Who Stole the American Dream? (25 page)

When he was laid off, Thibeau was not yet eligible for Social Security. Rather than use his retirement savings, he swallowed his pride and took a new job—at a huge pay cut, working at Aetna Insurance for $30,000 a year, plus health insurance.
When he retired from Aetna in 2008 at sixty-seven, Thibeau decided to tap his Social Security, but he earned extra money as a part-time high school teacher. The financial crash of 2008 took his 401(k) assets on a roller coaster, but, he told me later, “I am still ahead of what I put in.” By taking other jobs, Thibeau had protected his main nest egg for the future.

Winson Crabb could have used Thibeau’s luck and head for money. Crabb worked for sixteen years at National Semiconductor as a skilled maintenance technician, making $50,000 a year. Like Thibeau, Crabb said, he made his 401(k) contributions every month, assuming the 401(k) would pretty well run itself.

Crabb is a solid, salt-of-the-earth guy, good with his hands, smart about machinery and guns, but not quick at math and finance. “
My assumption was that when I got to be 65, well, there would be a large amount of money in there for me to take cash out to put in our bank to utilize for whatever,” Crabb said. “Well, that didn’t work out.”

The biggest problem, said his wife, Bess, was the sudden sharp market plunge during the two years before her husband retired in 2003. Before that, she said, Crabb had about $120,000 in his 401(k) plan. “That was our goal, and that’s what was there,” she said. But when the market fell, the Crabbs lost more than half of their 401(k) balance. “It went down to forty-five [$45,000], and we built it back up to sixty-four [$64,000],” Bess recalled. “And then … the day that he drew out the 401(k), it was fifty-two [$52,000].”

In fact, the Crabbs had less than the $52,000 that showed on his 401(k) statement, because Crabb had twice borrowed money from his 401(k)—$20,000 for his daughter’s medical training, which he paid back, and another $10,000 to buy a motor home, which he had not paid back. So that reduced his total. Worse, Crabb got socked with a hefty tax bill when he cashed out his 401(k) in one lump sum instead of rolling it over into a tax-sheltered IRA. “I just went with the information that I had and thought I was doing the right thing, which I wasn’t,” Crabb said sheepishly. In the end, his 401(k) was down to just $26,000.

“It was a jolt when we got to counting funds,” Crabb admitted, rubbing a weathered hand through his white hair.

“Well, I thought when he retired, it was going to be a lot different, you know, money-wise,” Bess Crabb added.

“So, how do you manage financially?” I asked.

“Well, you do what you have to do …,” Crabb said. “I had a couple jobs in between there, and my wife works.”

In bits and pieces, the Crabbs were cobbling together barely enough to keep afloat and hang on to their brick rambler home in Cleburne, Texas. Bess Crabb’s job in a local real estate office was bringing in some money. Crabb was drawing Social Security and getting $400 a month from a lifetime pension at an earlier job covered by a steamfitters union contract. Now and then, he would get temporary jobs doing repair work or driving a truck. To help make ends meet, Crabb sold off his prized gun collection for $12,000. “Broke my heart,” Crabb said in a whisper.

The big news during my visit was a job offer as a safety officer in
a computer chip plant in New Mexico. So at sixty-eight, Winson Crabb was heading out to Albuquerque alone, without his wife, for a temporary job. For how long? He didn’t know. The Crabbs had no long-term plan.

The stark contrast between Gil Thibeau and Winson Crabb left me wondering whether these were just two random cases or whether they told a larger story. Both had worked for the same company, enrolled in the 401(k) plan, faithfully made contributions, and benefited from a good company match. Of course, the two men had made different salaries, and that would explain why one would have twice as much saved as the other. But the gap was far larger: Thibeau had twenty times more than Crabb. Why such wildly different results?

Brooks Hamilton, the Dallas pension consultant who had been advising major companies on their benefits programs for fifty years, gave me the answer. Hamilton is a high-energy brainstormer with a law degree and a mathematician’s mind for figures. He loves statistical puzzles. When 401(k)’s first appeared, Hamilton believed in their magic. He was an early apostle, persuading companies to buy into the 401(k) concept and then helping them set up and run their programs. But by the late 1990s, Hamilton was troubled by the different results he noticed among employees in the fifteen corporate 401(k) plans he was then running, each with thousands of participants and each with total balances of $100 million to $200 million or more. Hamilton dug into the records of every single employee to find out what was going wrong.

The huge gap between Thibeau and Crabb was no aberration, Hamilton told me. It mirrored a wide and disturbing pattern. Their track records were dots on a chart, and when Hamilton connected those dots with thousands of other dots, he was shocked. Year after year, in one 401(k) plan after another, he saw a similar pattern that totally changed his views of the 401(k).

“
In every case, the 20 percent at the top not only had the highest investment income, like 30 percent or whatever, they also had the highest pay,” Hamilton told me, “whereas the bottom 20 percent not only had the lowest investment income, 4 percent, they had the lowest average annual pay.”

To Hamilton, this was a systemic flaw. The best-educated, best-paid employees and executives were getting investment returns that were six or seven times greater than the returns for average workers. That gap was compounded year after year. The top brackets were not only able to put away much more money each year, but they got far better returns than rank-and-file workers like Winson Crabb. They didn’t borrow from their 401(k)’s or make Crabb’s mistake of pulling out their retirement fund in one lump sum, triggering a tax penalty. They left the money in and let it grow. They knew how to get the best results and how to avoid costly pitfalls.

“
I label this [the] ‘yield disparity,’ ” Hamilton said. “I thought, ‘We have a yield disparity that is a financial cancer in this, in our great beautiful 401(k) movement.’ And I had never seen it before, but it was everywhere I looked.”

“What do you mean, a financial cancer?” I queried.

“It would destroy the opportunity for ordinary workers to retire in dignity,” Hamilton declared. Then he said very slowly, underlining each word:
“They can’t get there from here.”

Hamilton’s conclusion is reinforced by other retirement experts, and that points to a critical problem for middle-class baby boomers nearing retirement and for the next generation.

Half of America’s workers get no retirement plan from their employers. About 40 percent are enrolled in a 401(k) plan, an account balance plan, or a similar system where the employee makes a regular contribution, partially matched by the employer, and the employee picks investments from a basket of mutual funds offered by
the employer. Ten percent have a mix of lifetime pensions, 401(k)’s, or variations on the 401(k).

The 401(k) track record is not good. After twenty-five years, the typical account balance was just $17,686 on January 1, 2011, according to the Employee Benefits Research Institute (EBRI), which tracks 401(k) records for twenty-two million people.
The typical 401(k) nest egg of people in their sixties, who have been in a 401(k) plan for twenty years and are nearing retirement, is $84,469.
The Center for Retirement Research at Boston College puts the figure at $79,000 for those between fifty-five and sixty-five.

Either way, that’s far, far short of what people will need. Those balances represent less than two years of pay for a typical American family, when average life expectancy for people retiring at sixty-five is seventeen years. Even adding Social Security, which replaces about 35 percent of the pre-retirement income for a typical individual, many middle-class Americans are far below what’s needed.

By the estimate of EBRI’s Jack VanDerhei, 45 percent of the next generation of retirees are
seriously “at risk” in retirement, which means that they will
fall short of meeting their basic financial needs
—not a comfortable retirement, but basic needs. “They will not have enough money to afford the basic necessities of life and necessary medical care,” said VanDerhei. “They will still have Social Security and maybe something from a defined benefit program [a lifetime pension]. But it won’t be enough to cover their basic expenses…. I would say unless you’re fortunate to be in the upper-income quartiles that you’re probably going to be in for a very rough ride.”

Alicia Munnell’s Center for Retirement Research at Boston College estimates that
more than half of American families (51 percent) are “at risk” of being squeezed into a lower standard of living in retirement. That’s without adding in medical costs.

The number jumps to 65 percent of American families at financial risk when analysts add in typical medical costs during retirement.

Even for people on Medicare, average health costs are a huge item. Financial analysts project that most retired couples will spend $200,000 on supplemental insurance, Medicare premiums, co-pays
for chronic illnesses or serious accidents, and drugs, glasses, and other items only partially covered by Medicare.

“They are
not going to be penniless because they have Social Security,” Munnell told me. “But it’s a very serious situation. Middle-class people are going to be very hard-pressed. People will feel destitute, absolutely forced to cut expenditures, maybe forced to sell their houses, forced to dramatically change their lifestyle. Making ends meet is going to be a consuming task. It will be the focus of their lives. And that is not what it was supposed to be. After a lifetime of work, that is a terrible state for older Americans to end up in.”

The puzzle is how did we, as a nation, wind up with such an enormous shortfall from a system that seemed so attractive to millions of average Americans who were eager to manage their own retirement savings?

After a quarter of a century, the reasons are now clear. Success requires discipline over a lifetime of work, but most people lack sufficient discipline, especially in the New Economy, where periodic layoffs force many average Americans to change jobs, employers, and 401(k) plans.

Retirement specialists like Brooks Hamilton and Alicia Munnell question whether, in this turbulent economy, the task of financing retirement is too fraught with risk and too complicated for most average Americans, especially the millions who are gun-shy about financial markets.

“The individual has to make a choice every step along the way,” Munnell observed. “The individual has to decide whether or not to join the plan, how much to contribute, how to allocate those contributions, how to change those allocations over time, decide what to do when they move from one job to another, think what to do about company stock. And then the hardest thing is, what are they going to do when they get to retirement and somebody hands them a
check? How do you figure out how to use that money over the span of your retirement?”

These are the most common pitfalls that Munnell identified:

Even experts have trouble juggling all those problems, including Munnell, who has imposing academic credentials as a tenured professor of management sciences. “I have made virtually every mistake that I look out there and see other people doing,” Munnell admitted candidly. “We live busy, complicated lives. Saving for retirement is a really hard thing to do.”

When I asked her what went wrong, she laughed. “
Everything! Everything has gone wrong …,” Munnell confessed. “I wish I could say that I’ve stopped making mistakes…. I’ve stopped taking money out because my children are grown. But I still buy high and sell low, because I get panicked when the stock market collapses and think, ‘God! I can’t lose all my money,’ and get out.”

That panicky reflex during market collapses can hurt long-term retirement saving. Even for steady savers, recessions are a jolt. During the market collapse of 2008–09, 401(k)
plan holders lost an estimated $2.8 trillion in savings—roughly 30 percent of their assets. By January 2011, they had recovered considerably, but they were still $800 billion below their 2007 savings levels.

People’s panicky reflex in bad times can compound losses. If, understandably, they decide to cut down or stop their 401(k) contributions, they lose an opportunity to make investments when stock prices are at bargain levels.