Your 401(k) hates you

How a retirement vehicle from the seventies is crippling America

This piece represents my personal opinion, is not investment advice, and does not necessarily reflect the views of my employer, which was not involved in its publication.

At the time of writing, RobinHood has upset 56% of its users by delisting stocks that were being targeted by the Reddit WallStreetBets community. It feels like a slap in the face. As Nick Wing put it over on Twitter:

This feels like a good time to talk about 401(k)s.

The 401(k) was created by accident as a result of tax reform in the late seventies. Section 401(k) of the 1978 Revenue Act allowed employees to defer bonus or stock option compensation without incurring taxes. An enterprising benefits consultant suggested that this could be a good way for companies to provide a retirement savings account — essentially a hack on top of the Revenue Act clause — and the rest is history. When the IRS declared that ongoing salary deductions could be put into these savings accounts a couple of years later, the race was on.

By the mid eighties, over half of all the large firms in America offered a 401(k). Today, the 401(k) is simply how retirement plans are done.

There was a simple reason for the change. Even though the returns for employees were less certain than a traditional pension plan, they were far cheaper and more predictable for employers. This was a double-edged sword: on one hand, employees didn’t have the security they had previously enjoyed. On the other, more employers could provide retirement plans at all.

The net effect, however, is that employees are essentially bribed to take part in the stock market in the name of protecting their retirements. As we’ve seen, the dynamics of the stock market are not necessarily in their favor — and as it turns, out, most people saving for retirement don’t get to choose where their money goes.

In practice, the 401(k) is a support plan for fossil fuels, arms companies, and all kinds of heinous shit.

Clearly, retirement plans need regulation in order to protect the ordinary people who are trusting their futures to them. But the legislation that governs 401(k)s, ERISA, actually makes it hard for providers to let people invest in anything other than that default basket of heinous goods. ESGs — Environmental, Social, and Governance investments — are difficult to add to a retirement plan’s lineup. The Trump administration made it even harder for a retirement plan to add them.

Care about climate change? You’re shit out of luck.

Don’t want to invest in arms? You’re shit out of luck.

Private prisons? You get the idea.

Want to invest in alternatives like cryptocurrencies? Don’t even think about it.

If you want to save for retirement based on your values in a 401(k) plan, you’ll more than likely find you can’t. And most of the traditional target date funds contain companies that you’d probably be upset to know you were investing in. Some plans let you open a brokerage window and pick your own investments instead of the default funds, but it’ll cost you more.

The total AUM in these retirement plans is north of $28 trillion, while the total US stock market value is somewhere around $85 trillion. In other words, a third of the markets are invested in by people who don’t have full control over their investments.

Imagine what would happen if that money was liberated.

Freeing retirement savers to be able to invest according to their values — and potentially take that money out and put it in DeFi and elsewhere — will be nothing less than a revolution in finance that has the overdue potential to decimate companies whose stock is propped up by the current system. A full third of the market would finally be deployed according to the wishes of its owners, rather than the wishes of the people in charge of legacy financial institutions.

This isn’t a pipe dream: it’s an inevitability.

As part of the team at ForUsAll, which has always been about providing opportunities for ordinary people that would otherwise have been the domain of the affluent, I’ve been helping to work towards something better. We’re not quite ready to talk about it. But imagine a gateway between the traditional financial world and the world of liberated finance, where ordinary people have the full right to determine their own destiny. I’m sure we’re not the only ones. We’re at the foothills of a movement.

As with so many industries before it, the existing financial system will find itself transformed and democratized by the internet. It will be more equitable, more decentralized, and more valuable than it ever could have been under the mantle of legacy institutions.

The results will be widespread: from distributed wealth to climate change to how industry is financed. It will lead to the demise of many incumbent institutions and the rise of lots of new kinds of organizations. More than anything, it will empower ordinary people to be in control of their financial destinies. And not a moment too soon.

This is a personal post, but if you have 30 more seconds, I’d love to take the opportunity to learn more about how you think about the future of retirement. Click here to take a very quick survey.

Photo by Carlos Muza on Unsplash.

Writer: of code, fiction, and strategy. Trying to work for social good.

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