Houston Chronicle Publishes Op-ed on the Risk in 401(k)s

Conservatives' 401(k) push is big risk for public-sector employees

By Max Patterson

It used to be that being "conservative" meant being cautious about untested change, preferring tinkering instead of complete overhaul to institutions that developed over time to serve particular public needs.

If the current Texas Legislative session is any guide, that definition no longer applies to self-identified "conservatives" who seek to dismantle traditional retirement plans for police, firefighters and municipal employees. Their push toward 401(k) style plans is a radical approach with unproven benefit.

As background, the Texas Legislature established the defined-benefit plan for Houston firefighters in state law in 1937. The Houston municipal and police pension systems were established in state law in 1943 and 1947, respectively. The idea was to build trust funds that set specific amounts of monthly retirement benefits based on salary and years of service. Recall that in 1937, the federal government was establishing Social Security for most citizens, but government employees were allowed to set up their own. It was a state-vs.-federal issue, which every conservative supporter of Article 10 of the Constitution would normally view positively.

Drawbacks of 401(k)s 
Yet we see conservatives today breaking hard from those public employee trusts set up 70-80 years ago. Groups like the C-Club attempted to use Houston's pension wrangling with firefighters, police and municipal employees to force new employees into 401(k)s. And Windi Grimes, a board member for the conservative Texas Public Policy Foundation, recently sponsored a petition that could trigger a popular vote in November for enrolling new public employees in 401(k)s.

It is unconscionable that 401(k)s, having wreaked havoc upon retirement security for private sector employees, are now conservatives' best policy option. Let's look at their problems.

First, 401(k)s are expensive. Compliance and management fees have been documented to sap returns to a degree far greater than most people admit. Then, doing-it-yourself is not for everyone: It's hard to be the best investment manager for your own portfolio while working your full-time job. And most individual investors are unwisely risk averse, investing in bonds or near-cash equivalents when they should be in stocks in early adulthood. The problem is the loss of growth opportunities: Stocks show better returns over the long-term.

Other facts prove these 401(k) problems troubling. Retiring comfortably requires about $375,000 for the average American. The average account balance in Fidelity Investments managed plans was only $88,900 in June 2016 and thus may only generate about $4,500 per year in interest without touching principal. Considering there are more than 70 million people participating in 401(k) plans, the average balance is abysmally low. It is no surprise that a recent Insured Retirement Institute survey of 800 Americans aged 54-70 found just 23 percent thought their savings would last.

Putting economy at risk
Moreover, leaders of the $300-plus billion Blackstone hedge fund, one of the world's largest, have repeated warnings about the lack of 401(k) savings. Since consumerism is the engine of America's economic growth, they know less money in the hands of a retired generation reduces economic vitality.

Since most Chronicle readers probably have 401(k)s, they should probably take a look at their own statements, IRAs, savings and expected Social Security benefits. Fidelity Investments, along with research performed by Aon Hewitt and the University of Georgia, say that a person needs to have saved 11 times their annual income by age 65. How do your accounts stack up? Which is least?

If this is concerning to you, think twice about mandating that public sector employees be forced to adopt 401(k)s. Public sector employees spend $11 billion yearly in the Texas economy once they retire. Reducing the resultant economic multiplier in hopes that 401(k)s will produce the same is a risk. A big risk.

Also, think twice about supporting conservatives who want to dismantle traditional plans for public employees. They should instead focus on creating an economic environment that enables private companies to support sustainable traditional defined benefit plans for their employees.

Patterson is executive director of the Texas Association of Public Employee Retirement Systems representing 80-plus local pension systems for police, firefighters and municipal employees across the state.