Some readers may find the word swindle too strong of a term to describe what took and is taking place in the conversion from traditional pensions to 401(k) and other defined contribution plans.Â A swindle suggests illegality and what took place was perfectly legal.Â Or was it?Â Upon closer examination, where the financial services industry directly used false information to entice individuals to leave or not enter more valuable defined benefit programs, serious claims of wrongdoing could be launched in subsequent years, leaving it vulnerable to government regulatory sanctions and civil litigation.Â Â Â
In others there was no explicit claim of higher returns but no information of what the returns would be.Â What seems to have induced many people to have chosen these plans was a generalized belief that they were better, a belief encouraged by the financial services industry in the pro business climate of the 1980s and rapid stock market gains of the 1990s.
We could argue that for those who were placed in defined contribution plans without choice, a robbery rather than swindle took place.Â In a robbery victims are forcibly rather than voluntarily parted with their money as in a swindle.Â But in a robbery the victim knows that he or she is being robbed.Â In a good swindle, the victim does not know initially and the better the swindle, the longer it takes to realize it, which gives the swindler more time to get away.Â
A key reason why the retirement swindle was so successful was because it would take decades to realize that it had occurred.Â Hardly anyone in the 1980s doubted that 401(k)s would deliver good retirement incomes.Â Victims who trusted the confidence men and women of the financial services industry would not be able to find out differently since their individual retirement ages were decades away, hence the easier it was to swindle them.Â
Even though many of the victims of retirement plan conversions were forcibly dispossessed of their money, they did not know it at the time and many still donâ€™t.Â I therefore think that swindle is a more accurate concept than robbery for capturing the essence of what happened.Â
A case can be made that this was an institutionalized rather than personal swindle that was aided and abetted by a favorable ideological and political climate.Â This was not an individual like Bernard Madoff bilking investors.Â It was a case of a whole industry using deceptive information to sell retirement plans that were of much less value than what they replaced, though they argued directly or insinuated that they were precisely the oppositeâ€”much more valuable.Â The â€œmis-sellingâ€ scandal of the early 1990s in the United Kingdom in which aggressive sales tactics were used to convince workers to move from secure pensions to private accounts was similar.
Still another way to view it is as a class swindle in which the collective retirement savings of working people were diverted into the stock market to benefit the rich.Â The more retirement savings were diverted into the stock market, the more the demand for stocks increased thereby driving up their prices. The rich were the primary beneficiaries of increased demand driving up stock prices. Income from wages and salaries accounts of the bulk of income for most ordinary people.Â But for rich income recipients beginning at some point between $300,000 and $500,000 annual income, the majority of income shifts from wages and salaries to capital gains and dividends from stock market investments.Â New 401(k) accounts from ordinary people thus were a contributory factor in driving up the incomes of the rich and overall income inequality.
At the same time the flood of retirement savings into the stock market artificially inflated the values of stocks, creating a kind of fictitious capital that is reflected in lopsided price earnings ratios. That fictitious capital, in turn, has had a destabilizing effect on the system. It was a contributing factor to the 2008 stock market crash.Â
James W. Russell