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Reality check

Some executives looked closely at the faltering economy and did something they did not to advertise: They eliminated contributions to their companies, 401(k) retirement plans. These companies included Bethlehem Steel Corp., DaimlerChrysler's U.S. unit and the Wyndham International hotel chain.

Then some executives looked closely at the faltering economy and did something that they chose not to advertise: They eliminated contributions to their companies, 401(k) retirement plans. The ranks of these companies included Bethlehem Steel Corp., DaimlerChrysler's U.S. unit and the Wyndham International hotel chain.

In the eyes of William Wolman and Anne Colamosca, co-authors of The Great 401(k) Hoax: Why Your Family's Financial Security Is at Risk, and What You Can Do about It, 401(k)s are just one item on a bill of goods that Americans bought along with other false promises of the greatest bull market in U.S. history.

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

In a spirited polemic full of compelling facts and statistics amid occasionally hyperbolic prose, Wolman and Colamosca attack more than the 401(k). They take aim at Wall Street for convincing investors that they could be as smart as the pros. This was part of the widespread democratization of Wall Street that flourished in the 1990s (to cite but one example: 48 percent of U.S. households owned stock in 1998, up from 19 percent in 1983).

The 401(k) was at the heart of this equity culture and is now, in the wake of the Enron scandal, under siege. As Congress weighs various post-Enron reforms of the pension system , the energy company's 401(k) declined more than 70 percent in value, and many employees lost nearly all of their retirement savings , renewed attention is being paid to the strengths and weaknesses of these plans, which hold a combined $1.7 trillion in assets.

America's love affair with the stock market, which many carried on through their 401(k)s, rested on several delusions, the authors argue.

"The most common delusion is that it's always a good time to buy stocks," they write. According to Wolman, former chief economist for BusinessWeek, and Colamosca, a former staff writer at the magazine, this is most decidedly not a good time to buy stocks. That's a matter of considerable debate, of course. But as the authors point out, in the 100 years before Nasdaq cracked in 2000, the U.S. stock market suffered three crashes , in 1901, 1929 and 1966. In each instance, it took more than 20 years for the Standard & Poor's composite stock price index to surpass the highs of the bubble years. Inflation-adjusted returns, including dividends, in the 20 years following those three crashes were ,0.2 percent, 0.4 percent and 1.9 percent, respectively.

"While Wall Street tells the American family that it can rely on an inflation-adjusted return of 7 percent a year with a long-term stock savings plan, a return of fewer than 2 percent is far more realistic. The difference between what Wall Street promises and what history suggests is the difference between comfort and virtual penury," write the authors.

No one knows if that 2 percent is realistic or if more robust returns will ultimately prevail, but Wolman and Colamosca are right to argue that many Americans maintain unrealistic expectations , fueled in part by Wall Street hype , of what stocks will return in the decades to come.

Certainly, 401(k)s have their advantages: Individuals can choose their own investments, and plans can be transported from one company to another, unlike old defined benefit plans, which took years to vest. Employees can even borrow against their 401(k)s in emergency situations, creating in effect a vehicle for an interest-free loan.

The authors endorse the post-Enron bills before Congress that would limit the percentage of a company's stock in its 401(k). "In our ideal world," they write, "a company's own stock would be banned from the 401(k) that it sponsors." Still, they fail to acknowledge that if a 401(k) were better equipped with adequate planning tools , better education and increased access to independent, professional advice , it could be a more effective retirement savings vehicle.

With their pessimistic projections and occasionally heated rhetoric, the authors of The Great 401(k) Hoax seem to be trying to scare Americans away from the stock market. That's an extreme position, to be sure. But maybe post-Enron American investors have reason to be a little scared.

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