Monday, September 28, 2009

Rebuilding Your Wealth: What's Wrong with the 401(k)?

Your 401(k) is in trouble. While the concept of a self-directed retirement plan is, at least in theory a good idea, it was never meant to be all there is. So many components go into a the proper operation of such plans, it is hard to get a bead on which move is right and which might spell disaster.

So let's briefly examine some of the do's and don'ts of 401(k) investing:

Do: Participate. No matter how little your employer offers in the way of incentives, called matching contributions or even if they offer none at all, you need to be in the plan. Plan on a minimum contribution of 5%.

Don't: Believe that it isn't any good. There are a great many of these employer sponsored plans that are essentially worthless. They charge fees that are too high, offer too few good funds from which to chose, and lack good any real fiduciary responsibility (something the employer is required to do).

Do: Buy funds. There will, in almost every plan on the planet, be mutual funds to choose from in your 401(k). Mutual funds are essentially investors who feel as thogh the effort of pooling money spreads diversity and risk over a greater number of stocks than they would have been able to purchase individually. A fund manager is the person(s) you hire to make investment decisions for this group. The fund will charge fees for this.

Don't: Buy company stock. A lot of 401(k) plans are designed to force you to buy the company's stock. Some will do this by limiting any match to this purchase and prohibit you to sell those shares. This is still not a good reason to buy this stock or any other. When you put too much money into one stock (same goes for buying too specific of a fund in large quantities) you run the risk of jeopardizing your portfolio's overall performance. This is where many 401(k) plans got into trouble.

Do: Diversify. For many people, diversification is simply purchasing an index fund (a fund that tracks a particular sector be it the total market of the Standard and Poors 500 list of the top market capitalized companies. (Capitalization refers to the number of shares outstanding multiplied by the share price.)

Don't: Index funds/Target-dated Funds/ETFs. Index funds are very tax efficient and charge very low fees to manage. This is due to their passive nature. Once the index is bought, until the index is changed, there is no more trading. As money comes in from investors, it is simply used to purchase more stocks of the companies in the index. (Use index funds outside of your 401(k) and pay the taxes on them while the rates are still historically low). Target dated funds are a relatively new product and just about every 401(k) has something like this. They may call it a life style fund. These funds pick a date in the future when you would like to retire and the fund manager gradually alters the fund's focus from aggressive (although many are not too aggressive) to a conservative format as the fund gets closer to the target date (of your retirement). ETFs are not a good idea for 401(k) plans because they charge the employee each time they purchase more and in a 401(k), this happens every time you get paid.

Do: Pay attention. If you have built a portfolio that is diversified (some growth, some value, some international or emerging markets and further spread these funds to include large, mid and small cap areas) you will need to open your statement or check it online each month. Look for changes in fees, changes in the 10 largest holding and any statements that the fund manager might make.

Don't: Overreact. When markets rise, don't try to adjust your underlying funds to follow. When markets swoon, stay where you are. In a rising market, because of dollar cost averaging, you will buy less as the price goes up. In a falling market, you will buy more as the share price is discounted.

Think first. Your 401(k) is your future, directed by you. Never withdraw money from this fund either by loan or by any other means. This single action will take years to fix. If you leave a company, roll your 401(k) into an IRA.

Don't: Panic. Things will get bad but they never stay that way. Your 401(k) is not a cash account and should not be eyeballed to save you from financial bumps in the road - even those bumps seem like they will last for a long time.

Tuesday, September 22, 2009

The Beginning Investor's Dilemma

Where to begin? This question has stymied beginning investors since the time the market began. These days though, the question is twofold: why should I begin and where will I get the money?

Time remains the single best attribute to investing early and equally important, often. The powers of the equity markets are confusing unless you remember two basic rules:

There is risk;

And if you take no risk, there will be no reward.

That risk demands you put money somewhere. For the beginning investor, the best place is in a mutual fund. Your 401(k) at work is often a healthy list of choices. (Keep in mind, the number of choices available don't always signify the quality of the plan.) Among the most common types of funds in these defined contribution plans (so called because you define how much you will contribute) are index funds, growth funds, bond funds, balanced funds, and some combination of the lot.

Index funds track a broad index of companies in almost every instance, due to size. Growth funds may also be a type of index fund or one aimed at a particular group of companies. Bond funds invest in debt, which makes you a sort of lender (but in a mutual fund, without many of the problems associated with the transaction). Balanced funds look to provide some stocks and some bonds and usually tell you right up front how they allocate their investments.

The combination of the lot is represented by a growing sector called lifestyle funds or target-dated funds. These fund reallocate their holdings over the course of an investors career. The employee picks the date they would like to retire, say 2040 and the fund manager does the rest. As your holdings grow in tandem with your years in the plan, the fund gets more and more conservative.

Beginning investors are attracted to these because they are advertised as buy and forget. But they should be aware of the problems that may be associated with this type of investment. First, they don't have much of a track record. Even in the recent downturn, some very conservative funds (with short retirement dates targeted) did not beat the S&P500. Secondly, I worry that some fund families are using these new funds to prop up laggard funds that have done extremely poorly and lost many of its core investors.

While you are educating yourself on the subject, choose an index fund.

Now, where to get the money? If you set aside 5% of your income in a pre-tax situation (and 401(k) plans are just that), you will not feel a change in your take home pay. Do this even if your company doesn't match your contributions. (Some used to, some companies still do but to a much lesser degree and some never have added a contribution, usually dollar for dollar up to a certain percentage.)

If you have no defined contribution plan, use your tax refund (you know the one you plan on getting in about five months) to open an IRA.

No matter when you begin, waiting is no longer an excuse.

Saturday, September 19, 2009

Your 401(k): The Odds are Not in Your Favor yet...

It is common knowledge that your 401(k) is not being used correctly. Statistics show that you are probably not going to retire wealthy. The Social Security Administration has found that about 5% of those invested in such plans actually attain the goals they set out to reach. According to the SSA, about a third of you will leave whatever you accumulate to your heirs in part because by the time you reach eligibility you will be dead. A surprising amount of you (estimated at 54%) will not have invested enough over your working years to make any impact on your post-work life.

These odds of a financially secure retirement using a 401(k) seem to be not in your favor. Yet, there are ways you can improve your odds without too much effort on your part (which is good considering those 34% who never make it to retirement may have failed because of the stress of trying too hard to do too much).

You need to do three things:
First is start early enough in your working career to make the plan work for you. Age is the biggest factor in your retirement success, Time allows your plan to go through the numerous corrections that these plans need in order to function properly.

Markets have ups and downs. because you add a fixed amount each paycheck, you cannot buy more when the markets are expensive; instead you buy more when the markets are cheap. A steady stream of cash headed into these plans (pretax) basically ensures that you will have far more invested than those who spend a good deal of time trying to beat the market, time the market or otherwise trying to outsmart the market.

If you begin investing later in your career, you will have to set aside substantially more than your younger counterpart. Once you commit to this, do not adjust your contribution downward. Instead, look to your personal financial world to make budgetary adjustments. Fixing debt issues, getting your mortgage to a reasonable rate that will show a zero balance when you do retire, and living on a fixed income (long before it is actually fixed) all will help you reach the rarefied air of financially secure.

Second is a little more complicated: how much is enough? The question of how much you put away depends on many factors. But one thing is certain, five percent minimum will not alter your take home pay. Will that give you enough?

Folks will use the innumerable calculators found online to try and determine how much they will need. The correct way to make these assumptions is not in the total amount you might have accumulated but in the amount of money you will need to withdraw once you retire. Four percent per year will, in almost every circumstance, allow you to never outlive your money. And that is the goal. If you can safely say that the 4% mark is enough based on the way you are contributing, you will be fine. If not, it is time to step it up a notch. Time is wasting.

(If you company has suspended or eliminated their matching contribution, do not stop investing.)

Third is more complicated still: where to put your money? This is well-discussed yet in many conversations, misses the mark. Index funds, found in almost every 401(k) have low fees and low-risk. What you want is low fees and enough risk to grow that money.

Your 401(k) is a tax-deferred plan, meaning you pay the taxes later in life when it is assumed that you will be earning less and in a lower tax bracket. Why then would you want a tax-efficient fund in your plan? This kind of investing will be counterproductive to your goals. Spread your investment dollar over a series of investments in your plan, diversifying among growth (large-cap, mid-cap, and small-cap) and funds that offer some out-of-the-country exposure (it is a global economy that doesn't always act the same way domestic market do - they can actually do better).

Fees (what your mutual funds charge to invest for you and sometimes what your plan sponsors charges for the paperwork they do) however are what most folks should look at more closely. Most plans are flawed in this respect. If you are a small company employee, you may be able to get your plan changed. Larger companies move much more slowly and often do not respond to the wishes of a small group. But you can try and encourage your co-workers to do so as well.

Time, steady contributions and a close eye on the cost of your fund are some of the key elements in your retirement success. And it all relies on you doing something for your future.

Tuesday, September 15, 2009

Retirement Planning: Fixing Wall Street with Moral Authority

Ask any cop on the street for their assessment of a drug bust. It goes, they will tell you something like this: “Sir, may I search you?” “Yes.” “There is crack in your pocket.” “Not my crack.” “But sir, it was in your pants.” “Not my pants.”

There are two key elements of success on Wall Street that President Obama overlooked when he addressed the financial crisis a year past. The first is the crisis itself.

To which the conversation would proceed something like this: “Sure. Go ahead and try to figure out where we took risks, what those risks were and why those risks were not our fault. Search all you want.” “You took those risks because there was no real regulation governing what you did.” “Not my problem.” “Then we should begin to look for these problems so it doesn’t happen again.” “Not at my financial institution.”

Ask any cop on the street and they will tell you that the drug busts they often make are due to stupidity and ironically, bad driving habits. Ask Wall Street and they will tell you the appetite for risk drove them to do what they did. Ask any cop on the street and they will tell you that the more felony laws you break, the less misdemeanors matter.

The second reason we still have lingering effects from what happened last year is reckless behavior. Had the appetite for increased risk not been laid on the doorsteps of our financial institutions (by the Bush administration in the form of ridiculously low interest rates, lax regulations and tax-based, incentive-based rewards for bad behavior), the address at Federal Hall would have been far different.

Wall Street bankers choose not to attend the meeting on the anniversary of the collapse of Lehman Brothers. Much like maligned athletes who do as they please, these CEOs do not want to be role models. The president was seeking what he refers to as “a broader sense of responsibility” when it comes to how they act, prodding them to lead the financial markets in the right direction. Knowing that the cameras would be trained on every facial tick, every sigh and every uncomfortable shift in their chairs, much the way the CEOs of the big three car companies were scrutinized, they stayed away.

Where Mr. Obama missed the mark was in taking the strength of his general popularity into the den of thieves, where his championing of the worker is often met with open derision. Suggesting that these financial titans should be beholden to the average citizen means the shareholder should be relegated to a lesser role in terms of consideration. To do that, the public sector would need to step in. And this is where the divide begins to widen.

Risk has never been adequately defined. For the small investor, it is a soul-searching exercise that is often fraught with anxiety and overtly quixotic. Unable to hedge their stance the way more savvy investors do, they simply take risk at face value, not as a mechanism designed to grow investments. The confusion starts for this group when they refer to their interaction with Wall Street (largely through their retirement plans and even though many were unaware, home ownership) as savings.

For the large investor, risk is the only reason they do what they do. Exotic products make the experience much more interesting and profitable. Lack of oversight makes the thrill doubly enticing. Using the government as a hedge against losses (not only of share value and assets but bonuses) made the process even more appealing. Is it any wonder that the headwind facing the president has picked up speed?

The main issue is how to regulate and protect. Currently the government does not have a single agency that can act in advance of such a storm. Having knowledge of an impending crisis would require you to have the ability to evacuate the innocent. Having that knowledge would require a federal agency to have much more private access to information than any publicly elected official would want, even the president.

We rely on the ability to learn lessons instead. Yet Wall Street uses another mechanism to understand the way markets work: forgetfulness. Understanding that politicians come and go suggests to these top financial folks that regulations should be either more fluid, able to evolve with the markets, or simply non-existent, employing a buyer beware sticker on each new product that makes its way to market.

Sen. Bob Corker (R., Tenn.), a member of the Senate Banking Committee suggested more introspection in the process: "Financial regulation needs to be done in an atmosphere of thoughtfulness." In other words, not at all. But reform does need to come in some shape or form. Doubts remain whether the president’s proposal of creating a consumer oversight committee to provide this sort of thoughtfulness will ever make it into law.

The ripple effect that spread in the aftermath of September 2008 still lingers in most of America. Billions of taxpayer dollars disappeared in an effort to bailout a system that few outside of Wall Street understood. Now we understand that the methodology employed by these brokers/traders/dealers/bankers offered no projection or even entertained the possibility of a fallout turns this into a politically charged topic. The moral authority of the president and his insistence that this will not happen again will turn this kind of regulation into a turf war with conservatives and financial interest groups.

Those that were instrumental in creating lax regulation will need to find a common ground with those that seek retributions for the market loses that followed the near-collapse of the financial system. The problem is determining which agency is best equipped to handle the new responsibility?

The Fed may not be the best choice. Their inability to see the crisis coming and possibly their own accommodative stance make them a poor candidate. The FDIC, which oversees the nation’s banking system doesn’t see their role as protector expanding to include all of the financial markets. Their grasp of regulation is still, even in the aftermath rather weak.

The Treasury would be an attempt to control by committee. Although Treasury Secretary Timothy Geithner pointed out that the Fed is both incremental and essential in the president’s plan, the markets, Wall Street is quick to point out, have begun to recover without any new oversight. Forget economists.

The bailout should not be cure enough. In many instances, it came without ties or questions and has even been offered back to the government. Doing so, often before it was clear that the bad times were ending suggests that Wall Street is aware that regulation would hamper their efforts at delving into new and more complicated methods for making a profit.

The cycle of dramatic financial events is shortening. While some suggest that this type of regulation will protect us ten years from now, there is a greater likelihood that another similar event will shake out in a matter of years. This also suggests that regulation is needed yesterday more than ever.

As the president searched Wall Street for answers to why they did what they did, they simply replied: “Not my pants.”

Wednesday, September 9, 2009

Retirement Planning: Fix that Credit Score Now!

That sounds easy enough. Fix that credit score and the world of low interest rates, hassle free loans and financial security await you. And that is true. But how much should you agonize over the number? Apparently not that much. (Unless of course you are close to retirement.)

The Best Credit Score
You have heard people boast about their high credit scores, suggesting that once you breach that 800 mark (850 being the highest mark Fair Isaac, inc or FICO gives to the best), it will all be clear sailing. But if you didn't know, you don't even need an income to score that high. You don't need a good employment history. heck, you don't even have to own a single asset. That college grad/student living in your basement, with no job and no debt (some have actually paid as they went, using the community college option to keep costs down and college debt doesn't show up until your graduate) could score higher than you.

As Karen Blumenthal of the Wall Street Journal refers to it as: "less like a report card and more like an SAT score—your results on a particular date that seek to predict your future credit success or failure." This flies in the face of what you may think about these scores. Behavior is not the only thing these credit scorers look at.

When credit scorers look at you through their lenses, what they see is someone who uses credit. You may assume because you pay off your bill, you place on the pedestal is assured. It may be provided you use less than half of what (credit limit) is available to you each month. Charging everything you buy in the hopes of getting rewards such as cash back or airline miles can actually jeopardize that score - even if you pay it off each month.

Some Quick Thoughts
If you plan on applying for a mortgage or buying a car, back off on your credit card usage in the months prior to the application. Although a good credit history can stay on your report for life - from the very fist card you have to the accounts that were closed in good standing to the cards in you wallet - what you do stays with you.

That doesn't mean you will always be perfect. No one is. But if you do find yourself behind as much as one day, don't put the call off. In many instances, your creditor does not report your tardiness for thirty days, even though they will charge you a late fee immediately. Calling assures them you are aware of the problem and not about to let it go for an additional month. At that point, they will report you.

Keep in mind, these mishaps stay around for about seven years. But good credit lingers. Some folks believe that lots of open accounts signals a problem. That may be so in some instances but those inactive accounts with zero balances reflect the creditors unwillingness to close the account due to inactivity - not your need to remove the temptation.

Beware the offers to monitor your credit score monthly. These services are mostly unnecessary. You know where you stand and if you don't, once a year should suffice for most of us. offers a once year check on your credit but does not give out a score.

Keep in mind that once you are over the 700 level and approaching the 750 mark, you have done all that is worthwhile to improve your credit profile. Higher than that will not reflect in a lower rate. But every 20 points leading up to that mid-700 number will have a slightly better impact on your overall score, netting you a slightly better interest rate.

When it comes to Retirement Planning
Credit scores are for more than first time home buyers. They need to be repaired will you are still working. If your credit score is in need of repair, now is the time to do it. For many of us, we will be working later in life or carrying a mortgage into retirement - something our parents never did. Getting the best possible loan is key to making your retirement cash last. Although paying off the loan is still better.

Monday, September 7, 2009

A Year in the Life of Labor

I would be willing to wager that the vast majority of workers had no idea what the unemployment rate was a year ago on Labor Day. It would probably be a safe bet that most of you know now.

Our perception of what labor is has changed greatly in the short space of twelve months as we have watched the financial world shift from one of prosperity to one of uncertainty. This has affected one in ten Americans while shattering the hopes and dreams of the remaining workforce. Retirement goals have been altered. Companies have moved from prosperous thinking to cost-cutting seemingly overnight.

A year later, after the collapse of Bear Stearns and the pratfall that was Lehman Brothers, bailouts and bad investments headlined the news reports. If you had no idea who the head of the Treasury was, the evening news was there to tell you. So much financial information was suddenly dominating the news that it became pornographic: impossible to describe but easy to recognize.

For months, you got up in the morning and went to work, weighed down by the possibility that you might be among the fallen 10%, that you might be forced to take a wage cut or freeze, that your mortgage might not be sustainable and that all of the stability that kept you moving forward was no longer solid footing. But you went anyway. You didn’t need to be told things were bad and possibly getting worse; you simply felt it. It was palpable.

So a year later, as we observe another Labor Day, most of us wonder whether we will ever be the same. Will we ever get back to the days of endless optimism, hope for the future and the possibility that our children will no longer see the anxiety in our eyes?

Capitalists observe Labor Day in a far different way than those employed. Abraham Lincoln once said: "Labor is prior to, and independent of capital. Capital is only the fruit of labor, and could never have existed if labor had not first existed. Labor is the superior of capital and deserves much the higher consideration."

Business disagrees. And labor laws suggest that they have the lobbying power to make those differences greater, in essence creating a far wider schism between who produces and who finances that production.

2009 we will come to find out is the year when the recession has subsided. Yet, the replenishment of those lost jobs may not come for another twelve months. This will be referred to, long after it is over as a jobless recovery. This is an economic reference that flies in the face of what normally occurs. When things begin to turn around, businesses are forced to ramp up production to fill the void in inventories. No one can sell an empty shelf.

But so far, and in all likelihood, in the near future, this will not or has not happened. White-collar workers are seeing work loads increase, sometimes due to attrition (workers retiring or taking buyout options) and layoffs. Unions around the country, particularly those associated with troubled businesses such as autos or publishing have made concessions that during the good times would not even have been considered.

Rest assured, we did not create the situation we are in, despite the reasoning the many employers, economists and financial experts offer to the contrary. Their view of who we are, albeit convoluted, is based on a long history of class struggle, the belief that the poor are poor because of who they are and not what they did, and the fact that the land of opportunity, something all business suggest is applied equally to all workers, is alive and well.

The result of this type of thinking, supported by poorly written histories of labor and the struggles of unions over the last hundred years has deepened the stratification of our economy.

In 1970, the classes and the incomes associated with status in the United States closely resembled those of Canada. In the short space of forty years, the resemblance is more akin to those social classifications of Mexico. This is due in large part to how those in business (lobbying for empathetic support from the government) view the root causes of poverty, the opportunities that this land was supposedly blessed with and the chasm that has grown both in terms of incomes and jobs.

This Labor Day should be celebrated as a turning point. We have a government that is doing what no other administration has ever done in this century. And while the cost is high, the result will be a change in attitude in how labor is viewed by not only the workers but also those that employ us. It may be short in duration, as many financial cycles tend to be. But it will be a lesson worth noting long after 2008 becomes a footnote in the history books.

Thursday, September 3, 2009

DB(k): Not a 401(k), Not a Pension, Not a Bad Idea

It is rare to find this writer wrapping himself around anything that came from the mislabeled Pension Protection Act of 2006. I have criticized it at length and continue to find traces of this poorly written, business friendly piece of legislation that does little, if anything to protect pensions and a lot to shift the blame and the responsibility onto the employee.

But tucked away inside of the PPA is a little known, and possibly little cared for opportunity for small businesses to attract a higher quality worker through the benefit of a DB(k). What could this be?

In short it is a hybrid of sorts, a combination 401(k) plan and pension plan wrapped into one. Here's how it works (at least on paper):

Initially, you have to understand that part of the problem with retirement stems from the fact that 401(k) plans, the self-directed retirement plan that replaced the pension (defined benefit plan) were never designed to be the be-all-end-all retirement option. This is at the heart of our current problem. People were unprepared to become investors in many instances and refused in others to learn what they needed to know to become better at using the stock market to increase their wealth.

This (invested) wealth was supposed to shore-up retirement futures by investing in what appeared to be, even over the long-term, a sure thing. Although everyone was aware that stocks do not rise endlessly, over time, they rose enough to pique the interest of even the least savvy among us. You didn't need to be a rocket scientist to know that the act of simply putting money away in a tax-deferred account was all that was needed. Ignoring the rules of good investing was easy when you thought if your 401(k) plan as a savings account that provided bigger than life returns.

Although these folks failed to understand that these retirement accounts were actually investment accounts and not savings, the realization came too late. (Savings is what you put in a bank or CD, essentially money that is safe from loss and at the same time, earning interest.)

This doesn't mean that pensions were immune to the downturn. The people in charge of making sure that these plans were stable and low-risk, found the temptation to invest that money in greater amounts in riskier investments proved to be too much as well. What was supposed to be an economic stabilizer faltered. Because pensions were also hurt in the downturn, the PPA revealed its uglier side with rules that made many of these plans difficult if not cumbersome to continue. Less than 50% of the businesses now offer these plans.

We quickly came to realize that no corner of your retirement future it seemed was safe. There was no safe harbor.

So where does that leaves us now? Because "now" is a movable target, reliant on the strength of the economy and the recovery of the stock market, investors in their retirement future were left with two options: less risk or ignore the risk and get back in. Unfortunately, many are opting for less risk.

The DB(k) can change all of that by offering a stable side to the retirement picture while allowing the worker, specifically those at businesses with less than 500 employees, the chance to take risks they might not have taken otherwise.

The DB(k) is part pension giving the employer the opportunity to offer 1% of an employee's salary for every year up to twenty as a defined benefit. While this may not seem like the pension plans of yore, it is better than nothing and for the business itself, doesn't require them to shift funds to cover promises made.

The DB(k) is also a 401(k) plan. It has an automatic enrollment rule (which can be opted out of) that automatically stashes 4% of your pre-tax income in the plan. To encourage the employee without placing an outsized burden on the employer, matching contributions can be offered up to 50% of the employee contribution with a maximum set at 2%. Theoretically, the employee's participation in their retirement, including the employer match could be 7% of their income.

There is another part of the plan that could attract employers: work for three years and you are guaranteed a pension and the plan itself is not skewed towards the workers who make the most.

The added incentive for adopting such a plan is the ease of adoption and the low costs associated with it. If the employer opts to offer a plan that has lower costs (administrative fees) as well, the employee could see as much as 2-3% more money invested.

The only hold-up: the economy. As long as the recovery remains jobless, the incentive to change plans, which can officially be adopted beginning in 2010, will be slow. But once competition for new hires, particularly those looking for the best benefits possible increases, you can expect these plans will find a solid niche for employers.

Tuesday, September 1, 2009

Retirement Planning: Change is Worth Thinking About

I enjoy a good controversy. Actually, I love a good challenge and nothing like change gets the old blood moving through the veins. Perhaps that was the idea of a recent New York Times opinion on how to get more people to retirement with more retirement money. Is it possible that simply guaranteeing a portion of those investment (you will often hear it referred to as savings, which it is not yet) dollars would be enough?

Not everyone thinks so. But then not everyone has thought it through. The opinion set-up the controversy by suggesting that there should be some way to help those who have not put enough away by guaranteeing that some of it would be there when they retired. To do this would not be a difficult as one might imagine.

But first, the critics. Charlie Farrell at CBS MarketWatch offered up some pointed criticism of the suggestion, made by Gary Burtless of the Brookings Institution. Mr. Burtless is no slouch. In fact, he is a senior fellow that researches labor market policy, income distribution, population aging, social insurance, household saving, and the behavioral effects of taxes and government transfers. He was also an economist with the U.S. Department of Labor. His research has led him to make the following conclusion: the government needs to guarantee retirements.

Mr. Farrell suggested that there would be a moral hazard to such an action. People bought stocks even when they knew (even if they couldn't remember the lessons previous downturns have taught us) the risk was high. Any sort of guarantee would encourage additional risk as people put even more money into a market rife with volatility.

Wall Street would step up to the effort by increasing risk in new products designed to tap the inexperience of these investors. This is to be expected, in part because Wall Street realizes that for every savvy investor who reads between the lines, understands the risk and their tolerance to it and can acclimate their portfolios to these sorts of challenges will not be easily sucked into a riskier venture.

But Wall Street doesn't exists for these financial thinkers alone. Instead, the inexperienced, the unwary and the investor who wants to follow the market wherever it may lead, is the bread and butter of this industry. To use "moral" in the same article as Wall Street may be enough to qualify for the later group as the easily duped investor.

This sort of backdoor guarantee would undermine how America does business. Apparently, Mr. Farrell believes that an individual who uses mutual funds (the most common investment in a 401(k)) would find their fund manager - although he never does suggest it will be the much more experienced fund manager who will make this mistake - buying into companies with no value. Mutual funds live and breath and survive based on performance and how investors perceive that performance. In this instance, Mr. Farrell's worry is outsized.

He believes that the government will be left holding the bill as soon as the next disaster strikes.

But that is, in all likelihood, not how it will unfold. Three things will need to be understood before any such plan could take effect - as there is currently no plan in place.

First, the 401(k) would need to be recognized for what it is and what it is not. It is portable (but only in the sense you can roll it over into an IRA, where the continued contributions to it are considerably lower). It is investing (and all investing requires risk in some way shape or form to be considered investing). Risk is a moving target (that needs to be evaluated and reevaluated frequently; some call it asset allocation or even re-balancing a portfolio). It is not savings.

Second. the 401(k) is still a rich man's tool that we are permitted to participate in. It always has been and always will be a line of tax code for high earners to sock away even more money for their future. Ask the guy or gal sitting next to you whether they max out their 401(k). Then ask them if they know any one who does. This is a grass roots survey that is as good as any on the subject. Safe money would wager that they don't.

Third. Any such guarantee would be called a pension. This takes the money out of an workers paycheck - pensions traditionally make the contribution in addition to your income - and in theory, invest it conservatively. If the government were to suggest that the employer match would be placed in a pension (if you have one, it is placed in your 401(k) and often referred to as free money) and that the government step in and match that contribution, much of the risk would be removed. The company wouldn't want any more risk than is needed to grow the money and the government could suggest conservative investments that might suit both the nature of the business and the best interest of the country.