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Clinton Could Make Your 401(k) Plan Worse

The Huffington Post logo The Huffington Post 30/03/2016 Jane White

One of the reason why Presidential candidate Sen. Bernie Sanders is resonating with many voters is because he's taking on Hillary Clinton's ties to Wall Street.
While Clinton is promising to get tough on corporate wrongdoers and biggest shadow banks. Last December, the president of Blackstone Group, Tony James, hosted a fundraiser for Clinton--just two months after the private-equity giant settled with the Securities and Exchange Commission over charges that it used so-called monitoring fees to enrich the firm at the expense of investors. Among the investors in the Blackstone funds harmed by the scheme were major public pension systems were California, Florida, and New Jersey.
Dennis Kelleher, president and CEO of Better Markets, which advocates for tougher regulation on Wall Street, told the International Business Times that such campaign contributions reflect the financial industry's desire to have influence over policy if Clinton is elected president. "The industries that could be affected quickly line up to give money to any policymaker who might be engaged in the issue, so that they can at least have a seat at the table."
This is not the first time Blackstone has had run-ins with the law--or the public in general. In 2014 housing rights activists in New York City, Atlanta and Spain demanded that the firm stop its purchases of foreclosed houses and troubled mortgage loans.
Of particular concern were Blackstone's purchases of tens of thousands of single-family homes, which it subsequently rented out at prices out of reach for low-income tenants, said demonstrators. And in 2015 Blackstone along with KKR & Co. and TPG Capital agreed to pay a combined $325 million to settle a lawsuit alleging that a number of private-equity firms colluded to keep down the prices they paid for companies in the run-up to the financial crisis, according to court documents. (A spokeswoman for Blackstone did not respond to my request for any corrections.)
So what does this have to do with our 401(k) accounts? Incredibly, Clinton's pension adviser, Teresa Ghilarducci, a professor at the New School, is teaming up with Tony James to revamp our current 401(k) system.
Their proposal, called the Retirement Savings Plan, would require workers and their employers to contribute at least 3 percent of the employee's salary each year into a "Guaranteed Retirement Account" that "could be invested in opportunities typically reserved for institutional investors--less liquid, higher return asset classes. These include high-yielding and risk-reducing alternative asset classes like real estate, hedge funds, managed futures and commodities."
Why they consider real estate "risk reducing," since you can't reap any returns unless the property is sold at a profit, which is unlikely to happen in a housing bust, is beyond me. As for "managed futures," during the decade ending in 2012, more than 30,000 investors entrusted Morgan Stanley with $797 million in a managed-futures fund called Morgan Stanley Smith Barney Spectrum Technical LP. While the fund made $490.3 million in trading gains and money-market interest income, investors reaped none of those returns because the profits were consumed by $498.7 million in commissions, expenses and fees paid to fund managers and Morgan Stanley. Investors ended up losing $8.3 million over 10 years. Had those Morgan Stanley investors placed their money instead in a low-fee index mutual fund, such as Vanguard Group Inc.'s 500 Index Fund offered to most 401(k) plan participants, they would have reaped a return of 96 percent in the same period.
The other flaw in the James/Ghilarducci proposal is that it would REDUCE the typical employee contribution of 5 percent of pay and employer contribution equal to 3 percent of pay to 401(k) accounts to 1.5 percent each from employer and employee. (The authors also claim that employees are required to contribute "about 12.5 percent of their income" to Social Security--except that the contribution is split between the employer and employee.)

As I've pointed out in a previous post, employer contributions to our retirement accounts are among the lowest in the world, if not the lowest. It's 9 percent of pay in Australia, 11.8 percent in Denmark, 8 percent in Hungary, 6.5 percent in Mexico and 7.3 percent in Poland. A 2008 report on retirement savings for Australians projected that those in their 20's and 30's will have accumulated between $500,000 to $700,000 when they retire -- compared to a median balance of around $100,000 for the typical American retiree.

Don't get me wrong, 401(k)s need fixing but it's not the investment strategy but the puny employer matching contribution that needs addressing. My 401(k) reform proposal, developed with leading pension actuaries, would mandate more generous employer contributions-- equal to 9 percent of pay for Fortune 500 companies and 6 percent for other companies -- and require contributions to be consistent through an employee's job tenure.
Currently 54 percent of the Vanguard Group's clients make their employees wait one to six years before they are completely vested in employer contributions, hurting the majority of job-hopping Americans, according to its report "How America Saves 2011." According to the Bureau of Labor Statistics, the average person born in the latter years of the baby boom changes jobs roughly every two years between the age of 25 and 46 alone.
Bottom line: there's no doubt that 401(k) plans need fixing. But the remedy is not for employers to make reckless bets with investments but to cough up the deferred compensation that employees deserve.

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