Shrub's First Big Crisis

Retirement Funds Melt as Wall Street Stumbles

WASHINGTON, D.C., March 15—Sounding like a man caught in a house afire, President George W. Bush flailed as he tried to reassure the public yesterday that he still has great faith in the American economy.

That may not go far enough for the people worst hit by the precipitous stock market slide, workers whose retirement money is tied up in 401(k)s. According to reports cited by the Labor Department, which nominally oversees pension plans, some 22.3 million people have invested in more than 228,000 401(k)s. With assets in the neighborhood of $1 trillion, these plans come close to replacing standard pensions in much of the workforce. Most of them are controlled by huge insurance or mutual-fund companies.

Unlike a standard pension plan, which builds an independent portfolio of stocks and agrees to pay the retiree a set amount each month, 401(k) operators often invest in mutual funds they control and tie the payments to the rise and fall of Wall Street.

Free-market conservatives and Wall Street boosters have been arguing for years that all or part of a person's Social Security retirement fund should be invested in 401(k)-style plans, with the money eventually going into mutual funds. This would be one of the greatest windfalls in history for Wall Street. It's an idea Bush has stumped for again and again.

But in the cold light of a tumbling market, it doesn't look so sweet anymore.

One industry group that tracks mutual funds says the 14,000 funds in its database are down by 3.45 percent since the start of the year. Markets as a whole, of course, have plummeted much more than this. NASDAQ is down by 60 percent from its high, and the Dow Jones is off 14 percent.

What makes matters worse is that 401(k)s are completely unregulated. Unlike the standard old-fashioned pensions, they are not insured in any way. Nor are the companies that manage them. If the market collapses, it's your tough luck.

In addition, the 401(k)s have long been criticized for excessive management fees and other add-on charges. With the market on a roll, nobody thought twice about these costs, but in the current bear market, they'll make a difference. The Securities and Exchange Commission makes a piddling effort to track mutual-fund activities, and the Labor Department has just recently begun to make a stab at investigating the industry.

Bush, meanwhile, has shown little interest in backing off his plan to let Americans invest at least some of their retirement money rather than allowing the government to place payroll deductions automatically in Social Security. If the market keeps sliding, the commission he wants to have study the issue may not be able to block out the obvious dangers.

 
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