Comments on Is the 401k to Blame?TypePad2009-04-20T16:36:31ZNAhttps://www.freemoneyfinance.com/tag:typepad.com,2003:https://www.freemoneyfinance.com/2009/04/is-the-401k-to-blame/comments/atom.xml/kitty commented on 'Is the 401k to Blame?'tag:typepad.com,2003:6a00d83451bcbd69e20115705f7a7e970b2009-04-30T03:28:17Z2009-04-30T03:28:17Zkitty@Pop - I am curious, are you still shorting now? buying? on the sidelines?<p>@Pop - I am curious, are you still shorting now? buying? on the sidelines?</p>kitty commented on 'Is the 401k to Blame?'tag:typepad.com,2003:6a00d83451bcbd69e20115705f7a0a970b2009-04-30T03:26:53Z2009-04-30T03:26:53ZkittyI agree with Pop. Many of us actually like the freedom and don't want to give it up. A friend...<p>I agree with Pop.</p>
<p>Many of us actually like the freedom and don't want to give it up. A friend of mine took all his money out of the stock market and into stable value early in 2008 - he wasn't even a whiz, he just thought "I don't like the way it smells" - and he did a whole lot better than any "target retirement fund" or most money managers. Remember - Madoff was a manager too, and many people believed him. Personally, I'd rather trust myself and blame myself for stupidity.</p>
<p>I wasn't as smart, but at least I kept somewhere around 45% of my 401K outside of the market - I am 49, by the way. As a result, my investment losses from the highest point some time in 2007 till now are around 18% -- a little over 20% for 2008, and up this year - thanks to the recent rally as well as some changes I made over last few months. It is still a large amount, and it still may fall which is why I am watching the economy and am ready to make changes as needed. Yes, I may make mistakes, and I will live with consequences.</p>
<p>I am blaming my own greed for not getting out of the market, not 401K in general. I don't believe people lost money because they didn't know that they were supposed to keep less in the market as they get closer to retirement. A few people - maybe, but in most cases it was plain greed. My friend is making money, I am smarter than my friend, so I want to make money too. </p>
<p>RA - if you don't understand an investment, don't invest. People who don't understand stock market, can keep all their money in stable value. Stable value is easy to understand. </p>
<p>As to old retirement funds -- they were great (my employer had one, it was frozen in 2008), but they were very expensive for employers. They aren't coming back.</p>LotharBot commented on 'Is the 401k to Blame?'tag:typepad.com,2003:6a00d83451bcbd69e20115705ee678970b2009-04-29T23:41:35Z2009-04-29T23:41:35ZLotharBotPeople expect 401k's to magically take care of future financial needs without a thought. This makes them dangerous. Unlike the...<p>People expect 401k's to magically take care of future financial needs without a thought. This makes them dangerous. Unlike the "guaranteed" (heh) value of pensions or social security, a 401k allows you to make decisions about risk and reward -- which means people who don't take the time to manage risks will generally not see good rewards. But it also means that people who DO manage their risks will do very well for themselves. The 401k isn't "bad", it's just powerful, and misuse of a powerful tool is the real danger.</p>
<p>Like Rick said, those nearing retirement with the recommended stock-bond balance might have to delay retirement just a little bit, but they're not looking at a deal-breaker. And when the economy recovers, a well-balanced portfolio will get back some of that loss. It's those with undersized and/or poorly balanced portfolios -- who expect things to work by magic and who don't take personal responsibility to manage their risk -- who are in trouble.</p>Rick commented on 'Is the 401k to Blame?'tag:typepad.com,2003:6a00d83451bcbd69e201156f66feb5970c2009-04-29T15:12:01Z2009-04-29T15:12:01ZRickTo answer Sarah's question, the most common recommended portfolio for a 55-year-old is 55% bonds, 45% stocks. If the bond...<p>To answer Sarah's question, the most common recommended portfolio for a 55-year-old is 55% bonds, 45% stocks. If the bond portion returned 4%, and the stock portion lost 30%, the overall loss would be 11.3%. Hardly a dealbreaker for retirement. You'd probably have to work an extra year or two. So yes, such a portfolio would not have a significant effect on one's lifestyle in retirement.</p>Pop commented on 'Is the 401k to Blame?'tag:typepad.com,2003:6a00d83451bcbd69e201156f66e569970c2009-04-29T14:34:45Z2009-04-29T14:34:45ZPop"Is *your* portfolio structured so that a loss of that magnitude won't have a significant effect on your lifestyle in...<p>"Is *your* portfolio structured so that a loss of that magnitude won't have a significant effect on your lifestyle in retirement?"</p>
<p>Actually, I was out of the market and shorting it for the last 18 months. See, I don't dwell on how the government can rescue me, I help myself to achieve my goals- it's called personal responsibility, something many of the posters on this blog seem to know nothing about. I guess that's what separates me from those of you who look to the government to help protect them from the evil corporations and evil Wall Street. </p>
<p>What word do you prefer I use to describe you all? Progressives? Intellectuals? LOL!! </p>
<p>Can you at least admit that your point about "everything dropping in tandem" was completely wrong? Probably not.<br />
</p>Param commented on 'Is the 401k to Blame?'tag:typepad.com,2003:6a00d83451bcbd69e201156f65f362970c2009-04-29T04:56:30Z2009-04-29T04:56:30ZParamI think the govt's step to mandate 401K contribution via automatic enrolment is very good & using target retirement fund...<p>I think the govt's step to mandate 401K contribution via automatic enrolment is very good & using target retirement fund as default is quite acceptable. The one extra step they MUST take is to ensure that all companies can select ONLY Vanguard. This would put an end to all the issues that plague the system - which is lack of transparency, ridiculous fees and unwanted choices, thanks to the fund industry...</p>tom commented on 'Is the 401k to Blame?'tag:typepad.com,2003:6a00d83451bcbd69e201156f65371d970c2009-04-29T00:10:58Z2009-04-29T00:10:58Ztom401(k)s do need improvement, but they are a CHOICE for employees. An employee does not have to invest in a...<p>401(k)s do need improvement, but they are a CHOICE for employees. An employee does not have to invest in a 401(k), it's your choice. </p>
<p>I completely agree with FMF's first point. If you don't understand asset allocation then you have no business investing. What I don't fully understand is if you're putting in 10% of your income into a 401(k), why are you not buying a $10 book on asset allocation? It's absurd and your responsibility.</p>
<p>Also, 401(k) plans are REQUIRED by law to show the fees associated with each investment option. If you cannot find it, ASK for your fee matrix! If you don't see any low cost fees, start emailing HR, and continue to do so until you get a good answer. On the extreme side, some employees are suing for lower cost options and more transparency. </p>
<p>Any money you invest is YOUR responsibility, not your company's nor your 401(k) provider. If you still cannot figure anything out by reading a books, print off all the materials, and take them to a fee-only financial adviser and pay $200 for a couple hours to find a good asset allocation plan.<br />
</p>Sarah commented on 'Is the 401k to Blame?'tag:typepad.com,2003:6a00d83451bcbd69e20115705b103b970b2009-04-28T21:52:48Z2009-04-28T21:52:48ZSarahPop, are you under the impression that the use of the word "socialist" automatically wins you the argument? It's not...<p>Pop, are you under the impression that the use of the word "socialist" automatically wins you the argument? It's not a scare-word for grownups, even if you happen to think a pack of them are lurking under your bed.</p>
<p>Here's a very simple exercise for you. What is the most common "rule of thumb" asset allocation for a 55-year-old? And what is the overall impact on a portfolio if the percentage allocated to stocks has a thirty percent drop in value? Is *your* portfolio structured so that a loss of that magnitude won't have a significant effect on your lifestyle in retirement? </p>
<p>Extra credit if you can somehow restrain yourself from screaming "Socialist!!!" during your answer. (Hint: there's no relevance.)</p>Pop commented on 'Is the 401k to Blame?'tag:typepad.com,2003:6a00d83451bcbd69e20115705b03f5970b2009-04-28T21:27:04Z2009-04-28T21:27:04ZPop"If you let people put 100% of their money in high risk emerging market growth stocks when they are 64...<p>"If you let people put 100% of their money in high risk emerging market growth stocks when they are 64 years old then you're allowing people to fail. And people DO make stupid mistakes on their accounts."</p>
<p>"I do think they give people too much freedom and that puts the risk on the side of the employee."</p>
<p>I never realized this blog attracted so many socialists. Must be the same people who go ballistic when anyone questions the sanity of spending $5000 on an animal.<br />
</p>Pop commented on 'Is the 401k to Blame?'tag:typepad.com,2003:6a00d83451bcbd69e20115705b029a970b2009-04-28T21:23:57Z2009-04-28T21:23:57ZPop"It's ridiculous to think that the typical worker is going to be a whiz at investing. They have generally followed...<p>"It's ridiculous to think that the typical worker is going to be a whiz at investing. They have generally followed the advice given by the financial industry and press and it has been poor. It's just a bad concept for most."</p>
<p>Who said anyone has to be a whiz? Invest 100% in index funds till the age of 50, then convert more and more to fixed income. Pretty simple to follow. Your recommendations sound great, if you like socialism. I don't.<br />
</p>rwh commented on 'Is the 401k to Blame?'tag:typepad.com,2003:6a00d83451bcbd69e20115705aa577970b2009-04-28T20:57:24Z2009-04-28T20:57:24ZrwhJim: How much of the difference do you think is due to a balanced portfolio vs 100% in the S&P...<p>Jim:</p>
<p>How much of the difference do you think is due to a balanced portfolio vs 100% in the S&P 500?</p>
<p>I'm afraid to look at what my total return over the period would be. It probably is closer to 5% than 11%. My allocation over that time probably averaged 50/50.</p>Jim commented on 'Is the 401k to Blame?'tag:typepad.com,2003:6a00d83451bcbd69e201156f644caf970c2009-04-28T20:43:43Z2009-04-28T20:43:43ZJimhttp://freeby50.blogspot.comToo much freedom and too little investing knowledge/skill is a BIG problem for 401k's. Thats just the way 401k's are...<p>Too much freedom and too little investing knowledge/skill is a BIG problem for 401k's. Thats just the way 401k's are setup. If you let people put 100% of their money in high risk emerging market growth stocks when they are 64 years old then you're allowing people to fail. And people DO make stupid mistakes on their accounts. </p>
<p><br />
<a href="http://www.mymoneyblog.com/archives/2009/02/401k-failures-over-last-20-years-the-average-investor-did-worse-than-cash.html" rel="nofollow">http://www.mymoneyblog.com/archives/2009/02/401k-failures-over-last-20-years-the-average-investor-did-worse-than-cash.html</a></p>
<p>From 1988 to 2007 the average 401k investor had less than 5% return and underperformed t-bills while in the same period the S&P500 was up 11% annualized. SO the average investor is getting a BAD return in their 401ks and this is largely due to poor or overly risky investment choices.</p>
<p><br />
The fees and lack of transparency on the fees is a BIG problem of the 401k's. The bit about the lobbyist not knowing if the industry opposes disclosing fees was comical. He referred to their "comfort zone". Gee I don't want the financial companies to get out of their "comfort zone" by having to tell me what they're charging me on my retirement account. LOL</p>
<p><br />
401k's aren't all bad of course. They could use some improvement. I do think they give people too much freedom and that puts the risk on the side of the employee. There should certainly be transparency on the fees.</p>
<p>I thought the 60 Minutes report was fine.<br />
</p>RA commented on 'Is the 401k to Blame?'tag:typepad.com,2003:6a00d83451bcbd69e201156f64417c970c2009-04-28T20:20:16Z2009-04-28T20:20:16ZRA"Well, then maybe the average person has to start acting like an adult at some point." A fairly dumb argument....<p>"Well, then maybe the average person has to start acting like an adult at some point."</p>
<p>A fairly dumb argument. It's ridiculous to think that the typical worker is going to be a whiz at investing. They have generally followed the advice given by the financial industry and press and it has been poor. It's just a bad concept for most.</p>
<p>A better option would be to have the plan assets professionally managed similar to a pension fund with very low expenses and do away with mutual funds altogether. This would save the average employee six figures over the course of a career.</p>Foobarista commented on 'Is the 401k to Blame?'tag:typepad.com,2003:6a00d83451bcbd69e20115705a26d4970b2009-04-28T18:09:55Z2009-04-28T18:09:55ZFoobaristaThere are some problems with 401Ks, but they are easily fixed. For small companies, they are hard to offer and...<p>There are some problems with 401Ks, but they are easily fixed. For small companies, they are hard to offer and many small companies end up with awful 401K plan investment choices. I've been in several startups where the money market fund was the fund that sucked the least; one company I was in managed to have four out of five funds lose money from 1996-1999!</p>
<p>Personally, I'd make 401Ks more like IRAs, where the money is simply transferred every pay period into a self-managed brokerage account.</p>
<p>The idea of "bringing back defined-benefit pensions" won't work since corporations have shorter lives and people have longer ones than in the past.</p>
<p>Three changes I'd make:</p>
<p>o Get rid of "vesting" - company matches should be in cash - not stock - and should be available immediately.</p>
<p>o If a 401K is available, it should be available as soon as a new employee is hired.</p>
<p>o There should be no percentage-based contribution limits other than the legal contribution maximum. There are many tax situations where a relatively low-salaried employee may want to put nearly all their income in the 401K to save taxes and maximize retirement savings (ie, they're married to someone who makes a high salary).</p>Corporate Barbarian commented on 'Is the 401k to Blame?'tag:typepad.com,2003:6a00d83451bcbd69e201156f63ea5f970c2009-04-28T18:03:16Z2009-04-28T18:03:16ZCorporate Barbarianhttp://www.corporatebarbarian.comFor all of the drawbacks associated with 401K plans, I haven't changed my investment strategy. I'm still contributing the same...<p>For all of the drawbacks associated with 401K plans, I haven't changed my investment strategy. I'm still contributing the same percentage, and hope that I'm bargain shopping right now. I've got a long way to go to retirement, and I'll shift my asset allocation as I get closer to retirement. I think a responsible investor can still make the most of a 401K, and an irresponsible investor will pay the price for his ignorance, no matter what investment vehicle they choose.</p>Pop commented on 'Is the 401k to Blame?'tag:typepad.com,2003:6a00d83451bcbd69e201156f63d19d970c2009-04-28T17:33:00Z2009-04-28T17:33:00ZPop"I think the basic problem here is that you cannot build a retirement on an asset whose value can swing...<p>"I think the basic problem here is that you cannot build a retirement on an asset whose value can swing so dramatically in a short period of time. Shifting to a more conservative asset allocation over time *can* help, but it can't save you from a collapse like the past year's, when assets that should be essentially independent are falling in tandem."</p>
<p>How much have the bond or stable value funds (which every 401(k) I've ever seen have as one or more of the available investment choices) dropped in the past year?</p>
<p>Answer: they're UP!</p>Pop commented on 'Is the 401k to Blame?'tag:typepad.com,2003:6a00d83451bcbd69e201156f63ce7e970c2009-04-28T17:28:53Z2009-04-28T17:28:53ZPop"The average person is not able to successfully invest on their own and has no interest in it. They wind...<p>"The average person is not able to successfully invest on their own and has no interest in it. They wind up being over invested in stocks and then suffer the consequences as those in the story did. That's the part you don't understand."</p>
<p>Well, then maybe the average person has to start acting like an adult at some point.</p>rwh commented on 'Is the 401k to Blame?'tag:typepad.com,2003:6a00d83451bcbd69e201156f63c9c7970c2009-04-28T17:19:23Z2009-04-28T17:19:23ZrwhI think the biggest drawback to the 401k is not enough money is contributed. According to: http://www.401khelpcenter.com/benchmarking.html the average company...<p>I think the biggest drawback to the 401k is not enough money is contributed. According to:</p>
<p><a href="http://www.401khelpcenter.com/benchmarking.html" rel="nofollow">http://www.401khelpcenter.com/benchmarking.html</a></p>
<p>the average company only contributes 3% of an employee's salary and the employees themselves only contribute an average of 5.4% (if they are "non-highly compensated") and 6.9% if they are "highly compensated". That adds up to 8.4% - 9.9%. Along with this, only 77% of eligible employees actually have any balance at all in their 401k.</p>
<p>And according to:</p>
<p><a href="http://hr.blr.com/news.aspx?id=3621" rel="nofollow">http://hr.blr.com/news.aspx?id=3621</a></p>
<p>Only 61% of employees contribute >5% of their pretax pay to a 401k and only 21% contribute >10%. And older participants contribute a higher % of their pretax income than younger participants, intuitive I know, but just the opposite of what needs to be done as it is well known that getting an early start can result in significantly greater value at retirement.</p>
<p>I think forcing people to enroll is a good idea. And I think incentives to get young people to contribute more at the beginning of their careers would be good policy.</p>RA commented on 'Is the 401k to Blame?'tag:typepad.com,2003:6a00d83451bcbd69e201157059feeb970b2009-04-28T17:17:40Z2009-04-28T17:17:40ZRAAnother major problem with 401ks is that the employer is just as clueless as the employee in providing a plan....<p>Another major problem with 401ks is that the employer is just as clueless as the employee in providing a plan. So most of the plans are terrible. They choose a plan that saves them money but costs their employees a ton of money. That's a really bad set up for a retirement plan.</p>RA commented on 'Is the 401k to Blame?'tag:typepad.com,2003:6a00d83451bcbd69e201157059f66b970b2009-04-28T17:01:21Z2009-04-28T17:01:21ZRAI thought it was a pretty good story and was on the mark. I think the reporter knew exactly the...<p>I thought it was a pretty good story and was on the mark. I think the reporter knew exactly the problems with the 401k.</p>
<p>It is a bad idea for a retirement plan for the average person. And it has been an easy way for companies to shed the retirement burden onto the worker.</p>
<p>The average person is not able to successfully invest on their own and has no interest in it. They wind up being over invested in stocks and then suffer the consequences as those in the story did. That's the part you don't understand.</p>
<p>401ks are also a big rip off because as the report showed the financial industry is in control and is able to overcharge for their services with absolutely no value added. This results in the financial industry making off with $100,000 or more of the employees' money with high expense ratios over their career. That's the part they like the most about 401ks.</p>
<p>401ks are great for people who like investing and enjoy the process even though they don't do any better. But not for the average person.</p>Sarah commented on 'Is the 401k to Blame?'tag:typepad.com,2003:6a00d83451bcbd69e201157059f4f3970b2009-04-28T16:58:34Z2009-04-28T16:58:34ZSarahI think the basic problem here is that you cannot build a retirement on an asset whose value can swing...<p>I think the basic problem here is that you cannot build a retirement on an asset whose value can swing so dramatically in a short period of time. Shifting to a more conservative asset allocation over time *can* help, but it can't save you from a collapse like the past year's, when assets that should be essentially independent are falling in tandem. </p>Kevin commented on 'Is the 401k to Blame?'tag:typepad.com,2003:6a00d83451bcbd69e201157059e253970b2009-04-28T16:24:23Z2009-04-28T16:24:23ZKevinYeah, like biased view, looking for someone to blame, and little knowledge never happens here...<p>Yeah, like biased view, looking for someone to blame, and little knowledge never happens here...</p>tim commented on 'Is the 401k to Blame?'tag:typepad.com,2003:6a00d83451bcbd69e201156f63ab4b970c2009-04-28T16:24:17Z2009-04-28T16:24:17Ztimhttp://www.relocation.com/blogI've attended several forums about 401ks at different employers through the years, and they all emphasized the need to be...<p>I've attended several forums about 401ks at different employers through the years, and they all emphasized the need to be less invested in stocks the older one gets. Either people don't listen, or they ignore the advice in the chase for outsized gains, perhaps to make up for the lack of saving outside the 401k. Either way, the 401k is fine, it's people's use of it that needs to change, perhaps even to the point of offering NO choice, and just putting everyone in target-date funds. </p>SaveBuyLive commented on 'Is the 401k to Blame?'tag:typepad.com,2003:6a00d83451bcbd69e201157059dd6d970b2009-04-28T16:16:34Z2009-04-28T16:16:34ZSaveBuyLivehttp://www.savebuylive.comPersonally, I think that the 401K system is kind of a let down. Here's a few of my gripes. 1....<p>Personally, I think that the 401K system is kind of a let down. Here's a few of my gripes.</p>
<p>1. There are a ton of funds to choose from. Most are bad. And the sign up materials don't really tell you how to pick a winner from a dog. They don't even tell you how to do something simple like just pick some index funds.</p>
<p>2. My 401k provider shoves the target retirement funds down your throat so that they can profit from the increased expense ratio of these funds.</p>
<p>3. Contribution limits reset every year rather than accruing.</p>
<p>4. I can't pick the company my money goes to.</p>
<p>Many of these problems are easily fixable but if people aren't effectively educated about retirement planning then all the fixes will be for nothing. People will either under use their 401k by investing in dog funds or they won't even sign up because they can't figure it out.</p>
<p>One final note: I do think that the automatic enrollment that some companies provide is a step in the right direction.</p>Texashaze commented on 'Is the 401k to Blame?'tag:typepad.com,2003:6a00d83451bcbd69e201157059dcc0970b2009-04-28T16:15:41Z2009-04-28T16:15:41ZTexashazeHere we go... a few irresponsible people screwing things up for everyone. Remember the rule that your bond/money market percent...<p>Here we go... a few irresponsible people screwing things up for everyone. Remember the rule that your bond/money market percent should reflect your age. On that if you are 60 then 60% of your money is in bonds. If you did that then things shouldnt be so bad in this bear market.</p>
<p>I feel heartless but must agree with Pop. There are a lot of stupid people out there who expect others to clean up their mess. Bits like 60 Min portray only embolden our government to take more control. Folks, we got it good here. Even our poor people. I've been all over the world and have seen very bad things. Believe me, our poor live like the middle class in most countries. America is great because anyone can make it if they work hard. The problem is now we are lazy from the good life.</p>Pop commented on 'Is the 401k to Blame?'tag:typepad.com,2003:6a00d83451bcbd69e201156f638cc7970c2009-04-28T15:34:30Z2009-04-28T15:34:30ZPopAmericns are too stupid to know when not to buy a home, to know how to invest, to know how...<p>Americns are too stupid to know when not to buy a home, to know how to invest, to know how to prepare for retirement, etc. Sounds like fertile ground for a socialist to have a field day.</p>Colin commented on 'Is the 401k to Blame?'tag:typepad.com,2003:6a00d83451bcbd69e201156f638249970c2009-04-28T15:17:46Z2009-04-28T15:17:46ZColinSo, the alternative is to force everyone back into pensions, where those nasty corporations are responsible for taking care of...<p>So, the alternative is to force everyone back into pensions, where those nasty corporations are responsible for taking care of our retirement needs, even if it bankrupts them?</p>
<p>There is an argument for 401K reform... but scrapping them entirely?</p>
<p>That said, given the amount of freedom allowed, maybe there is an argument for "protecting people from themselves, be it through social security or something else.</p>