Dan Denning

The writing is on the wall for retirement assets held in conventional ways. A report last week in Business Week shows that the U.S. Feds have 401(k) assets in their sights.

“The U.S. Treasury and Labor Departments will ask for public comment as soon as next week on ways to promote the conversion of 401(k) savings and Individual Retirement Accounts into annuities or other steady payment streams, according to Assistant Labor Secretary Phyllis C. Borzi and Deputy Assistant Treasury Secretary Mark Iwry, who are spearheading the effort.

“Annuities generally guarantee income until the retiree’s death, and often that of a surviving spouse as well. They are designed to protect against the risk that retirees outlive their savings, a danger made clear by market losses suffered by older Americans over the last year, David Certner, legislative counsel for AARP, said in an interview.”

Now ostensibly, the plan to offer an annuity option for 401(k) plans will seem sensible. But don’t be fooled.

This is the beginning of a money grab by the Feds for the $3.6 trillion in assets held by U.S. 401(k)s. The Feds need that money to finance the deficit. This is where some of the money to fund the deficits may come from, answering a question we asked earlier in the week. What you can’t take, you’ll have to print.

But right now, the Feds can’t just take that 401(k) money. Well, they could. But it would crash stocks and infuriate the public, leading to some civic violence. What’s more, it would feel like theft as well as looking (and being) like it. So they have to dress the plan up as something that’s better for savers.

They’re trotting out the idea that a defined benefit pension plan is better than defined contribution plan (which is true, if it’s funded well). A defined benefit plan guarantees you income in your old age years. A defined contribution plan (what we have now) just guarantees money flows into the stock market (which is good for the financial services industry, but don’t guarantee you’ll have any money when you really need it later in life).

The U.S. Treasury Department and the Obama administration are exploring ways to encourage U.S. savers to buy more annuities or investment vehicles composed of “safe” assets. What constitutes safe? Why 30-year U.S. government bonds of course! Thus, the government can encourage people to buy what the Chinese and the Japanese and most other U.S. creditors don’t want to touch any longer.

The trouble with an annuity or 30-year bond is that you get crushed by inflation. In principle, it’s not different that a zero coupon bond. You get your nominal investment back upon redemption. But you are not compensated for inflation and your money is tied up, instead of working harder for you elsewhere.

It’s obvious what the Fed’s get out of this: a ready source of new funds to buy their bonds. This kicks the can of unsustainable deficit spending down the road a few months, or perhaps a few years. But it doesn’t change the fundamentally destructive path of U.S. fiscal policy.

What it does tell you is that mischief is afoot among the wealth stealers of the modern nation state? Faced with a failed funding model, they are beginning their cash grab. This takes the form of higher taxes. But the big bounty is the retirement savings of millions of Americans.

This solves the problem of having to sell the debt to foreign investors. And it solves the problem of having to make tough budget deficits. Just issue more debt and make the super funds buy it with your money.

If you think that’s balderdash or won’t happen, you’re being naïve. It won’t happen overnight. But it will happen gradually. It’s evolving towards that already. If they can’t get it through tax or royalty revenues, the tax posse will get it by any means necessary, which means your super assets are an obvious target.

Alarmist? Irresponsible? You decide. But we can see the evolution of this as clear as day, even if saying it in public is bad form or taboo. But now is the time to say the taboo things.

Dan Denning
The Daily Reckoning Australia

January 18, 2010

Dan Denning

Dan Denning is the author of 2005's best-selling The Bull Hunter. A specialist in small-cap stocks, Dan draws on his network of global contacts from his base in Melbourne, Australia, and is a frequent contributor to The Daily Reckoning Australia.

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  • http://N/A Geezer

    “Feds have 401(K) assets in their sites.” Strange. I thought my 401(k) assets were in various locations (sites) not controlled by the Feds. Your analysis is probably correct. However, “sights” is the word you wanted to use. You know. Like the “sights” on an AK-47.

  • http://www.thetexasring.com Linda Brady Traynham

    Dear Dan:

    I sat here for several minutes trying to find a way to say this that didn’t sound really dumb. I didn’t come up with one.

    I have said precisely what you did–although not, of course, as elegantly and authoritatively–several times in the last six or eight months and even in these very pages. I knew it was so. I knew my analysis was right. I watched as more clues appeared, and grabbed straws out of the wind as they went past.

    What sounds weird (at least to me) is that I find there is a difference between what I KNOW and what DAN DENNING said. I’m an analyst. I believe my mind. I KNEW the GRA was coming, and why, and what the effects will be.

    The difference is rather like that between a crisp little rectangle of pasteboard that says I have an appointment with Dr. X Tuesday and sitting in the dental chair come tomorrow. If my mind says it is so, it is…but when Dan Denning says it is so, then it is so on an entirely different level.

    Having been neither elegant nor eloquent, the best I can say is that when Cassandra says an earthquake is coming she believes it…but not the way she believes it when the earth starts to shake under her feet.

    Sounds like time to have a good, long talk with your CPA, people.


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  • letskeepitanonymous

    Way too over the top. Let us know when you find crushing inflation. People who relied upon modern portfolio theory the past ten years to guide them in their asset allocation have not done well. While I would be shocked if the Treasury did what Argentina did, I don’t think it will happen. Instead, what is wrong with offering what looks like an annuity? Goodness knows insurance companies offer the same thing right now.

    The author has confused forced conversions of plans with an alternative for people for which this option makes sense.

    I don’t work for the government or am looking to work for the government.

  • Grammar Nazi

    “A report last week in Business Week shows that the U.S. Feds have 401(k) assets in their sites.”

    That should be “sights,” not “sites.”

  • http://housingdoom.com/ John McLeod

    para #1, “sights” not “sites” — they don’t work **that** fast 😉

  • http://n/a CL

    On converting 401Ks to annuities ….

    Well, why not? The stock market is going to crash soon enough – when people start trying to pay their rent and grocery bills with their stock portfolios.

    Might as well help this along with a “managed” crash / conversion to annuities.

  • Tudorman

    The only question, once this “option” is made available, is how long before conversion will be mandatory upon retirement.

  • http://www.thetexasring.com Linda Brady Traynham

    Dear Let’s Keep It Anonymous:

    It is easy to tell you are a male and do not do the primary shopping for your household.: I would not be surprised by a combination of what our dear leader did in North Korea and what Hugo did to Venezuela–both of them recently. The name of the game is to devalue first but make it look like something else if you can, which neither Kim Jong Il nor Sr. Chavez managed.

    What is most wrong with the “annuity” is that it will not be voluntary. The second most deleterious factor is that you don’t want to be stuck on a fixed income in times of high inflation. Nothing good can come of letting the Feds play with your retirement income. I am sorry to have to tell you that the Sun was wrong and there is no Santa Clause, but my plan is to continue hoping for a dead heat between turning all cash other than pensions and a little walk around money into items of intrensic worth . It’s rather like not having to worry about mortgage rates because we don’t have a mortgage, and not worrying about losing our jobs because we’re retired and don’t have those, either. Bust of luck with your plan. Linda Brady Traynham

    We here in the Bar seek unusual investments because we don’t trust the standard choices. Let me guess….you own blue chips? You’re still brooding about not buying the IPO of Texas Instruments?. I’m not perfect. I took a real bath on my “wild cat” investment, but I will NEVER regret what it cost to get the IRA out of hock four years ago.

  • B.K. Foster

    Hello Gary,
    I had printed out Dan Denning’s 18 Jan 2010 article “Will the Feds Fund Deficits with 401(k)s?” for my wife to read. I did not save the e-mail, though, and my wife saw the Shooter’s question regarding cashing out his IRA. Unfortunately, I don’t have your response. Would you be so kind to forward your response, for my wife to read?
    Thanks very much,
    B.K. Foster

    P.S. Enjoy your newsletter and guest articles.

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