The Ubiquitous 401k, Business, and American Wealth

Ahh, the ubiquitous 401k – as time passes it’s popularity grows. Since it’s inception in 1978, it has become the defacto retirement savings account for employers. If you do not know your history, though, you likely wouldn’t know that pensions were the retirement account of choice. I don’t want to hash out pensions here; I have numerous posts on them and you can find them gathered here.

Instead, I want to take the time to actually delve into 401ks – something I should have done a long time ago – especially since I began this website from a retirement perspective. Of course, I’ve written about numerous other topics but it’s always nice to revisit retirement accounts from time to time.

What is a 401k?

This is a great and obvious starting point. The Revenue Act of 1978 had a line item in the IRS – 401k – that allowed employers to pass on taxes to employees and employees to defer taxes until they withdrew their money.

Reread that underlined part again. Many financial institutions, websites, and pundits will say that it allowed “employees to defer taxes until they withdrew their money,” and while that is true, they miss the bigger picture. Companies and corporations were already looking into how to squeeze more profit (nothing wrong with increased profits) and increase production (again, nothing wrong with that, either) into their coffers and they ultimately landed on the retirement plan called 401k. The reason? It allowed them to shift from a deferred benefit retirement plan (pension) to a deferred compensation one (401k), – which passed not only the risk but also planning and taxes to their employees.

To be fair, the time of employees working for employers for decades is over; according to monster.com, employees change job on average of every 4.2 years. Defined benefit plans (aka pensions) were designed to attract top help but companies have since capitalized on the massive savings to them – selecting the defined contribution plan (401k) instead.

And, while I’m at it, I’ll just go on to say that 401k plans definitely benefit those individuals who are intentional about saving for their future. There are scores of people who are millionaires in their 401ks because they saved and saved. I get it; I just opened a solo 401k for the sole proprietor work I occasionally do myself.

Still, I can’t in good taste ignore the context in which the plan was created. For example, let’s look at a couple facts that, when viewed in context, will help to highlight where I’m coming from. First, the increased productivity vs. wage graph from EPI.

For those who need context, this graph ultimately illustrates how productivity has increased while wages have lagged. The increasing gulf between productivity and wage growth is amplified when one considers the shift in retirement accounts; namely, employers have saved vast amounts of money by passing off minimal amounts towards retirement accounts – including taxes and management fees, too.

Perhaps even more informative is this particular graph from the PEW Research center, outlining the stagnation of American wealth.

Forget the “spike” on the chart – it’s basically useless for two reasons: the wealth has done what is expected for many Americans (it’s reduced) and the wealth at the top has substantially increased disproportionately.

Even worse is that the COVID-19 pandemic saw a staggering upward redistribution of wealth. What else are we to call it when small businesses were told to close down while behemoths like Amazon, Walmart and the like continued unimpeded?

Nick Hanauer and David Wolf, an unlikely pair (the former is a venture capitalist and the latter is a president emeritus of an SEIU local), highlight in their Time article that over the past several decades, “that the cumulative tab for our four-decade-long experiment in radical inequality had grown to over $47 trillion from 1975 through 2018. At a recent pace of about $2.5 trillion a year, that number we estimate crossed the $50 trillion mark by early 2020. That’s $50 trillion that would have gone into the paychecks of working Americans had inequality held constant—$50 trillion that would have built a far larger and more prosperous economy—$50 trillion that would have enabled the vast majority of Americans to enter this pandemic far more healthy, resilient, and financially secure.” They base this and other stats on a study you can find here.

They mention 1975 – and the ubiquitous 401k was created in 1978. There’s some correlation, here.

Working with the system

There are ways to save money in the current retirement system – but you must be intentional

Income inequality aside, there are ways to work within the system to actually save for retirement. I understand that we all have differing income levels, family needs/requirements, and disposable income, but overall there are avenues many can pursue. The 401k, even with all of the skeletons in the closet, can be utilized to create wealth – IF you are intentional about it.

Look at it this way: even though the system was designed to transfer risk, taxes, and management to you the end user, there is still opportunity to use it for wealth generation. In fact, in the second quarter of 2021 the number of Fidelity 401k millionaires jumped up 412,000 alone. Fortune favors the bold? More like fortune favors the intentional.

Intentionally saving for retirement

Make a plan – don’t let retirement just “happen” to you!

Intentionally saving for retirement isn’t easy – but it’s necessary. It’s a must, actually. Otherwise, you are leaving yourself open to just social security and it was NEVER designed to be the sole means of retirement income.

I’m fond of saying that every family is different; the needs, income, savings, etc. and the retirement savings is the same. Some are likely to be frugal even in retirement while others need more to spend. Whatever your personal situation is, you have to take charge – even when the system was designed to saddle you with the bulk of the work. And until the system changes (Short of a cultural tidal wave I’m not hopeful) it will remain so.

Rumblings in the 401k realm with employers

The rumblings in the retirement arena have begun to expose cracks in the system

Although I’m not hopeful of a cultural tidal wave, there are some signs that change is in the air – even if it is miniscule. Take, for example, this article by The Wall Street Journal that outlines how due to increased competition for talent, employers are offering more in 401k contributions. They site the tight labor market as one of the principal reasons for this and I, for one, am glad it exists: tight labor markets are some of the primary drivers of substantive changes in employment policy.

While COVID-19 has seen a massive transfer of wealth to the top 1%, it has also brought about some unexpected and strange consequences for companies, too. For example, what has been coined as “The Great Resignation” has shaken the workplace in ways that some didn’t expect. And, point of fact, it even appears some consultants have taken the line of offering lifetime income strategies for outgoing workers to retain/recruit top talent. Amelia Dunlap, VP Nationwide Retirement Solutions, said that,

“With long-term financial security top of mind for employees, guaranteed lifetime income investment options within an employer sponsored defined contribution plan can help them grow their retirement savings with the confidence that they can generate income they won’t outlive in retirement,’ Dunlap emphasizes.” (emphasis mine)

It’s fascinating to read that some financial pundits are advocating what is essentially a pension within a 401k system to recruit and retain talent. My how we have come full circle.

I also want to point out that despite the transfer of wealth, the staggering income inequality, and the tilted table, the system has finally started to regurgitate what has been shoved down it’s throat for decades. The Great Resignation, coupled with the increased opportunity for many to work from home and a tight labor market has brought about some very satisfying rumblings.

What’s in store for the future

To be honest, I have no idea. I have hunches, gut feelings that I suspect will come true but who’s to know? There are entire industries who try and predict what is to come and how many of them could say they saw things the way they are today? I’d wager it’s a low number.

I’ll take some chances, though, and offer some predictions. First, the 401k is here to stay. It may have been born out of a time when companies were looking to maximize their profit, reduce liability, and transfer risk and management, but it’s here to stay. I understand the transition from defined benefit to defined contribution – I really do. What I have a hard time grasping is how little the contributions employers have made since it’s inception. It should have been A LOT higher. Rewarding shareholders is one thing – doing so at the expense of those who provided those returns is another altogether. So excuse me as I applaud the tight labor market and the changes it is ushering in. IT’S ABOUT TIME.

Second prediction is that the number of retirement accounts will increase over the coming years. According to CNBC, the number of Americans without retirement accounts is 55 million. Yea, you read that right. There are some proposed solutions as well as initiatives to offer retirement accounts for those who currently do not have them. Nothing is perfect – but we have to start somewhere. The reason for this is simple: people who reach retirement age and are unable to are a drain on the entire country. This is one of the reasons the government attempts to incentivize Americans to save for retirement in the first place. People who have ample retirement savings contribute to the economy and not burden it.

This leads me to the third prediction: the amount in retirement accounts will grow due the the tight labor market. Companies are feeling the pinch in a system of their own making and to attract/retain top talent, they are going to have to change the way they approach offers – including retirement. For my part, I am pleased to see this come around. Changes in the way companies have to operate will ultimately shape the way things play out. I may not see through the veil into the future clearly but I can read the tea leaves.

In the end, things will change because some are learning what others already know: you get what you demand. Companies and corporations will not give anyone anything willingly; instead, it has to be fought for. The variables at play today can bring about change tomorrow – and I’m hopeful for serious change.

The last thing I will leave this article with are two very interesting points I’ve seen recently. The first is that the tight labor market is seeing recruiters offer large bonuses and even triple salaries to attract top talent. Top labor markets produce not only employment changes but also increased competition for those who are skilled. Headhunting is a real profession, after all.

The second thing is that in an attempt to to attract and maintain top talent, companies are considering offering equity to certain employees. I find this amazing and, if I am honest, a bit humorous. The reason? Companies and industries as a whole are reaping what they have sown – and are flirting with strategies many in the labor movement have touted for decades now.

Maybe I need to write another article delving into this topic a bit more.

Thoughts?