Kim Snider
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June 11, 2009

Do we need the government to make us save?

It may seem hard to remember now, as we sit here mid-way through 2009, but back in 2002, the scandal of the day was Wall Street analysts issuing buy and sell recommendations based on the opportunity for investment banking business with the company, rather than their true opinion of the stock.

Eliot Spitzer to the rescue.

"This has been about one thing," he said before a flock of television cameras at the New York Stock Exchange. "It has been about ensuring that retail investors get a fair shake."

Ultimately, a settlement was reached with ten of Wall Street’s biggest firms. Regulators would oversee a 5-year, $450 million program, funded by investment banks, to support so-called "independent research" on stocks, plus an additional $85 million for "investor education."

It was all about taking care of the little guy who couldn’t take care of himself. With 20/20 hindsight, it turns out that many investors couldn't have cared less.

The Wall Street Journal reports:

“Since Mr. Spitzer's landmark settlement in 2003, annual reports show that few individual, or "retail," investors took advantage of the offering. During one recent year at Credit Suisse Group, for instance, just 16 retail clients had retrieved reports from the bank's Web site.”

In a recent interview, Mr. Spitzer maintained the settlement achieved its aims. "The system was broken," said Mr. Spitzer, who resigned from office amid a sex scandal in 2008. "Our first task was to reveal to the public that the system was fundamentally flawed, that the research was tainted and the public was being misled."

The second task, he said, was to come up with a better product. "It's better to have what we have than have fraudulent research," he said.

It's not that what the investment banks were doing wasn’t wrong or that they didn’t deserve to be punished for it. I agree government’s role is to make sure the investing public isn’t misled. But it is not to come up with a better mousetrap. Their record at that is pretty dismal.

In a bit of déjà vu, the latest bear market has brought out all manner of people, politicians and otherwise, determined to make sure we take care of the little guy who is so obviously incapable of fending for himself.

A May 18, 2009, editorial in Investment News, which bills itself as “the leading news source for financial advisors”, calls for mandatory enrollment of workers in 401(k) plans and a mandatory minimum contribution to the plan by employees:

Robert Reynolds, president and chief executive of Boston-based Putnam Investments, is on the right track in proposing changes to 401(k) plans to reduce the risks for participants and in urging other financial industry leaders to join him in pushing Congress for action, as reported in InvestmentNews last week.

He has identified the two most critical changes that are needed. First, all employers should be required to enroll all employees in a 401(k) or similar plan, and all employees should be required to contribute a minimum percentage of their pay to the plan.

This would address the greatest weakness of the U.S. retirement system — the significant number of private-sector workers who aren't participating in any retirement plan.

Just 66% of full-time workers participate in such plans at large and midsize companies, and just 37% at small companies, according to the Employee Benefit Research Institute of Washington. Small companies, especially those with very slim profit margins, may need government assistance with the costs of starting and running such plans.

Second, employees must be given an opportunity and encouragement to annuitize a significant part of their retirement plan assets beginning at 50. Annuitization minimizes the damage to retirement income that can be caused by a major bear market as retirement approaches.

Although many other improvements to 401(k)s and similar plans are possible, these two would go a long way toward helping private-sector workers build a comfortable retirement.

The recession and bear market have revealed the weaknesses of the U.S. retirement system.

Perhaps the downturn also will spark the reforms needed to strengthen it.


Oh my aching head! The obvious benefit to Putnam specifically and the investment management industry at large aside, do these people really believe that government should be mandating retirement savings?

Wasn’t that the idea behind Social Security and Medicare? And gosh, look at what an overwhelming success that has been! And whatever happened to personal accountability? 

While I'm on the subject, partial credit goes to the Obama administration for pulling back on the pay limits they tried to impose on the companies that received government bailout money.  

The government had announced plans to "fix" the pay problems of the banking industry by having conflicting plans, one from the administration and one from Congress, to limit pay in the companies that took TARP money.  And it turns out we need a "pay czar" to watch over the whole thing.  What's with all the czars?  I hear we need a car czar, too.  Is this because the drug czar idea worked so well?

As it turns out, the government's plan (plans?) could hurt the very companies we all now "own" by pushing talent out the door to hedge funds, private equity firms and foreign firms.  Or, some attorneys and compensation consultants would get rich designing plans to get around the limits anyway.  

This is just another example of government trying to legislate the end result rather than addressing the root causes.  Passing these laws help get politicians reelected.  They help some special interest groups score some short-term revenue increases.  But in the end they come years after the market finds a different way to fix the problem, and they leave behind an entrenched bureaucracy whose only job is to perpetuate their own existence long after their usefulness has expired.

There has to be a better way to fix the retirement system. Here are my ideas (and a few of Jim’s).

1.    Let’s get rid of the 401(k) system altogether. It was never intended to be the cornerstone of our retirement anyway. Why is it up to the employer to decide what investment choices you have, what your contribution limits are (based on what type of plan they choose)  or whether you even have access to a retirement plan? It’s a bad investment vehicle, it is inefficient and it is limited in access.

Let’s give everyone the exact same plan – an IRA with higher contribution limits that is the same for everyone and has access to the entire range of investment choices. If I have to bear the risk of funding my own retirement, at least give me access to the full range of choices to be able to manage the risk!

2.    Let’s address the disease rather than the symptom. If you want people to save, don’t force them – teach them. Let’s take some of the money government wastes each year and use it to fund basic financial education in our schools.

I would love to hear your ideas. What should be done, if anything to address retirement savings in this country? I will temporarily open up comments on the blog just for this special occasion. What say ye?

Sources:

 1. ‘Stock-Research Reform to Die? - WSJ.com’ < http://snurl.com/jt42m > [accessed 10 June 2009].

2. “Let's rebuild retirement's three legs - Investment News,” <http://snurl.com/jt45r> [accessed 10 June 2009].

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Comments

Mike Busby

This Czar thing is driving me nuts. The definition of "Czar" is 1) the title of any of the former emperors of of Russia, @ 2) an autocrat. What is an autocrat? (a ruler with absolute power) Is this the United States of America or Russia, and where the hell is the system of checks and balances in all of this anyway?

david crim

It's an interesting academic discussion but in reality, the people's ideas and wishes stop at just that point. With the current course of our govenrnent, in due time it will be dictated exactly what Mr. Obama knows is best for each of us.

Ron Corbett

I love to hear and read your comments even though I don't understand some of what you say. I am a very smart person, but I don't like to let very many people know this. When it comes to technical stuff and mathematical stuff, I can hold my own with anybody. But when it comes to financial matters, I have the I.Q. of a well trained carrot. Therein lies the problem with deciding for myself how I should be investing and in what. I think most average people are like me when it comes to making the right choices for investing. Should there be mandatory 401(K)'s? Absolutely not. Should saving accounts be solely in IRA's? Nope. There should be a relatively easy way to self-direct investments. Using money that the government wastes won't work because the money is going to be wasted regardless. I found the Snider Method after losing money for years in 401(K)'s, brokers, investment bankers, financial planners, etc. I now make money even though I won't get rich, but that's what it should be about. I would propose that something be developed like the Snider Method that people can reasonably understand.

Ron

Robert Holman

It is my understanding that the government started using the social security benefits for 'other' projects and expenditures. If they had left it alone, the social security wouldn't be in the mess it's in and I may have something to look forward to, someday.

Dennis Lithgow

As long as we're re-establishing personal accountability, let's shut down Social Insecurity and Medicare/Medicade while we're at it. I can hear the "hisses" already, but if you've read "The Fourth Turning", you realize they're going to fail anyway. So why not be pre-emptive? Opening IRA's to things other than securities is a winner. Why not real estate (direct ownership -- not REIT's), gold, silver, and a whole host of others?

Hal Cone

The free market is not any better than government. Both are staffed by citizens of this country. If the government is more involved than we like right now it is because the uncontrolled, unregulated crooks in the financial industries have lied and cheated us out of billions if not trillions of dollars over the past few years. When traders receive multi million and sometime billion dollar bonuses somebody is being robbed. Guess what! We have been robbed! What the government is doing right now is getting our economy back in balance before greed destroys our free markets.

I am currently receiving Social Security and using Medicare. From my point of view both work and work very well. How well or poorly they are being funded is a separate issue and should be addressed as such.

Thomas Gough

Social Security and all of the forms of it from the outset should be abolished. But, this won't happen because enough people won't do anything about it, they are afraid, or ignorant. With most people loosing 50% of their retirement and 30+% of their home values you would think that they, us, would do something about it! Where is the national leadership to bring the country back to it's original values where we made our own decisions?
Thank you for what your have done, maybe it will spark a few more people into waking up before we can't even invest our own money!
Thomas Gough

Steve Smith

I would combine the best features of the traditional IRA with the ROTH IRA and do away with 401k's. Increase the contribution limit significantly, let it be tax deductible and tax the distributions are a flat low rate - possibly 10%. I think this would increase retirement savings considerably and might give congress some flexibility in dealing with social security in the future.

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Kim Snider is an author, speaker and host of Financial Success Coaching, Saturdays at noon, on KRLD Newsradio 1080, Dallas - Fort Worth. This blog is primarily devoted to empowering individual investors with information to help them be good stewards of their money. Above all, it is about achieving true financial success. Kim's book, How To Be the Family CFO: Four Simple Steps to Put Your Financial House in Order is in bookstores now. Order yours from Amazon or other fine booksellers today.

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