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Time to think outside the box about 401(k)s

By ROBERT TRIGAUX, Times Business Columnist

© St. Petersburg Times, published August 4, 2002

Here's a hot tip. Invest in cardboard boxes.

Here's a hot tip. Invest in cardboard boxes.

Not paper company stocks. Invest in actual cardboard boxes. Because if you are like the typical American worker with a few gray hairs, you may be calling those boxes your home later in your retirement.

I plan to call my box Chez 401(k). For good reasons.

We've just lived through one of the biggest and most sustained stock market booms in history. In spite of that seemingly ideal investment climate, the typical American's savings for retirement have stagnated for many years or, more recently, sharply declined in value.

Before dismissing my cardboard castle as alarmist, let's look at some rather remarkable numbers:

* The average 401(k) retirement account fell about 11 percent to $36,390 in 2001, down from $40,918 in 2000, according to Boston consultants Cerulli Associates. In 1999, the average 401(k) account topped $52,000. We're going backwards.

* In 1998, 65 percent of American households headed by a person between the ages of 47 and 64 had either the same or less retirement wealth than they had 15 years earlier in 1983. For the median household (half with more, half with less), retirement wealth fell 13 percent in those 15 years.

* Measured by wealth, the top 1 percent of our population owns just under 50 percent of all stocks outstanding. The top 10 percent owns 85 percent. Put another way, the remaining 90 percent of the population that invests in stocks owns only 15 percent of them. That's not a lot to go around.

* People between ages 38 and 66 will, on average, face expenses that exceed income by at least $10,000 during their retirement years, says new research from the nonpartisan Employee Benefit Research Institute. The study, based on a survey of Kansas residents, finds that the average single retired woman will face more than $20,000 in costs beyond her retirement income, while married couples will face the smallest deficit.

What's wrong with this picture?

Here's part of the answer. The much touted 401(k) -- the tax-advantaged investment vehicle that's become the primary tool for Americans to save for retirement -- has left most most of us grossly unprepared for our golden years.

Before I get my Monday morning calls and e-mails of protest, I know what some of you will say.

Too many Americans live beyond their means. People take on too much debt without a second thought. Retirees also get Social Security payments and can always get part-time work. Society so promotes instant self-gratification -- be it impulse buying or Wall Street's obsession with short-term profits -- that long-term retirement planning gets buried in all the daily noise.

I don't disagree. But there's another reason or two that so many American workers are shockingly ill-prepared for their retirements.

When it comes to the 401(k), we've all been snookered. What was supposed to be a new supplemental savings device quickly became twisted and hyped as the principal investment conduit and cornerstone of retirement funding for a large percentage of the American population.

That, at least, is one of the driving conclusions of The Great 401(k) Hoax, a book written by Stanford Ph.D., economist and former Business Week editor William Wolman and business writer Anne Colamosca, and published earlier this summer.

"The 401(k) turned out to be the greatest systemic financial hoax ever perpetrated on the unsuspecting public," they write.

Strong stuff. But let's briefly hear them out.

They argue that the 401(k) was really created at the urging of corporations that wanted to shift the responsibility of funding retirements from companies to the individual workers. Companies used to provide their retiring workers with pensions, or defined benefit plans, which guaranteed a monthly income to retirees. The company was responsible and bore the risk for figuring out how to pay for its pension obligations.

With the rise of the 401(k), corporations began to eliminate traditional pensions. Traditional pension plans fell from more than 170,000 in 1985 to about 56,000 in 1998.

Meanwhile, the number of 401(k) plans and others like them rose to more than 673,000. The result? Many employees became first-time stock investors and suddenly assumed the risk for managing their own 401(k) savings. Employers could (voluntarily) contribute matching funds or stock.

It all seemed ideal enough through the 1990s. The stock market generated 10, 15 and even 20 percent annual returns on 401(k) investments in stocks. Those few workers who diversified their 401(k) holdings with bonds or fixed-return investments were often viewed as fuddy-duddies who had not clued into the new business paradigm of prosperity through stocks.

Then the tech bubble burst in 2000. That was followed by last year's terrorism of Sept. 11 and disastrous collapse of Enron (where thousands of employees saw their Enron-stock-laden retirement plans vaporized), and this year's parade of corporate scandals, stock market woes and slowing economy.

The book's authors argue Americans were "hoodwinked" into relying on the 401(k) as their primary long-term investment mechanism -- something it was never intended to become.

"The 401(k) represents an implicit promise to middle-class Americans that they can live off the income from stock ownership, just like the rich do," they write. "It is a promise that is impossible to fulfill: It is the great 401(k) hoax."

Is the 401(k) a complete charade? Nope. Have Wall Street and employers oversold it for so long that American workers are erroneously addicted to the 401(k)'s supposed retirement magic? You bet.

We don't know how long it will take the market to recover from the binge of the '90s. A year? A decade? And what kind of market returns should we expect during such a recovery?

Some economists suggest we're entering a period of stagnation. Talk of a double-dip recession in 2003 is on the rise. Hoax authors Wolman and Colamosca offer a pessimistic outlook of stocks returning a paltry 1.9 percent annually for years to come.

That sounds too severe. But one thing's for sure. There's a retirement crisis brewing, and most of us are stuck in a profound state of denial.

Hey, we've only been talking about the plight of workers with 401(k)s. What about the 50 percent of American workers who don't have any private pensions to supplement their Social Security benefits?

I'm thinking about renting out the back box at Chez 401(k). Anybody interested?

-- Robert Trigaux can be reached at trigaux@sptimes.com or (727) 893-8405.

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