Whenever there’s a hard bump in the market or a bad economic report, you’ll hear commentators speak in worried tones about what this means for people’s 401(k)s.
You would think, then, that any big changes in this retirement savings program would draw a lot of attention. But two big developments, a proposed rule change that would allow 401(k) plans to sell a much wider spectrum of financial products, including private equity and cryptocurrencies, and a new executive order from President Donald Trump expanding the pool of people who can participate in these programs, have passed without a lot of notice.
Part of the reason for this is Trump’s tendency to step on his message, so that ideas that might win the support of voters in this perilous year for Republicans are eclipsed by each day’s change of subject. Nor is a financial media designed for day traders much interested in the institutionalized version of granny stocks.
The first thing to know about 401(k)s is that the government had almost nothing to do with inventing them. The second and most crucial thing is that they were never intended to replace Social Security, and they don’t.
The name 401(k) comes from a section of the 1978 Revenue Act, which was intended to give top corporate executives a way to defer taxes. If there were any justice, the program would be named after Ted Benna, the retirement consultant who realized a couple of years later that the provision would also make a payroll matching plan possible for employees.
“There wasn’t anything that said ‘Thou shalt not,’ so I chose to take the more aggressive interpretation,” Benna said decades later. He got the approval of the IRS for his idea and set up what would come to be called a 401(k) for his small company. Similar plans spread quickly all across corporate America.
Benna has long been a critic of changes in the system, which he thinks have made 401(k)s too complicated for the average person, and he has said a lot of small companies could find better alternatives than 401(k)s. It’s doubtful he would be crazy about the most recent ideas for improving the program.
What is being characterized as a broad expansion in availability is a website that will be up next year, TrumpIRA.Gov, where Americans whose employers don’t offer 401(k) plans can shop among different tax-deferred plans and receive up to $1,000 a year in a program called Saver’s Match, an update of a program started in the Biden administration called Saver’s Credit. It’s a welcome step in the right direction, but you’d have to say that for the cost of a website and the extension of an existing program, the administration is getting a lot of bang for the buck.
This $1,000 credit, by the way, is not to be confused with the $1,000 Trump Accounts credit, also known as “401(k) for babies,” which has been heralded as a backdoor strategy for replacing Social Security. The same will like be said about these proposals.
But even where Americans have taken full advantage of them, 401(k) withdrawals have only rarely surpassed Social Security payments in the monthly budgets of retirees. Those frequently mentioned references to anxious retirees watching every move in their accounts turn out to be mostly a news show cliche.
Having the ability to invest in more risky ventures might give some people the chance to build up a lot more money in their accounts, but it increases the chance that others will lose their shirts.
Most 401(k) investors probably don’t pay enough attention to their accounts, but after all, these are supposed to be passive investments that you sit on for years in order to generate a reliable old-age income. Introducing a host of exotic new investment options would dramatically increase the time investors would have to spend with what was supposed to be an easy way to save for the future.
Opening such a potentially lucrative new market will be a tremendous boon to the private equity companies, meme coin salesmen and real estate speculators. The question is whether in the long run it will be for the average American.
