Maybe we shouldn't. be surprised that something that was. created to help rich guys shield some of. their money from taxes has ended up. helping lots of rich guys become even. richer. Mhm. So if, as it turns out, to bring this. full circle, the 401k in a very real. sense was a mistake,

what are we supposed to do about it? Well, for a long time, Gillard Duchi. hoped we could get rid of 401ks. And in. fact, at one point came up with a plan. to replace 401ks, but it didn't get very. far. It was an idea that was popular in. progressive circles, but for many years. she was a figure of scorn on the right. Conservatives thought that she was. attacking the very idea of the free. market and of individual choice. Lately. though, some conservatives have had a.

change of heart. Some significant voices. on the right have even conceded that she. actually had a point about the flaws of. the current retirement system. Who are those voices on the right. suddenly agreeing with her? Well, one. prominent figure is Kevin Hasset, a. well-known conservative economist who. served as one of Donald Trump's chief. economic adviserss when he was. president. After Hasset left the White. House, he took an interest in the. economics of retirement in the United. [clears throat] States and he became.

concerned that millions of Americans. were indeed falling through the cracks. of the retirement system. Hassid has been concerned for some time. that the country was drifting towards. socialism. And so he felt that doing. something to help lower and middle inome. Americans put aside money for retirement. basically would be a way of res not not. just helping millions of Americans but. of restoring their faith in the. capitalist system. From what you're saying he saw the. American retirement situation in the US.

as a betrayal of a different kind. Not a. betrayal of the concept that. corporations owe their workers a. retirement, but a betrayal of the. concept that people could believe that a. capitalist system would provide for them. in their retirement. Exactly. As H has dug deeper into the. economics of retirement, he became. familiar with Gillard Duchi's work and. he reached out to her to strike up a. conversation and they came up with a. quite bold plan for addressing the needs.

of lower and middle inome Americans who. don't have enough put aside for. retirement. And what does their plan, this product. of these two unlikely bed fellows. actually look like? They came up with a really intriguing. idea. [music]. The government has a program called the. thrift savings plan which uh is. available to all federal employees and. all members of the uniform services. It. is like the 401k a defined contribution. plan. People set up individual.

retirement savings accounts. They put. money into it and the government. provides a match. [music]. Giller Duchcci and Hasset had the idea. that you could extend this program to. other Americans to people who didn't. have 401k plans or other retirement. savings vehicles through their employers. and they could put money in [music] and. the government could provide a match up. to a certain percentage and up to a. certain income threshold. [music]. This would allow millions of Americans.

currently locked out of the retirement. system to start building nest eggs. So. in this plan, instead of your company. providing a 401k or a match [music] for. your retirement, it would instead be the. federal government. Exactly. And this plan has gained. traction on Capitol Hill. In fact, there. is now legislation before Congress that. [music] is based on Gillard Duchi and. Hasset's plan, and it has bipartisan. sponsorship. Wow. It underscores the point that.

despite the toxicity of our current. politics, there is growing agreement. across the ideological divide that. something needs to be done to help more. Americans save [music] for retirement. But Michael, here I think I have to. pause and reflect on the fact that this. entire episode has been about the. shortcomings of the 401k. And so I have.

to ask, why would a program that. embraces a 401k style approach be the. solution to a problem that the 401k. itself seemed to create? Well, I don't. think anyone would say that this program. is going to make, you know, everyone in. the neighborhood a millionaire, but it. is going to provide more Americans with. something of a nest egg, something they.

can retire on. That's the hope anyway. It's about trying to help more Americans. put aside enough money they can possibly. retire with some degree of economic. security and dignity. The key point is. participation. You want to give people. access to a retirement plan, give them. an incentive to take advantage of it, right? The match, the match. The match is a crucial part. of this that you. seeing your money, you know, grow. instantly through the match, whether. it's from your company or from the.

government is a huge incentive to. actually participate. And so, you know, this could make a significant. difference. It really feels like the. saga of the 401k ends up being like so. many questions in the United States. where there's this huge seemingly. unresolvable tension between a. collective problem, the need for a. comfortable life after work for millions. of people and a solution that as. currently designed relies on the.

individual to make it happen. And even. the program that expands the government. 401k to all Americans that we just. discussed doesn't seem like it's really. going to resolve that inherent tension. No, [snorts] it won't. And at the end of. the day, this all comes down to a very. basic question. Should we think of retirement as [music]. a privilege or as a right? Mhm. In the 1950s,60s, and into the 70s, the heyday of. pensions, it seemed that we were moving.

towards an answer. And the answer was that it was a right. The 401k system seems to have taken us. in the other direction. And so long as we live in a world where. it's considered a [music] privilege, it's going to put a lot of the onus on. workers themselves. [music]. And that's a very hard problem to solve. for. with policy measures and perks. It. ultimately comes down to whether. individuals have access to retirement. plans and if they have enough money and.

discipline [music] to contribute to them. on a regular basis. Well, Michael, [music] thank you very. much. We really appreciate this. Thank you for having me. [music]. We'll be right back. [music] Here's what else you need to. know today. The president and foreign.

minister of Iran are presumed [music]. dead after their helicopter crashed in. the country's northwest. [music] The. cause is unknown, but it occurred in bad. weather and thick fog, which made search. and rescue operations difficult. [music]. The crash comes at a fraught moment for. Iran. It recently launched its first. direct attack on Israel, suffered a. devastating [music] terrorist attack, and faced massive protests against its.

government. And. [music]. over the weekend, a key member of. Israel's war cabinet, Benny Gance, presented the country's prime minister. with an ultimatum. Unless the government. of Benjamin Netanyahu quickly develops a. plan to end the war in Gaza, Gance said. that he [music] would quit the cabinet.

[music]. In a televised speech, Gance accused. Netanyahu of quote dragging the country. [music]. into the abyss. In response, Netanyahu accused Gance of. betraying Israel [music] and essentially. calling for its defeat to Hamas.

Today's episode [music] was produced by. Rob Zipco and Moo Zadei with help from. Sydney Harper and Luke Vanderplug. It. [music] was edited by Mark George with. help from Patricia Willins. Contains. original music by Marian Lozano, Alicia. Baup, [music]. and Dan Powell and was engineered by. Alyssa Moxley. Our theme music is by Jim. Brunberg and Ben Lansfk of Wonderly. [music].

That's [music] it for the daily. I'm. Michael Babaro. See you tomorrow.