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Guest Editorial

How Congress, Banks and Wall Street Ruined Your 401k Plan

By Russell McAlmond. Russ is President and Chief Investment Officer of Evergreen Capital Management Inc., an Oregon registered investment advisor. He works with individuals, companies, banks and charities to provide the best in financial and estate planning advice. He is a fee-only advisor and accepts no commissions for any advice or recommendation he makes. He has been named as one of the best Financial Planners in the country by independent Consumers Research Council based in Washington, D.C. and by his peers in Brainstorm NW magazine. You may reach him at 503.223.8880 or at russ@evergreencap.com.


As a financial advisor with over twenty years of experience, I have seen markets go up and down many times and have assisted my clients in getting through them. We are prepared for a normal economic cycle where the economy overheats and then needs to cool off through a recession before picking back up again. We are primed to advise our clients through various charts and graphs how these cycles work and why they need to stay invested in equities in their 401k plans for a solid retirement. We are ready to console and counsel our clients through market downturns. We were not ready for this.

Due to a perfect storm of financial incompetence created by Congress, banks, and Wall Street our clients are going through an economic downturn that is destroying their retirement. This is not a normal economic cycle. This is a credit market fiasco that was caused by appalling decisions made in governmental monetary policy, Fannie Mae and Freddie Mac Congressional oversight, loan creation with no accountability, and by Wall Street derivative designs that took delight in how complex and over-leveraged they could make their derivatives. They were all playing with taxpayers money, depositors money, and 401k plan money as if it were a board game with no real economic consequences. We are seeing the economic consequences now.

Counseling 401k participants into staying in equities through normal market cycles is good retirement planning advice. Counseling them to stay in equities when the parties mentioned above have mismanaged the entire economic system is folly. Advising your clients to stay in equities through this downturn would be similar to advising your clients to stay in Enron stock after the mismanagement of that company. The best advice you could have given an Enron shareholder would have been to sell and go to cash, the earlier the better. The same advice would have been best here as well.

The market is down 52% and may still drop more. How much do we have to pay for mistakes that we never made? Investors did not cause this. They put their faith in the system that was supposed to invest their money prudently. The system has failed them. Bankers have failed them. Congress has failed them. Wall Street has failed them. Nonetheless, they are paying the price as they watch their 401k plans dwindle before their eyes. Hard-earned money that took years to accumulate is gone to pay for these mistakes. Their only mistake was trusting the system.

During the great depression, stocks lost 90% of their value and unemployment went up to 25%. As most financial historians know, governmental policy and speculation also exacerbated that economic downturn and created tremendous hardships on ordinary Americans. I do not believe we will experience that kind of economic depression but we have already paid a terrible price which can still become worse.

Wall Street's propaganda that if we trust them with our money they will invest it wisely turns out to be just that. We do have one of the best economic systems in the world but, in this case, our trust has been abused. We have also done a tremendous disservice to our 401k participants in advising them to ride this market all the way down. We should have recognized that this was not a normal economic recession but a mismanagement of the financial system by those who believe they are so much smarter than the rest of us. They broke the system and we should not have let our clients pay the price.

Congress, the banks, and Wall Street need to earn our trust again. My clients are in almost all cash now and we will not change that position until we know that any investments we make will not go to imprudent lending or unregulated derivatives. Stocks can still be excellent long-term investments but they need a competent and stable financial system that supports them. Wall Street needs to understand that the trillions of dollars 401k participants give them to invest is not money to play with but the economic future of each hard-working American. That money needs to be given the respect it deserves by investing prudently, not speculatively.


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