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401k plans are conduits for random acts of fortune and misfortune

Cross Post from IfLizWereQueen

Wall Street and its various financial “products” (scams) are not good deals for the 99%.  In fact we should all keep our money as far away from the Wall Street shysters as possible.  The chances of a 99%r “making a killing” on Wall Street are slim to none. Wall Street financial products all come with a huge risk for any member of the 99%. The odds are stacked against us.  In fact, many of their financial products are designed to rip off the 99%.  But of them all, 401k’s are perhaps the worst in my opinion because they have ruined so many lives and hold the potential for ruining even more.

We need to start telling people the truth about 401k Plans and their high risk.  These are the “retirement” plans that many Republican and Corporate Centrist Democrats tell the 99% that we should invest in instead of paying into Social Security.

By putting your money into a  401(k),  you put yourself at the mercy of market cycles. You could earn the same money, save the same amount, invest as wisely as a colleague and still wind up eating the McDonald’s special while your doppelganger vacations in Europe. It all depends on where in your lifetime the inevitable market downturn falls. If early in your career, you’ll build your nest egg by buying cheap assets and retire rich. If late, you’ll find your life savings decimated when it’s too late to rebuild.  The nation’s main retirement funding plan is a conduit for administering random acts of fortune.  [Source: Money Watch 2009]

Most Americans should consider any Wall Street corporation that they work for as a potential Titanic.  Taking that analogy to the next level, ordinary employees are in steerage (the lower-class section of a steamer) where there are no life preservers.  The CEO and executive management of any large corporation have their highly protected golden parachutes to cushion their landings in a fallout.  Those from the 99% in steerage who are invested in Wall Street do not.

Employers are allowed to automatically enroll their employees in 401(k) plans, requiring employees to actively opt-out if they did not want to participate. Automatic 401(k)s are designed to encourage high participation rates among employees. Therefore, employers can attempt to enroll non-participants as often as once per year, requiring those non-participants to opt out each time if they do not want to participate. The Pension Protection Act of 2006 made automatic enrollment a safer option for employers. Prior to the Pension Protection Act, employers were held responsible for investment losses as a result of such automatic enrollments. The Pension Protection Act established a safe harbor for employers in the form of a “Qualified Default Investment Alternative,” an investment plan that, if chosen by the employer as the default plan for automatically enrolled participants, relieves the employer of financial liability.

Having your money in a 401k is about as safe as having some Casino owner in Vegas holding it for you.  Ask a few “lambs” who were sheared by Bernie Madoff, or Enron, or Alan Stanford or the next Wall Street grifter to come along–because you can bet your boots there are plenty more coming up.  But even if Wall Street CEOs and Hedge Fund managers cleaned up their acts, 401k’s would still be a risky investment because of the inevitable ups and downs of  market cycles.

CASE STUDY: PGE, a utilities company that was purchased by Enron

Since 1981, all of PGE’s employees had participated in a § 401(k) plan, which they expected to provide them with a comfortable retirement. For every dollar they individually contributed to the plan, up to 6% of their income, the company was committed to contributing an equal value in its stock.Then Enron purchased PGE in 1997, at which time all of the PGE stock that the employees had in their accounts automatically converted to Enron stock.  They had no say in the matter.

When a company crashes, you don’t get a chance to abandon your stock–at least not the majority of stock holders. One of the PGE employees who testified before a Senate committee investigating Enron had this to say:  “Every PGE employee has a story to tell about his or her losses,” Vigil added. “All of them are tragic, and most of them are life changing. All of us regarded the 401K plan as a way of investing our hard-earned wages for future security. And we assumed that, in matching our contributions, our employer was giving us something of value. It all now appears to have been a cruel illusion.”

To give you an idea of the magnitude of the overall losses, a number of workers at PGE have agreed to provide their names, ages, years of service with PGE, and losses in Enron stock. Keep in mind that these losses represent only the lost stock value since they were locked out of their accounts in mid-September when Enron began its free-fall:

  1. Tim Ramsey, age 55, 33 years with PGE: $995,000 loss.
  2. Roy Rinard, age 53, 22 years with PGE: $472,000 loss.
  3. Al Kaseweter, age 43, 21 years with PGE: $318,000 loss.
  4. Joe and Diane Rinard, age 47, 12 years with PGE: $300,000-plus loss.
  5. Dave Covington, age 42, 22 years with PGE: $300,000 loss.
  6. Tom Klein, age 55, 30 years with PGE: $188,000 loss.
  7. Mike Schlenker, age 41, 10 years with PGE: $177,000 loss.
  8. Patti Klein, age 47, 24 years with PGE: $132,000 loss.

Just these eight employees who have together invested 188 years with PGE have together lost $2,882,000.

AND  here is the story of what happened to one of the executives at Enron.  He didn’t lose his money.  Nope. He skated away and took his bonus with him.  Most people have never heard of him, but he is not the only executive from Enron who was untouched by the financial disaster that they created.

John Douglas Arnold, born in 1974, is an American hedge fund manager, specializing in natural gas trading. His firm, Centaurus Advisors, LLC, is a Houston-based hedge fund that specializes in trading energy products.

After graduating from Vanderbilt University, he began his career as a trader at Enron. After initially working on the Crude Oil desk, Arnold moved over to the Natural Gas Desk upon the departure of Jeff Bussan. Using their new Internet-based trading network, EnronOnline, he is credited with making three quarters of a billion dollars for Enron in 2001 and was rewarded with an $8 million bonus.

When Enron collapsed in 2002, he founded Centaurus with his previous year’s bonus. How about that!  Arnold didn’t skip a beat, nor did he lose one cent of his $8 million dollar bonus.  Thousands of Enron employees were not so lucky. *  His company now has as much as $3 billion in assets under management.  His employees include several big name energy traders including ex-Enron President Greg Whalley.

In Forbes magazine’s 2010 list of The World’s Billionaires, John Arnold ranked 212, with a net worth of $4 billion.


Bear Stearns, another study in 401k loss

Ask the people at Bear Stearns what happened to their 401k when Bear Stearns crashed in 2008–it went down with the company. When Bear Stearns was  shot down by Goldman Sachs back-biting in 2008, 50,000 Americans lost their jobs in one day and only a few of them were hot-shot high-rollers (who of course had golden parachutes to cushion their fall).  One of the saddest stories I remember reading was an interview with a man who was 58 years old and his biggest concern was what he was going to tell his son whose college fund had disappeared that day.

Wall Street is no place for the investments of members of the 99%.  The less control you have over your investment for the future, the less secure your future is.  If you want your financial future to be more secure, bring at least part of your investments home to your local community where you can monitor them and see exactly how your money is being used.


Disclaimer: This is not to be considered “professional” financial advice from a Wall Street shyster.  It is opinion from a member of the 99% who has a friend who once thought she had enough money to retire on from Enron, but who is now working at WalMart as a greeter.

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Liz Berry

Liz Berry