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401(k) Accounts Are Losing Money for the First Time


NY Times, July 9, 2001

For the first time in the 20-year history of the popular 401(k) retirement savings plan, the average account lost money last year, even after thousands of dollars of new contributions. And despite some strengthening of stock prices in the last couple of months, recent estimates show, the declines persisted in the first half of this year.

The trend is exposing years of mistakes by employees, raising some questions about proposals to permit Americans to manage part of their Social Security accounts and clouding the future of many employees' nest eggs for retirement.

The losses have led many individual workers to second-guess themselves, since they are the ones who decide how much to contribute to 401(k) plans and how to invest their money. There are some risks that people cannot control, such as stock market declines and company contributions that shrink with profits.

But a look at shifting account balances over the last decade shows that many people have grown overly dependent on stocks, do not contribute enough to retire when they expect to and put too much into a single aggressive mutual fund or their own company's stock, financial planners and plan administrators say. And relatively few employers offer much useful help to workers in making these crucial decisions.

Still, many people seem eager to give Americans more control of their retirement funds. A special commission appointed by President Bush is exploring ways to carry out his campaign promise to permit Americans to manage a portion of their Social Security benefits. Many states are also creating plans similar to the 401(k), so that their employees can manage their money themselves.

For many workers, the 401(k) has long seemed to be a magical, ever- expanding account. The plans grew quite popular, partly because they coincided with the strongest and longest bull market in history. They also provided benefits to workers at many smaller companies that did not have traditional pension plans, encouraged saving and created a portable plan better suited for the modern, job-hopping work force.

But this last year has brought a gloomy crop of 401(k) statements, and that has employees wondering whether they made the right decisions in the first place. The average account shrank to $41,919 in 2000 from $46,740 in 1999, according to a report from Cerulli Associates, a benefits consulting firm. Although comprehensive 401(k) account data will not be available for some time, the average account has since shrunk about $600 more, to about $41,300, according to a rough projection by one Cerulli analyst.

"You could be stupid in the last 10 years and make a lot of money," said Mark Bruggemeyer, a 45-year-old co-pilot for Continental Airlines. "Now you've got to buckle down and start learning all over again."

Mr. Bruggemeyer has more than 80 mutual funds to choose from in his 401(k) plan. This never seemed to be a problem before, because the two funds he had picked, almost randomly, kept going up. In the last year, though, the value of Mr. Bruggemeyer's technology fund has been cut in half, and his holdings in a diversified stock fund have fallen more than 12 percent.

Like many Americans, Mr. Bruggemeyer grew overly dependent on stocks. The average 401(k) account had 72 percent in stocks and stock funds in 1999, according to the latest data available from the Employee Benefit Research Institute, a Washington nonprofit group.

That stance reverses the conservative posture of investors a decade ago and appears somewhat aggressive when compared with the classic allocation of professional pension plan managers: 60 percent in stocks and 40 percent in bonds.

More recent information from Fidelity Investments, which handles a mix of small and large employers' plans as the nation's largest 401(k) administrator, shows an even more aggressive posture. The average Fidelity account had 19 percent in company stock on top of almost 62 percent in stock funds at the end of last year. Owning a large amount of a single stock is riskier than owning an aggressive stock fund since so much rides on the fortunes of one company.

This is not to say any particular worker should abandon stocks or pile into bonds, or that the typical pension fund mix should be copied by workers of various ages and incomes.

Moreover, most pension funds have faced losses as the market has declined. But professional pension trustees work zealously to balance risk and reward in traditional pension plans, and workers also need to have a strategy and stick to it, financial planners say.

"It's wonderful that individual employees are empowered," said Brian Orol, a financial planner in Raleigh, N.C. But he thinks workers do not realize that many companies are using the 401(k) to replace the traditional pension, and that the guaranteed retirement income provided to many who retired from the end of World War II through the early 1990's is disappearing.

Beyond averages, there are signs of many flawed individual choices. Between one-fifth and one-quarter of workers eligible for 401(k) plans do not participate at all, according to the Profit Sharing/401(k) Council.

And while financial planners warn that those close to retirement should take fewer risks with their money, they note that some young people with the longest time frames and the most ability to withstand market shocks invest too conservatively.

At the same time, many baby boomers are behind in their savings, a deficiency the Bush administration tried to help address by significantly raising, in the tax bill recently approved by Congress, the maximum contributions and permitting those over 50 to contribute even more to catch up while they can.

At another extreme in risk, workers at big companies are overly reliant on company stock. The average account at Hewitt Associates, the nation's second-largest 401(k) provider, which caters to Fortune 500 companies, has almost 30 percent in company stock. If a company fails, employees might lose much of their retirement money along with their livelihood as their jobs vanish.

"I don't know where this is going to lead us over the next 10 or 15 years, when these people start retiring," said Roy T. Diliberto, a Philadelphia financial planner and the chairman of the Financial Planners Association. "Some checks are not going to be there."

The French health care system has proven to be quite superior to that of the U.S.  As portrayed in the Chicago Tribune, France’s health care system has a “same care for all” philosophy where patients, regardless of social status, receive the same medical care.  This is an alarming difference from the U.S., which comprises of 40 million people with no health insurance.



Health care in France gets top marks
Quality praised, even as some lament costs

By Ray Moseley
Tribune foreign correspondent
July 8, 2001

PARIS -- David Burgess, 56, an American living in Paris, describes himself as "positively a right-winger," and he came to France 18 years ago with an aversion to its socialized health-care system.

Most of all, he resented the steep price he was forced to pay for it: about $438 per month. On top of that, $384 goes out of his monthly paycheck to cover his French pension.

But in the past 2 1/2 years, Burgess' resentment has evaporated under the impact of an illness that almost cost him his life. He developed cancer of the esophagus and was told the mortality rate was about 85 percent within the first three years.

But so far he has fought it, boasts that his care has been superb and says the only out-of-pocket expense he has incurred amounted to $6.50. "I'm not sure what it was for, but I paid it," he said. "I no longer complain about my taxes."

A friend who is dean of a New England medical school told him equivalent treatment in the United States would have cost about $700,000.

"I have nothing but praise for the French system, for the doctors and nurses and the quality of care," Burgess said. "I used to think I was paying a bloody fortune, but the French system saved my life. I don't know what it is like in the U.S., but if I lived in England, where the system is not as good, I would be dead now."

The World Health Organization in Geneva rates national health systems by a variety of criteria, and on all scales France is among the world's leaders.

U.S. ranks 37th

In overall performance--relating achievement to expenditure--France ranks No. 1 in the world, the U.S. 37th. All 15 nations of the European Union, with similar systems, fare better than the U.S. in the WHO ratings--even Britain, whose underfunded system is widely criticized in Europe.

All are based on the premise that every resident is guaranteed the same quality of health care, by contrast with the U.S., where 40 million people have no health insurance.

This represents a major philosophical and cultural difference between Europe and the U.S., and whether Americans would ever accept such a concept is open to debate. A bill expanding the rights of patients in dealing with their health insurers recently passed the Senate but faces an uncertain future in the House. Former President Bill Clinton's ambitious universal health-care plan died in Congress in 1994.

Critics of the European system point out that it has its downside: While the cost to workers is high, the burden is even greater on employers, who have to contribute three times as much as their employees. This can make them reluctant to take on workers in lean times, contributing to higher unemployment.

But there is no public debate in Europe about this. People may complain about the way health systems work in practice, and governments worry about rising costs as their populations age. But the principle of universal health care is widely accepted, even though it takes an average of 40 percent of a worker's pay.

"Overall the French are satisfied with the system and want it maintained," said Edouard Couty, a senior official of the French Health Ministry. "It is very important sociologically."

Dr. May Mabro, a doctor at the suburban Foch Hospital in Paris who has treated Burgess, said there is an official list of 30 serious illnesses for which hospital patients pay nothing. The list covers all types of cancer, diabetes, heart disease and other ailments.

Same care for all

The hallmark of the system, she said, is that it guarantees "the same quality of care for all, regardless of social level or income. When people are ill, we don't look at how much money they have." The system even pays for taxis to bring people to the hospital, and take them home, regardless of ability to pay.

"I think this system is not perfect," Mabro said. "The system is sick because it is too costly. Perhaps people who can afford to pay something should do so."

Mabro said many French people feel coddled by the system and abuse it. They mistrust a doctor who prescribes inexpensive medications, she said, because they think costly medicines must be better. Generic medicines, only recently introduced in France, are not popular.

She recalled that a government TV campaign 10 years ago tried to make patients more responsible, for example urging them not to take an ambulance if they could come to the hospital in a car. "This was unpopular, so it was stopped," she said.

Likewise, Mabro said some doctors order examinations that are not necessary.

While Burgess, a copy editor for the International Herald Tribune, got into a hospital a day after his illness was diagnosed, Mabro said in many outlying towns, it may take a month or longer to gain admission to a hospital. Even in Paris some people have to wait three or four weeks for surgery, she said.

Pay for doctors

Like all the staff in her hospital, Mabro is paid by the hospital from an annual budget allocated by the government. A doctor with two or three years of practice can earn about $49,000 a year.

A Health Ministry official said such doctors can boost their incomes by up to 30 percent by seeing private patients. More senior doctors, he said, can earn about $76,000 from their hospital work.

These may seem modest pay levels by American standards, but they compare well with those of lawyers, other professionals and senior executives in France. Still, there is dissatisfaction among doctors over pay.

"We are asked to provide higher and higher quality care and more costly therapies," Mabro said. "But the budget from the state stays the same."

The French system clearly works best for those with life-threatening or long-term illnesses that are hugely expensive to treat. With 100 percent coverage of costs, no one need worry about ruinous medical bills. Even illegal immigrants are entitled to such treatment but can find themselves expelled afterward.

The Health Ministry's Couty said the system needed to be adapted to focus more on care of the elderly and treatment of Alzheimer's disease as the population ages. At present France has only one specialized public hospital for Alzheimer's patients.

Helping the elderly

Under a law taking effect this spring, the government will devote more resources to helping the elderly stay in their own homes and to give them better care if they must go into institutions. Local governments now cover the full costs of care for the elderly, then claim the money back from patients' heirs when they die. "It can be almost the entire inheritance," Couty said.

The new law will put a $42,000 ceiling on the amount the local government can extract from heirs.

In the mid-1990s, the entire social security system was $12.5 billion in the red. The government raised taxes steeply to overcome the deficit, and there was hardly a murmur of public protest. "The French are very attached to the system," Couty said.

There may be no one in France more attached to the system than that one-time skeptic, David Burgess. But even he agrees that, in at least one respect, it falls short of perfection.

"The only criticism I have is that the hospital food is absolutely disgusting," he said. "Even the doctors and nurses agree it's a national disgrace."

Many seniors citizens feel disenfranchised with regards to their social security benefits.  As highlighted by this Chicago Tribune article, middle-income seniors pay much higher tax rates in comparison with millionaires.  This reality is very unfortunate and unfair and must be reassessed as more people grow dissatisfied with the system.  

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