I’ve seen some provocative headlines before, and sadly, I always fall for the bait and click to read the accompanying article. This morning, I did it again when I saw this headline on Fiduciary News: “Is the 401(k) merely a Ponzi scheme?”
Now, I certainly don’t believe 401(k)s are a Ponzi scheme, but I couldn’t resist. I simply had to see what kind of argument could be posted in support of that statement. (Plus, I’m a Libra; we have an uncanny ability to see merit in both sides of nearly any argument, so there was the possibility I could be swayed.)
According to the FN report, Rochester, N.Y. radio talk show host Bob Lonsberry recently was mid-rant against the state’s pension policies and called 401(k)s a Ponzi scheme and labeled them the cause of the recent stock market crash and future crashes.
Oh my.
I thought Lonsberry’s perception was the misguided view of one talk show host. Hey, it happens — a lot. Just scan through daytime TV or primetime cable sometime if you have doubts.
As I kept reading though, I was surprised to see it’s not just Lonsberry who thinks 401(k)s are a scam. The FN article, written by Christopher Carosa, cites others who also see the nation’s premier retirement vehicle as little more than a pyramid scheme. Click to read the multiple arguments laid out in the story, which include an analysis of stock market patterns and GDP growth.
After fairly presenting the pro-Ponzi perspective, Carosa then steps in to negate their arguments. “By definition, Ponzi schemes require the use of ‘new’ money to replace ‘old’ money,” he writes, noting that pro-Ponziers would say baby boomers represent the old money and Gen Xers and Yers the new.
Yet, Carosa cites Census data showing boomers are 18% of the population, while Gen X and Y combines are more than 40%. “These younger groups are poised to earn more over time; thus, saving a higher dollar amount in their 401(k)s. Rather than remove the demand for stocks, it appears that demand will only increase,” he reasons.
Carosa continues: “Finally, implicit in the Ponzi scheme assertion lies the assumption baby boomers will sell their stock upon retirement. In fact, most financial planners would suggest retirees plan on funding a 30 year retirement. This requires a continued reliance on equities; thus, negating the need to sell stocks as some conspiracists believe. Even as they take money out of their retirement plans, they are likely to move any excessive funds into taxable accounts invested (at least some portion) into equities.”
So, there you have it — both sides of the 401(k)s-as-Ponzi-scheme debate, and a provocative headline to boot. In the end, I wasn't persuaded, but what do you think? Are 401(k)s a pyramid scheme or is that a notion built on sand? Share your thoughts in the comments.
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11 Comment(s)
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Posted by: jack j | March 23, 2012 11:37 PM
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Posted by: FiduciaryNews | February 13, 2011 11:37 PM
Kelley - Thanks for liking my title and for the kind words on the accompanying story.
What surprised me most about the topic wasn't the rantings of a small-market radio talk show host, but the fact major media outlets have reported the same thing. In general, the level of financial literacy seems unfortunately low, so it's probably important to recognize where facts need to be established and promoted. It appears the myth of the 401k Ponzi Scheme is one of those topics.
Again, thanks for the honor. - CC
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Posted by: FrankV | February 9, 2011 4:30 PM
I think the talk-show host and others do not know the difference between a defined benefit plan and a defined contribution plan. The former is the old-style pension plan still enjoyed by government employees and a few industries. In those plans the organizations add money to their pension funds based on future assumptions and actuarial tables designed to insure that future obligations to retirees can be met. When these assumptions are low-balled this can result in contributions being delayed into the future. That means more of the cost is paid in future periods in order to make up past shortfalls. However, 401k plans are defined contribution plans (like IRA's) and can simply be thought of as tax-advantaged savings plans. There is no liability, there are only the contributions (real money) made into the plan. Logic would dictate that if a 401k is a Ponzi scheme so then are all other savings and investments, and one would need to think about capitalism itself as a Ponzi scheme; an interesting but unknowledgable perspective.
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Posted by: WAdams | February 9, 2011 2:00 PM
Typical talk show rant-think. Take one vague similarity and construct a "castle in the air" - Glen Beck and his chalk board comes to mind. Wonder what they think self directed 401(k)s investing in assets like real estate? With all the get-rich-quick real estate types promoting these products, they really look like ponzi schemes (and in some cases probably are). Nevertheless, at their heart, a Solo-K and IRA invested in assets such as real estate or mortgages is not exotic, but a qualified and reputable Solo-K or IRA professional is important.
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