The 401k system is a generational scam as it exists. Yet before the Baby Boomers start to retire, your investors are already taking huge losses.

U.S. Representative George Miller, a California Democrat, held a hearing in February to highlight what he described as the shortcomings of 401(k) plans. Miller, chairman of the House Education and Labor Committee, called the plans “little more than a high-stakes crapshoot.”

Alicia Munnell, director of the Boston College center, testified about the harm the decline in stock prices had done to account balances. The center’s data, which is awaiting publication, was an attempt to quantify the extent of the damage.

Boston College’s researchers made a series of assumptions to generate return data for their typical investor. They started with a 30-year-old worker who on March 31, 1999, earned $36,000, then the median salary for a head of household of that age covered under a 401(k) plan, according to the U.S. Bureau of Labor Statistics. The base salary was increased 3.3 percent a year, roughly in line with U.S. wage growth.

The researchers also assumed the investor consistently contributed 6 percent of salary to the plan and that the employer added the equivalent of 3 percent, or $38,406 over the decade. Retirement-plan fees weren’t factored into returns.

Two Scenarios

Under one scenario, the investor put all the money into the S&P 500 Total Return Index. In the other, half went into stocks and half into bonds, a blend of government and corporate bond indexes.

The stocks-only investor wound up with $28,552, or $9,854 less than he and his employer contributed. The worker with a mix of stocks and bonds had $36,920, or $1,486 less than the contribution total.

Over the 10-year period, stocks lost 26 percent of their value, while bonds rose 62 percent, according to the center’s analysis.

“With a start like that, it is going to take young people a long time to accumulate meaningful balances,” Boston College’s Munnell said.

There are several things to be drawn from this article.

#1) Remember that 401k's are pre-tax money, thus they overstate what the investors are actually going to get out of these plans. (think of taxes paid on any income above social security benefits)

#2) Think what these investors could have done if they had all opened CD's at a local credit union instead? Or a treasury bond? Or even gold and silver? More money with no stress.

#3) The most important piece of information to take away from this article is that it doesn't count the fees on these 401k plans.
Fees generally run in the range of 2% a year. That doesn't sound like much, but when it compounds it becomes a monster.

I've said it before: this downturn won't be over until the average citizen stops sending their money to Wall Street.