It's a 401(k) World- And it Basicaly Sucks

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**Easy E**

I found this blog post from matthew Yglesia at Slate interesting. MY is a professional contrarian, so YMMV.

http://www.slate.com/blogs/moneybox/2013/05/01/it_s_a_401_k_world_and_it_sucks.html

I like the metaphor in Tom Friedman's latest column, arguing that we now live in a 401(k) world. But I wish he'd spelled it out in greater detail, because the problem with living in a 401(k) world is that Planet 401(k) is a pretty sucky planet. Here's the essential shape of 401(k) as a backbone of the retirement system:

— Poor people get absolutely nothing.
— Wealthy people who would have had large savings anyway get a nice tax cut that offers no meaningful incentive effect.
— For people in the middle, the quantity of subsidy you receive is linked to the marginal tax rate you pay—in other words it's inverse to need.
— A small minority of middle class people manage to file the paperwork to save an adequate amount and then select a prudent low-fee broadly diversified fund as their savings vehicle.
— Most middle class savers end up either undersaving, overtrading, investing in excessively high-fee vehicles or some combination of the three.
— A small number of highly compensated folks now have lucrative careers offering bad investment products to a middle class mass market based on their ability to swindle people.
Congratulations, America! Across a very wide range of products there's a strong case for a large dose of consumer sovereignty. People should buy the shoes and sandwiches and shirts they want. They should watch the shows they want to watch. Get the furniture and appliances they like, and pick their own hairstylists and their own favorite grocery stores. Tastes differ, so even though competition and choice will rarely lead to a perfect outcome it's going to lead to a much better outcome than trying to have a Shoe Commission tell everyone how many shoes they need and what they should cost and look like.

Middle class retirement savings isn't like that. We know roughly how much people need to put away in order to retire with a standard of living they'll be comfortable with. And we definitely know what kind of investment vehicles are most appropriate for middle class savers. And we have abundant evidence that left to their own devices a very large share of middle class savers will make the wrong choices. What's more, because of the nature of the right choices it's obvious that far and away the dominant business strategy for vendors of middle class investment products is to dedicate your time and energy to developing and marketing inferior products since the essence of superior products in this field is that they're less remunerative.

In other words: A disaster. What's needed is a much more forceful, much more statist approach to forced savings whether that's quasi-savings in the form of higher taxes and more Social Security benefits or something like a Singapore-style system where "private" savings are pooled into a state-run investment fund.

Now since we are in fact living in a 401(k) world, here's some advice. You've got to save a lot of money for retirement. More than you think. More than you want to. And you need to put that money in a broadly diversified low-fee fund. And you have to keep it there. Don't panic when the market plunged and sell. In fact, unless you're planning on retiring in the next decade don't even check how it's doing. Just buy and hold and shift into something less volatile when you're near retirement. Vanguard has these good Target 20XX funds that automatically shift you into less volatile products as you get closer to your target retirement date, allowing you to do even more ignoring of the state of your investments. Which is good. The only way for anyone to make any money managing your savings is to try and trick you into making trades you shouldn't make, or buying products you shouldn't buy.

**Frazzled**

Don't worry. Obama wants to end the 401K and get his greedy paws on that money.
http://online.wsj.com/article/SB10001424127887324050304578412932073225110.html

But thats probably why Slate brought it up. Got to follow those Journolist marching orders.

**gorgon**

Nine years in the financial services industry showed me what a disaster the defined contribution experiment has been. At least people had professional money management with their defined benefit plans. With defined contribution plans, employees get a 1 hour crash course in investing and an "atta boy/girl" to help them figure out their financial future. That's like giving a 4 year old gasoline and matches to play with, and was never going to end well for most people.

On the other side, I don't think it was ever the windfall that investment companies expected since huge numbers of small accounts cost a lot for them to service.

Seems to me that a better solution would have been something in between the two. Give employees only three options -- aggressive portfolio, moderate portfolio, and conservative portfolio, each with well-defined asset allocations handled by a money manager. The children might still end up drinking the gasoline, but that way at least you've taken the matches away. And it'd have to be at least a little easier on the account services side.

**djones520**

I have the US Government Employees version, called the TSP. I've been contributing to it for 11 years now, and have about $27,000 in it. I keep mine under the slowest growth, but safest, account.

I've been considering switching some of the funds to more aggressive measures, since things in the market seem on the uptrend.

**Jack_Death**

Yeah, Iglesias. He talks about 401k's without mentioning the reason most people actually buy in - the company match. Without that, it is a limited investment vehicle that usually has a choice of bad and worse investments. There are other tax-advantaged choices, such as annuities and life insurance, if one isn't competing with a "company match" option.

Of course, if the only metric you care about is "fairness" (defined along left-liberal lines) then I guess you can come to the same conclusions that he has.

His solution is, of course, a state-run plan on the model of Social Security. He fails to mention that SS returns about 2%. Inflation is running around 3%, and not likely to go down from there, so do the math ;-> Without Federal subsidies, SS is not a great investment vehicle.

He also ignores the rather glaringly obvious problem that any Government run fund would have - they are not magically free of market risk and interest rate risk; they have to compete with the rest of us for returns. So, yeah. How many State and Federal pension plans are kicking the crap out of the market because they are so well managed? I'd bet the number is just about zero - all of the big ones are in fact technically insolvent.

As for the Pres, well, we know where he is coming from. If you have money, he wants it. Period. Unless of course you are HIM, then do as I say and not as I do. The guy took a deduction for f**ing office supplies against an income of well over a million bucks. He wants other taxpayers to pay for his pens and pencils! Pricelessly hilarious hypocrisy, but what do we expect from a guy that wrote two "autobiographies" (I'm not sure that means what he thinks it means) before he was 50. Pompous ass.

**Easy E**

gorgon wrote:
Nine years in the financial services industry showed me what a disaster the defined contribution experiment has been. At least people had professional money management with their defined benefit plans. With defined contribution plans, employees get a 1 hour crash course in investing and an "atta boy/girl" to help them figure out their financial future. That's like giving a 4 year old gasoline and matches to play with, and was never going to end well for most people.

On the other side, I don't think it was ever the windfall that investment companies expected since huge numbers of small accounts cost a lot for them to service.

Seems to me that a better solution would have been something in between the two. Give employees only three options -- aggressive portfolio, moderate portfolio, and conservative portfolio, each with well-defined asset allocations handled by a money manager. The children might still end up drinking the gasoline, but that way at least you've taken the matches away. And it'd have to be at least a little easier on the account services side.

Yeah. I've seen it too.

"Financial Planners" are nothing more than glorified salespeople, unless they have an alphabet soup behind their name.

Automatically Appended Next Post:

Frazzled wrote:
Don't worry. Obama wants to end the 401K and get his greedy paws on that money.
http://online.wsj.com/article/SB10001424127887324050304578412932073225110.html

But thats probably why Slate brought it up. Got to follow those Journolist marching orders.

And I'm sure the Wall Street Journal has no agenda either.

You just like their's better.

Automatically Appended Next Post:

Jack_Death wrote:
Yeah, Iglesias. He talks about 401k's without mentioning the reason most people actually buy in - the company match. Without that, it is a limited investment vehicle that usually has a choice of bad and worse investments. There are other tax-advantaged choices, such as annuities and life insurance, if one isn't competing with a "company match" option.

That is one of its most attractive features. That and it is realtively easy to use.

**daedalus**

That sounds pretty similar to how I've understood it.

Of course my solution was, once it came time to cash in my 401k, to be responsible and pick up barbiturates. I'm told that's the most preferable way to go.

**Frazzled**

401s aren't hard. If you don't ahve a CFP many companies have guys who can give advice.

Frankly a generic S&P 500 mutual fund is all you need if you have no expertise.

**Jihadin**

Just had my wife clarify TSP again DJ......in otherwords I should have continue to read your post lol. She been bouncing her between all three setting. As for me...well....military retirement....VA disability....debating on taking a certain amount a month from disability and play around with penny stocks or something....

**Orlanth**

Why is it called 401(k)? Why not 40k?

Seriously, does 401(k )mean something that requires no explanation to the target audience.

**daedalus**

Orlanth wrote: Seriously, does 401(k )mean something that requires no explanation to the target audience.

To pretty much anyone who works a professional job in the US at the very least, it's a household term.

**Frazzled**

Orlanth wrote:
Why is it called 401(k)? Why not 40k?

Seriously, does 401(k )mean something that requires no explanation to the target audience.

Yes sorry. 401K is a plan wherein you can hve money deducted from your paycheck. Its a retirement account thts not taxed until you pull money from it. Typically its an investment account. Also typically your employer "matches" up to a certain level some portion of this amount - which is the real benefit for most folks. So if I deduct $500 a month my employer may match it and deposit an additional $500 into the account.

**Orlanth**

Why would employers match it? What is the kickback to them?

**whembly**

Orlanth wrote:
Why would employers match it? What is the kickback to them?

Part of the compensation plan...

But, most I've seen isn't really significant. Like, they'll only match the first 3% of your contributions.

**Ouze**

Frazzled wrote:
Don't worry. Obama wants to end the 401K and get his greedy paws on that money.
http://online.wsj.com/article/SB10001424127887324050304578412932073225110.html

But thats probably why Slate brought it up. Got to follow those Journolist marching orders.

This is the most willful misreading of an article ever, which actually appears to be the goal of that incredibly poorly written article.

Removing tax breaks on 401(k)'s past a certain dollar figure ≠ "Obama (or anyone else) taking your money". We could argue about whether or not the proposed legislation is a good idea - whether or not a section of tax code intended for sheltering retirement income should continue to be used to protect incomes on the Paris Hilton level - but first we'd have to stop wildly misrepresenting it - and of course, aren't you a banker? I mean, that means you know the difference, and are just being willfully, partisanly obtuse to further a political agenda.

How tiresome that must get after a while, pretending you know less than you do so you can root for the home team.

Orlanth wrote:
Why is it called 401(k)? Why not 40k?

That's the section of the US code it appears in (and is defined by). If you want to read it (and you do not) you may find it here.

**gorgon**

Frazzled wrote:
Frankly a generic S&P 500 mutual fund is all you need if you have no expertise.

Other than fixed income, international investments, small-caps, mid-caps, etc. Even the most simplistic asset allocation should have at least a few of those other elements to manage risk.

Orlanth wrote:
Why would employers match it? What is the kickback to them?

They match instead of giving you a pension. Defined contribution plans like 401(k)s have largely replaced defined benefit (pension) plans in the U.S. because they're a lot cheaper for employers. Not all employers match employee contributions (mine doesn't), but obviously that makes their benefit package less desirable to prospective employees. One of my workplaces was effectively matching my contributions up to 10% of my income. I racked up some retirement money there without even trying hard.

**KalashnikovMarine**

Eh I'll stick my to my personal Roth IRA

**Jack_Death**

Hmmm, not what I have seen in my career. Most match 50% of your contribution up to 6% of your salary, this is a pretty standard offer. Matching 3% of your SALARY and not 3% of your CONTRIBUTIONS makes quite a difference ;->

whembly wrote:
Orlanth wrote:
Why would employers match it? What is the kickback to them?

Part of the compensation plan...

But, most I've seen isn't really significant. Like, they'll only match the first 3% of your contributions.

**Rented Tritium**

We're finally realizing that pensions suck and can randomly screw employers or employees depending on how the wind is blowing, but we're still not settled on what we want the predominant retirement plan to be.

I don't know if 401k is optimal, but I sure as heck would rather have one than a pension.

**Jack_Death**

That depends on how much you earn. There are no IRA deductions if you make more than IIRC $152K this year. Once you are investing after tax dollars, the Roth has challengers ;->

KalashnikovMarine wrote:
Eh I'll stick my to my personal Roth IRA

**Frazzled**

Ouze wrote:
Frazzled wrote:
Don't worry. Obama wants to end the 401K and get his greedy paws on that money.
http://online.wsj.com/article/SB10001424127887324050304578412932073225110.html

But thats probably why Slate brought it up. Got to follow those Journolist marching orders.

This is the most willful misreading of an article ever, which actually appears to be the goal of that incredibly poorly written article.

Removing tax breaks on 401(k)'s past a certain dollar figure ≠ "Obama (or anyone else) taking your money". We could argue about whether or not the proposed legislation is a good idea - whether or not a section of tax code intended for sheltering retirement income should continue to be used to protect incomes on the Paris Hilton level - but first we'd have to stop wildly misrepresenting it - and of course, aren't you a banker? I mean, that means you know the difference, and are just being willfully, partisanly obtuse to further a political agenda.

How tiresome that must get after a while, pretending you know less than you do so you can root for the home team.

Orlanth wrote:
Why is it called 401(k)? Why not 40k?

That's the section of the US code it appears in (and is defined by). If you want to read it (and you do not) you may find it here.

Simple math:
removing tax breaks = taxable income = PROFIT! for the government.

Obama wants your money, like a fat gamer wants to suck down a coke. suck suck suck!

Automatically Appended Next Post:

gorgon wrote:
Frazzled wrote:
Frankly a generic S&P 500 mutual fund is all you need if you have no expertise.

Other than fixed income, international investments, small-caps, mid-caps, etc. Even the most simplistic asset allocation should have at least a few of those other elements to manage risk.

Well yea. But if you want sophisticated investment advice you hire an expert.

**Polonius**

I have no problems with 401(k)s in principle, but I think the author makes a pretty good point: how can we sit and pretend that people are making anything other than bad choices?

I'm a pretty smart guy, with a JD and at least a superfiical understanding of the markets. And when I set up my IRA, I basically nodded at my financial planner (who is at least licensed), and cut a check. I'm doing an IRA (and TSP) because I'm trying to be responsible, but I'm counting more on my annuity than I am in retiring on my personal accounts.

**gorgon**

Polonius wrote:
I have no problems with 401(k)s in principle, but I think the author makes a pretty good point: how can we sit and pretend that people are making anything other than bad choices?

I'm a pretty smart guy, with a JD and at least a superfiical understanding of the markets. And when I set up my IRA, I basically nodded at my financial planner (who is at least licensed), and cut a check. I'm doing an IRA (and TSP) because I'm trying to be responsible, but I'm counting more on my annuity than I am in retiring on my personal accounts.

That's it, really. I went into financial services with an advanced degree and the feeling that I had a clue or two about investing. And I quickly found out just how many things I was doing wrong.

And even if someone learns about things like expense ratios, he or she might still engage in bad behaviors just because it's how their brain is programmed. There's a whole field called investor psychology that deals with this. As children, we learn that if we stick our hand in a fire, we get burned. Financial markets don't work like the fire, but because we're programmed to learn that way, we get people pulling their money out of the markets after a crash (ow...hot) and keeping money on the sidelines during a market recovery. Then as the bull market reaches its peak (and they've missed out on all those returns), their "hand" feels healed enough to jump it...and they get burned again when the market corrects.

Which is not to say that most people should be trying to time the markets. Most small investors saving for retirement should be sticking to their (presumably good) plan and dollar cost averaging through changing market conditions. This is why I do think most people would end up better off with something between a pension and a 401(k) as we know them. Employers could withhold a certain percentage of employees' wages (say 5%) and throw in a matching contribution if they're inclined to do so. Employees could choose from a few pre-set, diversified portfolios based on their risk tolerance. They'd also have the option to invest additional wages into their chosen portfolio.

Sure, employees would lose "THE POWER" to some degree, which would send certain ideologues into a tizzy. But again, we're talking about 4-year-olds playing with gasoline and matches here. They need some protection from themselves. Note that I'm not holding myself up to be the "grown-up" here. But I did learn some things after 9 or 10 years in the industry and a couple of licenses (they even make us advertising folks get licensed). So call me an 8-year-old, LOL.

**Grundz**

djones520 wrote:
I have the US Government Employees version, called the TSP. I've been contributing to it for 11 years now, and have about $27,000 in it. I keep mine under the slowest growth, but safest, account.

I've been considering switching some of the funds to more aggressive measures, since things in the market seem on the uptrend.

congrats, if you work for another 480 years or so you'll have enough to retire!

**Kilkrazy**

Orlanth wrote:
Why is it called 401(k)? Why not 40k?

Seriously, does 401(k )mean something that requires no explanation to the target audience.

To avoid being sued by GW.

The 401(k) sounds very much like a UK personal pension fund with company contribution.

My employer matches my contribution up to a maximum of 10% of salary. The management fee is only 0.25%.

It is high management fees that kill any fund that doesn't grow well over 5% a year, and it's high fees that pay the fund managers.

Very few actively managed funds match the investment performance of tracker funds over the long term, partly because an actively managed fund spends more on admin.

**gorgon**

I generally agree, although my personal philosophy (note that none of this is professional advice) leans toward index funds for things like domestic large-caps and mid-caps, and active management for small-caps, international small-cap or mid-caps, specialty funds etc. My thinking there is that those are areas in which a good stock picker can make more of a difference. For domestic large-caps, etc. there will probably be little difference in performance between some actively managed fund of 100-200 stocks and a simple S&P500 index fund. Note that those areas in which I'm selecting actively managed funds also represent smaller pieces of my asset allocation.

**azazel the cat**

High management fees is what kills most portfolios, and encourages low-to-middle-range investors to make riskier moves.

I'm personally not a fan of the current stock investment climate due to the presence of micro trades (are they called flash trades? Y'know, the rapid trades that occur hundreds of times per second by fully-automated computer programs, that cause insane rapid swings). I place my faith in rental real estate.

**Leigen_Zero**

@Orlanth: a 401(k) is more-or-less a UK pension plan, the stuff behind it is almost completely different, and the lingo is completely different altogether, but essentially the same thing happens when you are all used up, tired, haggard and in poor health from the stress of working for the man for 40+ years.