Magazine

Pension Plunge


THE GREAT 401(k) HOAX

Why Your Family's Financial Security

Is at Risk, and What You Can Do about It

By William Wolman and Anne Colamosca

Perseus -- 246pp -- $26

What horrified some people most about the Enron Corp. collapse was the way its employees' retirement accounts got wiped out. The increasingly popular 401(k) is a pension plan in which employees are responsible for investing a tax-sheltered portion of their earnings and employers kick in matching funds or stock. In the booming 1990s, millions came to see their 401(k) plans as perpetual wealth-spinners.

They're anything but, say former BusinessWeek chief economist William Wolman and Anne Colamosca in The Great 401(k) Hoax. They argue that Americans have been hoodwinked by corporations and Wall Street into believing that investing savings in stocks will guarantee income enough for a comfortable retirement. But even at the end of the '90s, a decade in which stock prices quintupled, the average 401(k) account held just $46,740.

Worse, the authors say, there's strong evidence that stock market returns will probably average less than 2% a year throughout the first decade of the 21st century. They draw parallels to market bubbles that peaked in 1901, 1929, and 1966 and were followed by years of declining or stagnating stock prices.

Along the way, they explain how and why employers wiggled out of long-term commitments to provide pensions based on defined benefits in favor of defined contributions--the essence of the 401(k) system. And they skewer Democrats as well as Republicans for policies that led Americans to become hostages to the stock market.

What to do? Many employers will contribute only to 401(k) plans, and Congress can't seem to agree on even modest reforms. Wolman and Colamosca advise investors to load up on high-dividend stocks and bonds, particularly U.S. Treasuries whose yields are indexed to inflation, and shut out the "noise" from Wall Street's ever-optimistic prognosticators. The go-go years are gone.


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