A reader asks: What's in a number, for example 401(k)

A reader asks: What’s in a number, for example 401(k)?

Archer replies: As it happens, Chapter 3 of the not-yet-best-selling book Radical Problems, Simple Solutions: How Markets Can Help Fix the Retirement Crisis and Solve Wealth Inequality, is called “What’s in a number?” It starts like this:

401(k).

It looks like what it is: a reference to an arcane subsection of Federal legislation, in this case the United States Revenue Act of 1978. It conjures the image of a dolorous bureaucrat with a green eyeshade and sleeve garters, a modern version of the scrivener Bartleby who, after meeting with his motivational coach, was briefly energized to sneak in something a little extra into the bill in deference to the working man – a way for employees to set aside a few dollars for retirement on a pre-tax basis.

And now there’s this headline from The Wall Street Journal: “The 401(k) has Reached a Tipping Point In its Takeover of American Retirement.” The lede: “It took nearly 50 years, but half of private-sector workers are saving in 401(k)s for the first time.” At the end of September 2024 there was nearly $9 trillion in assets held in these plans. Bartleby would be proud.

There are different ways of looking at this, of course. Some see the rise of self-directed, mostly self-funded retirement plans as nothing more than a dodge for corporations to avoid the responsibility of providing for their employees in old age. It has certainly had that effect. Few, if any, new defined benefit plans (where the employer has sole responsibility for funding retirement payments) have been started in recent decades, and many have been shuttered or migrated to 401(k)s.

Others (me) have argued that there is a silver lining, or maybe two. First, while it’s true that the 401(k) has devolved responsibility for saving and investing to the individual, that’s not always and everywhere a bad thing. Engaging with markets, and with money, can be good. Owning shares means having a stake in the economy, in the country, and, by extension in the idea of free market capitalism (see my article in Barron’s).

Second, the assets in a 401(k) plan are inheritable, allowing wealth to compound over time. With a defined benefit plan, the assets stay with the sponsor. You don’t own them. Likewise, neither you nor your heirs (nor your employer) can get back the money you put into Social Security during your working life, though it ostensibly belongs to you.

There are downsides, certainly – left to their own devices some will make bad or overly conservative investments. Their portfolios won’t grow. They will jump in and out of markets at exactly the wrong time, and they will fail (or be unable) to save enough to fund a comfortable retirement.

Some of this has been addressed by the sponsors of the plans. There’s a lot of money in what are known “target date funds,” for example, where the stock/bond balance in the portfolio is recalibrated automatically as the plan participant ages. It’s not a perfect solution, but it can be helpful for the many people who would struggle to develop a diversification strategy on their own.

Of course there will always be those who insist on going their own way, loading up on single-day options, going all-in on Dogecoins. For them, Bloomberg’s Matt Levine has proposed his own solution – the “Certificate of Dumb Investment.”

“The idea,” he has written, “is that anyone can go to the SEC and ask for the certificate, which says ‘I want to buy a dumb investment. I understand that the person selling it will almost certainly steal all my money, and that I would almost certainly be better off just buying index funds, but I want to do this dumb thing anyway. I agree that I will never, under any circumstances, complain to anyone when this investment inevitably goes wrong. I understand that violating this agreement is a felony.”

But the real problem is that people keep getting older as Apollo’s chief economist, Dr. Torsten Slok, recently noted in his daily email. There are, he wrote, “11,500 people who turn 65 years old every day in the US. In China, it is 32,000; in Japan, it is 4,000; and in Germany, it is 3,300. The bottom line is that the number of retirees globally is growing rapidly, and there is a need to provide retirement savings for all of them.”

Most of these places have the same numbers problem – too many retirees, not enough workers. In the Herman Melville work referenced above (“Bartleby, the Scrivener: A Story of Wall Street”), our eponymous copy clerk’s response to the demands of a rapidly modernizing economy was, famously, “I prefer not to.” Sadly, this philosophy does not lead to a prolonged retirement. Preferring not to work, he is eventually arrested and sent to prison; preferring not to eat, he starves to death.

Most of us, I suspect, would prefer to keep eating into old age. Most of us are unlikely to have the government to rely on to fund us. Half of us now have access to 401(k)s. It’s time for the other half to get into the game.

Woof.