If Bill Wolman's new book, The Great 401(k) Hoax catches on, brokers and financial advisors will have a tough time getting clients to jump back into equities any time soon. Wolman, for many years the chief economist at BusinessWeek and the resident party pooper of CNBC during the boom years, makes a strong case that a decade of market malaise lies ahead. With co-author (and wife), Anne Colamosca, Wolman parses the events of the past two years — from the start of the bear market in spring of 2000 — and puts them in historical perspective.
And Wolman has a nearly unique perspective. In early 1966, when the Dow Jones Industrials Average was flirting with 1,000, he wrote a cover story for BusinessWeek called “Stocks Near Their Own Millennium.” At the time, he admits, he was caught up in the notion of a “new economics” that — like the late, great New Economy of the 1990s — promised to produce an era of “perpetual prosperity.” The grim reality that followed was a decade and a half of nearly stagnant equity markets. The Dow would only move decisively beyond the 1,000 benchmark in 1982.
It is his intention in The Great 401(k) Hoax to keep investors from making that same mistake. Marshalling data from earlier market surges, inflated by investment in new technologies ranging from canal transportation to radio, the authors document a disturbing pattern. Despite the advances in productivity the new inventions had created, the “new” economies were never strong enough to pull the whole economy away from its normal trend.
Inevitably, valuations plunged from their speculative highs and — here's the bad part — returns were depressed for more than a decade. Their data show that in the two decades following the 1929 crash, total inflation-adjusted returns on equities averaged just 0.04 percent annually. If we're lucky, they suggest, the current period will be as kind as the two decades following the 1966 end of the go-go market — when annual returns on stocks averaged 1.9 percent.
None of that analysis is particularly startling until it is linked to the 401(k) phenomenon. Then the probability of a lengthy period of mediocre returns has the makings of a national economic crisis. When companies began replacing defined benefit plans with defined contribution plans in the 1980s, the promise was to provide workers with a greater opportunity to build up retirement savings: Ordinary Americans would take their financial futures into their own hands and use the power of compound returns on equities to build a secure retirement.
The problem is that it hasn't happened. According to the authors, the average 401(k) account held about $49,000 in 2000. The median account held about $13,500. In other words, as with other forms of stock market wealth created in the 1990s, most of the spoils went to the richest. While the pension wealth of the median family actually fell 13 percent (adjusted for inflation) between 1983 and 1998, the pension wealth of the top 5 percent of households rose 176 percent. In other words, even without the market's reversal, most Americans today would be woefully unprepared for retirement.
You may not agree with Wolman's view that the 401(k) phenomenon is a hoax, perpetrated by Corporate America in collusion with Wall Street firms and complaisant politicians in Washington. Still, what Wolman and Colamosca say is important: It is going to take years of reforms and perhaps a new approach to pensions by the government to bridge the gap between what Americans have saved for retirement and what they will actually need.
What does it mean for brokers? Wolman excoriates brokers for convincing middle class Americans that they could afford to take on the market risks that wealthy individuals assume in retirement accounts. But he does provide some ideas for how enlightened brokers — those who go beyond generating transactions and are capable of true financial planning — can help their clients.
The short answer: Bone up on bonds, look for stocks that pay dividends and help your clients learn to have realistic expectations. Most likely, they are going to have to save their way to retirement, without an assist from the market and, perhaps, without any more help from corporations that now have to report real earnings.
This may not be a message that brokers want to hear. Still, it is better for financial advisors to understand why The Great 401(k) Hoax resonates with investors — before their clients start telling them.
The Great 401(k) Hoax
Why your family's financial security is at risk, and what you can do about it.
By William Wolman and Anne Colamosca
246 pages, $26 Perseus Publishing