The 401(k) Disaster

An offhand but important remark from Felix Salmon:

Just because you have a 401k plan does not, ipso facto, make you an investor. This is a serious problem with defined-contribution pensions in general: they place an onerous set of responsibilities onto individuals who are wholly unqualified to discharge them in a sensible manner. Already, such plans tend to have far too many choices, many of which are expensive long-only mutual funds which seem like a pretty bad idea for just about anybody. Trying to add alternative investments in private equity or hedge funds to the mix would almost certainly be disastrous — the dumb money coming in at just the wrong time, just like it always does.

I think this is a really underrated problem with the contemporary United States and a major policy error of the neoliberal age. It's bad for middle class workers who are having a share of our compensation siphoned away by value-subtracting financial managers, and it also seems to me to undermine corporate governance. How am I contributing to the management of the firms of which I am, through my 401(k), a partial owner? Well, not at all! Heck, I couldn't even tell you the name which firms I partially own.

The basic idea of Social Security—a slightly redistributive defined benefit pension with a capped contribution level—is actually a really good vision of how middle class people should pay for retirement.