Relax. The Government is Not
Going to Seize Your 401(k)
An inside look at the evolution of an utterly ridiculous rumor A SPECIAL REPORT November 2008
by Ric Edelman
T
he political rumor mill has written in November 2007 and stated
FACT or FICTION?
been working overtime lately, that Congress should consider her
grinding out one of the most idea to “let workers trade their 401(k) FICTION
preposterous and unfounded rumors and 401(k)-type plan assets (perhaps The U.S. government will
confiscate your 401(k).
I’ve heard in a longtime. The scary valued at mid-August prices) for a
tittle-tattle: The U.S. government is Guaranteed Retirement Account FACT
going to kill 401(k) plans and seize composed of government bonds.” A college professor says the
the funds. To pay for this new program, she government should end 401(k)
tax breaks, use the money
To ease your fears, let me suggested scaling back the tax breaks
to create a new guaranteed
simply say this is completely untrue. provided to workers who contribute
retirement program, and allow
The government is not confiscating to 401(k) plans. Dr. Ghilarducci did workers to trade their 401(k)s
401(k) funds and has never even not suggest that her new program for it if they wish.
considered doing so. The rumor is become mandatory, nor has Congress
entirely untrue. expressed an interest in implement- the country’s $30 billion private
But where did this myth come ing her ideas. Her notion was merely pension system, taking the money
from? And why are members of the a suggestion — one of many shared to help repay some of the govern-
mainstream media covering it? during the hearings. ment’s debts.
It all began with two hearings One week later, industry news- And that’s when it started.
conducted last month in Congress. paper InvestmentNews published an Someone somehow morphed these
The House Committee on Educa- article headlined, “House Democrats two separate stories into one — and
tion and Labor, chaired by Rep. Contemplate Abolishing 401(k) Tax soon, rumors spread. A House hearing
George Miller (D-Calif.), examined Breaks.” The story referenced Ghilar- on 401(k) plan + Ghilarducci’s pro-
how the current financial crisis is ducci’s proposal and quoted her as posal to end tax breaks + Argentina’s
impacting pension funds and saying that members of Congress action = the U.S. government is seiz-
401(k) plans. Over two days, 13 were interested in her plan. ing the money in your 401(k) plan.
people testified. One of them was Perhaps the story would have U.S. News & World Report colum-
Teresa Ghilarducci, an economics died there if not for an unrelated nist James Pethokoukis played into
professor at The New School for story that occurred a week after that. the game with his October 23,
Social Research. On October 22, the government “Would Obama, Dems Kill 401(k)
In her testimony on October 7, of Argentina, facing a severe financial Plans?” Pethokoukis wrote, “I hate to
Ghilarducci discussed a paper she’d crisis of its own, nationalized use the ‘S’ word, but the American
Edelman Financial Services RicEdelman.com 888-PLAN-RIC
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government would never do some- It’s true let this continue. We need to figure
thing as, well, socialist as seize private Just 56% of employees have out how to increase participation,
pension funds, right?” He went on access to a 401(k) plan, according and we need to drastically improve
to discuss the concept as though it to 2008 figures from The Bureau of financial literacy — so that workers
were possible. He explained why it’s Labor Statistics. And only 77% of know the importance of starting to
a bad idea (and it is), but he offered those workers actually participate save early in their careers, and so they
no source or information suggesting in the plan. Between the people know how to make the right invest-
that anyone on Capitol Hill is pursuing who don’t have access and the ment choices for their savings. Under
such an idea. people who don’t use the plan they current rules, employers aren’t even
Soon after, on November 4, the have, nationally only 43% of all work- allowed to provide advice! That’s just
Carolina Journal Online went further ers contribute to retirement plans. plain stupid.
with the idea, running an article Their average balance: $121,000, If we don’t help people succeed
entitled, “Dems Target Private Retire- according to 2007 data from the with retirement planning, millions of
ment Accounts: Democratic leaders Employee Benefit Research Institution. Americans will enter retirement with
in the U.S. House discuss confiscating Worse, only 10% of workers con- little to no assets. If that happens,
401(k)s, IRAs.” But the article failed to tribute the maximum, according to based on past history, you can expect
offer any source or evidence to sup- 2007 data from Vanguard Institutional that the government (and thus, the
port that wild headline. Investor Group, a pension consulting taxpayer) will be called upon to bail
Meanwhile talk radio hosts firm. No wonder, then, that those ages them out. So if you think our current
and political pundits have been run- 60 and over have an average 401(k) rescue efforts are costly, you ain’t seen
ning with the story. Forget Joe the balance of just $157,727, according nuthin’ yet.
Plumber. We now have Terry the to EBRI. That’s barely enough money For all these reasons, it’s entirely
Left-Wing Economist. to produce a monthly income of just appropriate for Congress to examine
$625 — before taxes. this issue. But to suggest that it is
The Real Problem
If that’s not bad enough, consider about to seize the money is absurd.
Ghilarducci’s idea has no chance
that, according to Hewitt & Associ- If such a proposal were to start to
of getting anywhere — so that’s not
ates, one out of four workers who are receive serious consideration, I would
the problem.
within 10 years of retirement have be among the first to organize a
The real point, which the pundits
90% of their 401(k) funds in stock — a grassroots campaign to oppose it.
are missing, is that America’s retire-
risky option that lacks any sort of di- I wouldn’t stand for any action that
ment planning system doesn’t work
versification. Guess what’s happened is even remotely similar to what
very well. Too few save, they don’t
to those workers’ account balances in happened in Argentina. I know you
save enough, and they choose the
the past year. wouldn’t either. And Congress knows
wrong investments. Result: 401(k)
So we really do have a problem. it, too.
plans are failing to create a workforce
The 401(k) system isn’t failing; Ameri-
that will be ready for retirement.
cans are failing to use 401(k)s. We can’t
Ric Edelman is Chairman and CEO of Edelman Financial Services LLC and Co-CEO of The Edelman Financial Group (NASDAQ: EF) and a member of its Board of
Directors. He is an Investment Advisor Representative who offers advisory services through EFS, a registered Investment Advisor. Ric is also a Registered Principal
of and offers securities through Sanders Morris Harris Inc., an affiliated broker/dealer, member FINRA/SIPC.
mc-govtnottake401k-051611
Edelman Financial Services RicEdelman.com 888-PLAN-RIC
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