Your 401(k) Shouldn't Be an ATM The current economic strain has some people tapping into their 401(k) nest eggs to pay bills and buy groceries. But is that any way to manage your retirement fund? Author and economist Julianne Malveaux joins NPR's Tony Cox to talk about money management and sky-rocketing oil prices.
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Your 401(k) Shouldn't Be an ATM

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Your 401(k) Shouldn't Be an ATM

Your 401(k) Shouldn't Be an ATM

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TONY COX, host:

From NPR News, this is NEWS AND NOTES. I'm Tony Cox. We begin today with some important economic news. Last week for the very first time oil jumped past the $100 a barrel mark. Since then prices have dropped but only slightly. And now there's more news of instability in the Middle East with the Turkish incursion into northern Iraq. With Middle Eastern tensions controlling what we pay at the pump, the chance that the cost of oil will continue to rise seems all but inevitable.

But how will rising oil prices affect you, and what can we do about it? Meanwhile, the current economic strain is hitting some people pretty hard. Folks are tapping into those 401(k) nest eggs to pay bills and buy gas and groceries. But is that any way to manage your retirement fund? With me now to talk about oil prices and your 401(k), we've got Author and Economist Julianne Malveaux. She is president of Bennett College. Julianne, nice to talk to you as always.

Ms. JULIANNE MALVEAUX (Bennett College): Always a pleasure, Tony.

COX: Let's begin with this. Folks were waiting for oil to hit that $100 a barrel mark. It came and it went. My question is going to be how you thought folks felt the strain, because I did notice, Julianne, that my gas went up again in the last couple of weeks. Is that why?

Ms. MALVEAUX: That's one of the reasons why, of course. The oil that you paid for, the gas that you paid for was from oil that did not cost $100 a barrel. You know, the pipeline just doesn't move that quickly. But part of this market is about perceptions, and indeed consumers have been feeling that. You are one of many. Some people have begun to withdraw, to spend less, to drive less. And so this affects our economy and it does certainly reflect the concern about these high oil prices.

COX: How likely is it that we're going to see oil at that price again? Just in the NPR national report just before we came on, they indicated that gasoline had gone up 16 cents a gallon and you indicated that was before the $100 spike. So what's going to happen?

Ms. MALVEAUX: We're going to see higher gasoline prices, I think, through the summer. You know, we get a spike because people tend to drive in the summer. It's a peak time for consumption. So we're going to see prices go up. It will affect our economy, Tony, in a number of ways. If people chose to drive less, it impacts our tourism market. Someone who was going to go to a family reunion to Florida may chose to do something closer and that's going to affect several markets.

In addition, one of the things that I think is interesting is to see this summer the Olympics in Beijing, which really does signal the entry of China into the world market in a number of ways. That increased cost of living in China has an impact on gas prices in the United States. As more Chinese citizens choose to drive, it means there's more pressure and more competition for this resource, which is a scarce resource. It's a resource that the United States has not paid attention to since we first had a nibble at an energy crisis in 1973. And so we should fasten our seatbelts and basically say, why have we spent 35 years not dealing with issues of conservation?

COX: One last thing on gas prices before we go on to topic number two. And I didn't know this. I don't know whether you did or not, but apparently there was such a thing as winter gasoline and summer gasoline. And they have different mixtures and they also have different prices.

Ms. MALVEAUX: You know, Tony, I just learned that as well, and it raises all kinds of questions about the mix that we have and how environmentally friendly it is. But the fact is that we know we see these spikes in demand that are a function of seasonality. And so while winter gasoline may be different from summer gasoline, it's all pricy.

COX: Absolutely. In fact, that leads us into our next topic, Julianne. With the prices of homes falling and banks becoming more stingy about what they loan out and the price of gas as we've just mentioned, some folks are turning to another source of funds, their own retirement accounts. Is this ever a good idea?

Ms. MALVEAUX: It's never a good idea, but let's look at what's going on. For a very long time, American consumers had been using home equity as a way of stretching their consumption dollar. Indeed, debt was the economic driver in the early part of the 21st century, people borrowing against their homes, people using credit cards. But it was most home borrowing. People's houses had appreciated so much, they could pull money out and they could use that for college tuition, for a new car, for any number of things. Now they don't have that pot to pull on anymore. So where is their money? It's in their 401(k).

But this is a really bad deal because you're taking money out of your future to pay for your present. How are you going to replace that? We know that Social Security will provide some but not all of your retirement income. Those folks who are pulling into their 401(k)s are gambling their future against their present.

COX: But you're caught between a rock and a hard place, are you not, because if you don't pull that money out from someplace, and if the 401(k) is the only place where you have any money set aside, what choices do you have?

Ms. MALVEAUX: Well, Tony, it depends on what you're pulling it out for. If you're pulling it out to pay your mortgage because you think, you know, you've come on hard times, you need three months' worth of money to save your home, that's one thing. If you're pulling it out for Kibbles and Bits, which is goodies and stuff, which many of us can convince ourselves that we need, that's another issue. And even when you're pulling it out for the home loan, I encourage people to sit down and make sure they have 12 and 24 month plan. How long do you need to tap into this 401(k)? Is it a one time thing? Is it a permanent thing?

If you're tapping in there to provide your child's tuition, make your child take out a loan.

COX: You know, I don't know how many people, Julianne, know that when you take out that money before you are 59 and a half years old that you pay a penalty and a higher tax rate for that money. Is that correct?

Ms. MALVEAUX: That's exactly it, and that's another piece of it. I don't care what the exigency is. You can say that you're about to go bankrupt and you need the money. But you will have to pay a penalty if you're younger than 59 and a half and that money is now perceived as income. So whatever your income level is and whatever tax rate you're paying on your income, that's now income to you, because you've sheltered it tax free, so when you take it out, it's income.

COX: Speaking of retirement accounts, just last week the Supreme Court ruled that workers have a right to sue their employers if they think that their retirement accounts are being mismanaged. This is a very interesting situation, Julianne. What impact do you think this is going to have on folks who hold retirement accounts, first of all?

Ms. MALVEAUX: I think it raises awareness for consumers. Too many people have trusted that their employers would do the right thing. But can I spell Enron for you to talk about the ways that employers with 401(k)s did not do the right thing? All of those Enron people lost their retirement. And so workers righteously assume that the employers are going to do the best for them, and when they don't, they are, you know, they are out of luck.

Taking this to the Supreme Court ought to raise a question for everyone who has a 401(k) about how it's managed, because oftentimes you have some input in the management. You may have some input in the portfolio you have. You may be able to decide that you want to be aggressive or to be very conservative, and your administrator has to cooperate with you. When they don't, obviously this is why we have cases going to court.

But here's what we - we've transitioned, Tony, from a platform where workers could trust their employers and trust the government to take care of them in retirement to a platform where we all have to aggressively be informed about where our dollars are going and what we want our retirement to look like.

COX: Here's a question. How do you distinguish - if you hold a 401(k), let's say, and you are not happy necessarily with how your employer is investing your retirement fund, how do you distinguish between mismanagement of the fund that would make the company liable under this new ruling as opposed to the company simply making the wrong choices, maybe picking a bad investment or a losing investment? But does it necessarily rise to mismanagement if you lose money?

Ms. MALVEAUX: Not necessarily. But you want to look at who the winners are. You want to look at whether the company invested exclusively in its own stock, which is self-serving in many cases. Again, let's spell Enron. We want to look at any number of other things in terms of who was on the investment board, what kind of advice they got. It's certainly possible, especially in a volatile market, to lose money. And we've seen a very volatile market in the last three months. So you know, it's very possible to see a losing portfolio. What did people do about it and who are the winners in a losing portfolio?

COX: If a 401(k), given all of the vagaries that we've had in the economic sector of this country, is it still a good place to go to?

Ms. MALVEAUX: It's an important place to go to. It's a place where often there's an employee match so that if an employee and employer are matching, you're putting in seven percent, your employer is putting in seven percent, you're making more money than you've invested. You just have to be vigilant in and careful about the terms and conditions of your investment. We certainly could change public policy to make sure that people got investment match in other ways. But right now the way that you are able to leverage is through a 401(k); every worker doesn't have it but those who do should take advantage of it. But they should be clear and they should be clear with their, you know, human resource person how this money is being invested and what rights they have in changing the course and the path of that investment.

Most of these accounts come up once a year, where you can change the asset allocation and a lot of people get the notice you want to change it and they just ignore it. We've got to be more aggressive about investing in our futures.

COX: We have about a minute left. What do you do, Julianne Malveaux, if you're just not savvy financially? You get the statement. You just want to know if the money is going up or going down. You don't really care how it gets there. What do you do to keep yourself informed?

Ms. MALVEAUX: You read. You aggressively get yourself organized around these things. If necessary, you get a counselor or some advisor. Many of the banks and many of the insurance companies do provide people. Of course as a footnote there, oftentimes they are pushing their products., there are a number of websites that walk you through what you need to do. I tell people you've got to spend, you know, a day a month looking at your own money. You've got to spend a full day looking at what's going where, raising questions and then going about getting answers. If you don't feel comfortable doing it by yourself, get it with a team.

Lot's of people have investment clubs or personal finance clubs or financial literacy clubs. Any number of the banks have these financial literacy websites, Wachovia does, HSBC; Cardinal... and they will walk you through what you need to do.

COX: That's where we got to stop, Julianne. Our time is up. I appreciate it. Julianne Malveaux, author and economist. She's also president of Bennett College.

Ms. MALVEAUX: Thank you, Tony.

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