Our financial future: the problem with 401(k)

In the past few days we have seen something of a crisis brewing in the financial centers of the country. There have been crashes, bailouts, and the housing bubble has burst. I have a unique take on the cause of all of these problems, and I am going to try to explain it as simply as I can, I hope I can do it justice.

The problem with the markets today is that there is a glut of capital that is essentially mandated for investment into stocks. This glut has been deliberately and directly created by act of the U.S. Government. These trillions of dollars are by statute required to be invested in one of two things: mutual funds or government bonds. Those who choose government bonds are doing nothing more than propping up the government with free credit (though supposedly paying less taxes while they do so), but the more insidious problem is that the majority invest in mutual funds, and their money is trapped in the market, and cannot be withdrawn.

Of course, I am talking about the 401(k) plan and its sister, the IRA. These plans were set up ostensibly to ensure people will save for their retirement, and they have, to some extent, achieved that goal. However, they have also skewed the market by providing what amounts to unlimited and unretractable money to mutual funds who have something, anything, to offer.

Let me go back to the conventional wisdom. The current crisis is supposedly the result of reckless lending to people trying to buy homes. The lending institutions would loan money to anyone who came asking, and then bundle those loans together and sell them to mutual funds, who would be making good interest on the mortgages as the borrowers started paying in. The incentive to bundle the loans and offer them on the market was this: there was so much money in the market that funds were desperate for things to buy!

We have a word for what happens when there is too much money in the market: inflation. If the Consumer Price Index, which is what is used to measure inflation, included investments in its list of things that it checks prices for, the measurement would have been through the roof over the last 15 years. It is not unreasonable to assume that the average American is going to be invested in the stock market, so there is no reason not to include a bundle of stocks when considering prices. If you want to enter the market today, you will paying a lot more for equivalent resources than someone who entered 20 years ago!

This inflationary effect has largely been ignored, or lauded as a true increase in value, when really it is a unique situation in history. A cause, and I think the main cause, of high inflation in the stock market when “consumer” inflation is so low is the glut of money mandated to stay in the market by these government plans.

If the money that is trapped in these 401(k) and IRA plans were released, or had never been stuck there, the market would be less skewed. People could have and probably would have used the money to start small businesses, buy commodities like gold and oil, or simply saved in a savings account. Many also would have invested the money in stocks of their choosing, rather than the broad managed mutual funds (where their money may be supporting companies and initiatives that they dislike, though they will not do the work to discover this).

The structure of the 401(k) and IRA systems make them essentially a direct subsidy to two groups: retirement plan managers and companies that are issuing common stock. They drastically increase the ability for common stock companies to get credit and they line the pockets of the owners of the largest financial firms. Here is a list of some of the top retirement benefit companies. You’ll note that the top few control the vast majority of accounts. These companies and the companies that offer the mutual funds they select as investment choices make billions because the government mandates they, or people like them, manage your retirement funds.

To sum up: the government has told companies that the best way to handle their employee’s retirement is to require the employees to invest in either a) government bonds, free credit for the government or b) mutual funds, free credit for corporations and controlled by the biggest financial companies. Many companies have done as the government told them. This has caused a glut of money and artificial inflation in the stock markets, especially the markets for mutual funds. This artificial inflation and easy credit to corporations is what is coming back to bite us in the butt now.

The government has no plans to do this any differently in the future.

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2 Responses

  1. […] whole theory on 401(k)s and IRAs, which I explain (poorly) on my blog.  It’s actually the most viewed post on here, […]

  2. Hi! I was surfing and found your blog post… nice! I love your blog. 🙂 Cheers! Sandra. R.

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