One of the few advantages of getting older is that, as long as the memory remains good, you know where all the bodies are buried. This is sometimes called wisdom. A couple of weeks ago, the Wall Street Journal reported that 401(k) plans wouldn’t provide many soon-to-be retirees the income they needed for retirement:

The median household headed by a person aged 60 to 62 with a 401(k) account has less than one-quarter of what is needed in that account to maintain its standard of living in retirement, according to data compiled by the Federal Reserve and analyzed by the Center for Retirement Research at Boston College for The Wall Street Journal. Even counting Social Security and any pensions or other savings, most 401(k) participants appear to have insufficient savings. Data from other sources also show big gaps between savings and what people need, and the financial crisis has made things worse.

Felix Salmon notes this about the replacement of defined benefit pensions by 401(k) plans:

The more important answer is “I’m not an investor” — and neither are you. 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.

So your 401k is going to be made up of stocks, bonds, and cash, just like it always has been. Those asset classes are, it’s true, only a subset of the full range of investment opportunities available to sophisticated investors. But you’re not a sophisticated investor, so there’s no point in feeling aggrieved. It’s possible that you might be able to invest some of your 401k funds in Pimco’s Total Return Fund, which is an active and sophisticated investor, and which happily uses very sophisticated derivatives on a regular basis to get extra return and to make money in down markets. But generally speaking, people with 401k plans should stop at big-picture asset-allocation decisions: beyond that, they’re way out of their depth.

But I think this misses the larger picture: 401(k) plans were not invented to help middle-class (or upper-middle class) people retire. A tax attorney (not Michele Bachmann) who also happens, according to tax historians (really, such people exist), to be one of the legal architects of the 1968 Tax Reform Bill and who knows his way around this stuff once explained to me what 401(k) plans were all about.

401(k) plans were a way to give rich people, who were already going to invest that money anyway, a tax break for doing so. This was a common theme of the Carter/Reagan* era for you young’uns. They were also a way for employers to avoid having to support fixed benefit pensions and thereby reduce compensation (i.e., retirement benefits) to employees (cutting back on retirement benefits was another theme of the late 70s and 80s). The advocates of these plans never even thought about middle class workers. They–you–didn’t enter into the calculations at all.

And now we have an entire generation of ‘citizen investors’ who have been played for suckers:

Traditional or defined benefit pension plans, properly administered, increase economic efficiency, while the newer defined contribution plans have high costs whether done one at a time through Individual Retirement Accounts or in group plans like 401(k)s.

Efficiency means that more of the money workers contribute to their pensions – - money that could have been taken as cash wages today – - ends up in the pockets of retirees, not securities dealers, trustees and others who administer and invest the money. Compared to defined benefit pension plans, 401(k) plans are vastly more expensive in investing, administration and other costs.

Individually managed accounts like 401(k)s violate a basic tenet of economics – specialization increases economic gains. That is why the average investor makes much less than the market return, studies by Morningstar show.

“Much less than the market return.” “Vastly more expensive in investing, administration and other costs.”

There you have it in black and white. Played for suckers. Fixed benefit pensions would require money managers to earn their salaries, as opposed to extracting it from the middle class.

*While Carter has been portrayed as a liberal, he massively deregulated the economy and slashed taxes. Reagan simply went further.