Not Leonardo DiCaprio, who played the "Wolf of Wall Street" on TV, but real bankers who aren't so handsome and charming.

Not Leonardo DiCaprio, who played the "Wolf of Wall Street" on TV, but real bankers who aren't so handsome and charming.

It is a tenet of American life that the only way to save for retirement is through a so-called 401(k). We route a "defined contribution" from each paycheck into a tax-deferred 401(k) account and, if we're lucky, our employer matches a portion of that contribution. It's a bare-knuckle, every-man-for-himself approach to retirement savings. 

But it wasn't always like this. In fact, it's been like this for less than 40 years. Before that, there was no such thing as a 401(k). Employees didn't "save for retirement"—their employers did it for them through "defined benefit" pensions. Employers rewarded loyal employees with promises to pay a certain amount through retirement. It's what fueled the massive post-war middle-class expansion and allowed hundreds of thousands of World War II veterans to retire comfortably in sunny California.

The pensions worked because sophisticated companies worked with sophisticated money managers to securely invest their pension portfolios in long-term income funds. The money grew reasonably and predictably and paid out as expected. Occasionally, a pension fund would get into trouble by promising too much, but state pension guaranty funds were there to pay the losses and protect retirees. It was a fairly decent system that kept investments safe and reasonable.

It was a huge problem for Wall Street. Pensions are boring. They require slow and steady growth over long periods of time—not the type of investing that makes, say, 30-something Wharton graduates hundreds of millions of dollars. They left way too much money in boring, predictable long-term income funds and not enough to trade in-and-out of fast moving—and commission generating—high-risk growth stocks.

So Wall Street came up with a fix. Under the guise of individual responsibility, it lobbied Congress to pass the Revenue Act of 1978, which created Internal Revenue Code Section 401(k). Over the next few years, most of corporate America shifted their employees onto 401(k) "defined contribution" plans—taking the responsibility for retirement savings out of the hands of sophisticated employers and transferring it to lunchbox toting workers who were much less suited to do the job. 

Enter the "wolfs" of Wall Street. Soon, every bank on Wall Street was paying commissioned salesmen to sell high-risk, high-growth stock funds to ordinary Americans who needed nothing more than a long-term, income-generating, slow-growth fund.

But the money was insane. By 1987—the amount of cash in the stock market (as measured by the Dow Jones Industrial Average) had tripled. Ten years later, in 1997, it had increased 800%. Wall Street money managers were killing it. And they were just getting started.

 Exponential Growth: The Dow Jones Industrial Average since 1975.

Exponential Growth: The Dow Jones Industrial Average since 1975.

By 1999, the Dow—which had hovered below 1,000 for the better part of a century—hit 10,000 for the first time. After that, it almost touched 12,000 before—disaster. All the high-risk, fast-growth stock funds that had been sucking in money from 401(k) funds started a series of never-ending bubbles and crashes. The staid and boring stock market that had fueled a generation of slow and predictable growth had become a torrent of booms and busts.

The biggest of which was, of course, 2008's "Great Recession." Wall Street mixed an intoxicating cocktail of high-risk, get-rich-quick inventions called the Collateralized Debt Obligation and Mortgage-Backed Security to make huge loans to ordinary Americans who could never repay them. That was OK of course, because Wall Street would just lie about the loans and sell them back to you-know-who—investors in the stock market. When it all fell apart, the Dow—and all those 401(k)'s invested along with it—lost almost half its value in less than a year. And retirees were left holding the bag. 

There is—and was—a better way. Invest in yourself. Pay off your debt. Don't spend more than you make. Save at least 20% of your pay. And, if you want, invest your savings in a low-cost, slow-and-steady growth fund. Just don't give your money to Leonardo DiCaprio.