What Few Know About 401(k)s & Wall Street

This mission brief will expose the Wall Street myth most Americans have been conditioned to believe. 401(k)s and a record high stock market will no longer be viewed the same. In five minutes or less you will learn more about 401(k) truths than most Americans will ever know.

Since the early 1980s, Wall Street financial engineers have crafted a system that depends not on business innovation or manufacturing growth but on a steady influx of Americans’ hard-earned money. It largely began with a tax code provision that would become the 401(k)—a simple retirement savings tool that quickly morphed into one of the most impactful financial vehicles in American history. The 401(k) is responsible for shifting billions of dollars from American workers to Wall Street’s bottom line.

The Birth of the 401(k) and Wall Street’s Rise to Power

In 1978, the 401(k) plan emerged as a provision in the tax code. By the early 1980s, companies found that moving employees from traditional pensions—where the employer bears the investment risk—to 401(k) plans allowed them to cut costs and shift financial responsibility to the individual. This philosophy certainly made sense, but it produced several negative consequences nobody mentions, especially Wall Street insiders.

In 1981, the IRS made key changes that altered the game. The new rules allowed employees to contribute tax-deferred income directly into their 401(k) accounts through payroll deductions, making it easier than ever to put money into the stock market. Companies across America quickly pivoted from pensions to 401(k) plans. Every two weeks Americans began sending fresh dollars directly to the Wall Street casinos, and nobody was happier than investment banksters.

This chart from Macrotrends illustrates a decades long ascent since the implementation of the 401(k).

America only had so much production capacity and so many companies; however, Wall Street and investment banks now had a pipeline of American money flowing to them every two weeks. Turning the money away would be foolish since Wall Street insiders and investment banksters earn fees based on assets under management.

Wall Street could not funnel all this fresh cash into producing company stocks or soon the company valuations would be far above the underlying company’s ability to produce goods and services.

Alongside these rule changes, the Reagan administration’s deregulation policies in the 1980s and Alan Greenspan’s tenure as Fed chairman in the 1990s allowed financial institutions to create complex financial products known as derivatives. Banks and investment firms were granted unprecedented freedom to trade these derivatives with the growing pool of 401(k) funds. Mutual funds exploded in popularity during this time.

• B.O.L.O.: Derivatives are not based on the production of anything real; instead, they are paper instruments financial engineers develop to bet against other paper instruments. This allows speculation to grow wild. Mutual funds are appealing for diversification; however, all the components within a mutual fund are much more complex to track and understand than single stock ownership. It doesn’t take much thought to realize why Wall Street insiders love the fog of complexity. With enough layers, Wall Street could now confiscate all the earnings Americans would voluntarily allow.

Key Rule Changes that Supercharged the Trend

Over time, a series of regulatory changes made 401(k) contributions even easier, accelerating this trend. Here are some key milestones:

• 1986: Congress revised tax codes to increase employee participation in 401(k)s by allowing automatic payroll deductions.
• 2001: The Economic Growth and Tax Relief Reconciliation Act raised the amount employees could contribute, pushing more money toward Wall Street.
• 2006: The Pension Protection Act allowed companies to automatically enroll employees in 401(k) plans. Workers could opt out, but automatic enrollment meant a huge influx of capital flowing into stocks—most without active choice or any understanding from workers.

Each change was promoted as empowering Americans to save for retirement. But in practice, they are funneling an ever-growing pipeline of Americans’ earnings to Wall Street investment firms, driving up stock prices and creating unstable financial leverage via engineered financial instruments.

• B.O.L.O.: Starting in 2025, rules from the SECURE ACT will require all new 401(k) and 403(b) plans to implement automatic enrollment and automatic escalation. The rule mandates that the contribution rate for employees will start at 3% and increase annually until reaching at least 10%.

Currently, the total market capitalization of the U.S. stock market exceeds the U.S. Gross Domestic Product (GDP). Here are the approximate figures:

• U.S. Stock Market Capitalization: $46 trillion (as of early 2024)
• U.S. GDP: $27 trillion

Think of all the businesses & activities contributing to GDP that are not involved with the market. Then consider the total market capitalization (price) of the U.S. stock market is nearly 1.7 times the size of the entire U.S. GDP! This ratio is often referred to as the "Buffett Indicator". Warren Buffet says:

• Below 80% of GDP: Market may be undervalued.
• 100% of GDP: Fairly valued.
• Above 120% of GDP: Market is overvalued.

This Federal Reserve chart illustrates this steady increase since the inception of the 401(k).

Most Americans agree there is a massive wealth divide in this country. The cause of the wealth divide is where the debate resides. I study financial history often and believe many ingredients have contributed to the problem, but a major ingredient is the 401(k) or what I call the 401 (confiscation).

Look at the increases in American stock ownership and notice how it parallels the advent and regulatory changes of the 401(k).

• 1981: Approximately 10% of Americans owned stock.
• 1990: About 25% of Americans had stock holdings, spurred by widespread adoption of 401(k)s.
• 2000: Over 50% of households owned stock, with most holdings in retirement accounts.
• 2020: Just over 55% of Americans owned stock, yet the richest 10% held 89% of the stock market’s total value.

Baby Boomers and the Soaring Stock Market: Who Got the Rewards?

Largely thanks to 401(k) contributions, Wall Street insiders made billions while Baby Boomers who filled the workforce in the 1980s saw their retirement accounts balloon. Additionally, boomers were able to purchase their early primary homes before the derivative markets on Wall Street artificially increased home prices.

Boomers, now sitting on larger balance sheets, are using this newfound wealth to buy second homes or vacation properties which places stress on new homebuyers. Today, home affordability is at all-time lows dating back to at least the 1940s.

The 401(k): A Captive Audience for Wall Street

By design, 401(k) plans pipe money directly from paychecks to Wall Street, where firms can use it for risky trading, executive bonuses, and stock buybacks.

The irony is hard to miss. What started as a tax incentive has become a form of financial captivity. Workers pipe money from their paychecks with little control over where their money goes or how it’s invested.

In his AMAZING book Tax Free Wealth (Third Edition), C.P.A. Tom Wheelwright explains why Americans are being lied to when told government sponsored retirement plans will allow them to be taxed at lower rates in the future.

It’s a system where Main Street funds Wall Street’s massive rewards today while Americans are told to stay the course until they have “enough” to retire decades later. Meanwhile, Wall Street allocates massive capital to influence politicians who ensure the music keeps playing while the same politicians use the resulting social division (from the wealth divide) to continually solicit votes.

The 401(k) system has turned ordinary Americans into captive participants.

I say “captive” because Americans become addicted to the image of wealth on paper but if they try to cash in the paper wealth for real wealth, they are heavily penalized and taxed. Meanwhile, Wall Street collects the massive fees Americans pay them every month and use it to improve their quality of life today, not decades from now.

In this video clip from the movie Wolf of Wallstreet, (watch from 1:20-3:05) Mathew McConaughey (playing a boss) accurately describes the system in less than two minutes. (CAUTION: the video clip has a lot of profanity).

Other factors, beyond real economic output, have resulted in an inflated stock market and a growing wealth divide. Another key culprit is deficit spending which I’ll discuss in a future mission brief.

Other factors, beyond real economic output, have resulted in an inflated stock market and a growing wealth divide. Another key culprit is deficit spending which I’ll discuss in a future mission brief.

If you think you may be interested in hearing about future opportunities someday, click here and I'll send you an email explaining why our investor questionnaire and establishing a pre-existing relationship matters a TON. I'll also explain why SEC rules often prevent you from hearing about opportunities without completing these steps.

The email will also include a short video of our Securities Attorney, Mauricio Rauld going over why this matters!

Please note, we do not have any offerings in the works so this is not an invitation to participate in any offering.

Until next time...Team's UP!