Retirement Account Pioneers Regret What They Started

NPR's Ari Shapiro speaks with Wall Street Journal reporter Timothy Martin about why the creators of the retirement investment accounts known as the 401(k) worry about what they started.

ARI SHAPIRO, HOST:

The 401(k) is the most common tool Americans use to save money for retirement, far more than pensions. Congress created the savings plan some 35 years ago. Now some of the 401(k)'s earliest backers say they oversold it. Timothy Martin writes about this in today's Wall Street Journal. He spoke with us from an airport, which explains the background noise you'll hear. I asked him to describe how the creators envisioned the 401(k).

TIMOTHY MARTIN: These people talked about a three-legged stool, that you'd have Social Security - we've still got that - you'd have a traditional company pension, which provide a set payout for life as a percentage of your sort of final years of salary, and then you would have this thing called the 401(k) that would supplement both the pension and the Social Security. And, you know, it just might be there to either buttress a pension or for vacations, paying for grandchildren's college education, that type of stuff. They did not vision a world where the 401(k) would supplant the pension. And...

SHAPIRO: Well, how did it happen that 401(k)s became the alternative to the pension rather than one leg of a three-legged stool?

MARTIN: The 401(k)s came at this moment when pensions to companies and employers were becoming increasingly complicated and expensive. It was just much easier to shift to a 401(k). You know, the upshot for workers was just as companies wanted to give up pensions, workers who had pensions would see their friends with 401(k) accounts and see how much money they were making every year - you know, 15, 20 percent plus, if not more - and sort of saying, like, well, I wish I could get in on that. And...

SHAPIRO: So it sounds like there was no one bad guy. It was a convergence of events where companies wanted to get rid of pensions, workers thought that 401(k)s would do better than pensions. Everybody got on this boat and set sail kind of altogether.

MARTIN: No one predicted that the 401(k) would sort of underperform or underserve, you know, a mass range of workers. I don't think anyone would've signed on. You know, one sort of mistaken perception heading in - these people all thought Americans would see it in their best interest to save as much as they could for retirement. And what we've learned in recent decades is that more people are willing to spend, or want to spend, rather than save.

SHAPIRO: One of the things that really struck me about this article is this is not just retirees or HR managers saying gee, the 401(k) isn't really working as a retirement tool. It is the people who pushed the 401(k). It is the people who said to Congress and said to corporations, this is the tool of the future, this is the answer to your problems now saying, we oversold it.

MARTIN: Yeah. You know, for a lot of these people, they thought it would either sit aside a pension or it would be used with far more robust market returns and willingness by workers to sock away. They had much different visions of what this could become or would become than reality.

SHAPIRO: Your story ends with a human resources executive who was an early champion of 401(k)s now saying the very program that he championed has not created enough for him to be able to retire on.

MARTIN: Yeah, that would be Herbert Whitehouse. He's also unlike a lot of Americans. He's not living off of bologna sandwiches. I mean, he's very, very well off. I did sort of discuss with him - would he be in a better position to retire if he had a traditional pension and he stayed at Johnson & Johnson, the company he was at in the early '80s, for 30, 40 years?

And yeah, he said he would be in a much, you know, comfortable spot. And the basic difference being he wouldn't be exposed to market risk, the economy tanking and stocks falling. He'd get a set payout for life from his company. And that's something that the 401(k) did away with. You could potentially gain more, but you could also potentially lose more.

SHAPIRO: If there's somebody listening to our conversation right now who, like many Americans, has no pension, does have a 401(k), thinks they've been responsible preparing for retirement, but now here's - a 401(k) might not be all it's cracked up to be, what advice would you have for them?

MARTIN: I think as we sort of see some of the situations with baby boomers in particular, with this first wave of 401(k) perhaps have not the retirements that they would have expected, I think that will inform subsequent generations about prioritizing saving more rather than spending and just sort of having a multi-decade view of how much people actually need.

SHAPIRO: That's Timothy Martin of The Wall Street Journal speaking with us via Skype from an airport lounge, which explains some of the background noise. Mr. Martin, thanks very much.

MARTIN: Thank you.

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