We didn't lose the game; we just ran out of time. - Vince Lombardi

Everybody Panic on The 401!

by Hal_10000

The WSJ has a another dumb article today about 401k’s, in which the author his the roof because the stock market has dropped their value back to ... what they were in 2005:

After watching her account drop 44% last year, Kristine Gardner, a 35-year-old information-technology project manager in Longview, Wash., feels no sense of security. “There’s just no guarantee that when you’re ready to retire you’re going to have the money,” she says. “You either put it in a money market which pays 1%, which isn’t enough to retire, or you expose yourself to huge market risk and you can lose half your retirement in one year.”

Or, you don’t get hung up on market swings.  You put money in for 30 years and lock into the long-term consistent return that the market has always provided.  How much did your account rise in the years before that, Ms. Gardner?  How much is it work compared to five years ago or ten years ago?  My 403b balanced are cratering too, but I still prefer them over the “guaranteed” incomes of the bankrupt Social Security fund and collapsing pensions.

And that risk-return interplay?  That’s normal.  There is no such thing as a high-return, no-risk investment.  Investments pay more when they are risky, pay less when they are safe.  To believe otherwise is to believe in Fantasy Investmentland.  Or government, I guess.

“This is the biggest test that the 401(k) plan has seen to date, and it has failed,” says Robyn Credico, head of defined-contribution consulting at Watson Wyatt Worldwide, noting that many baby boomers are ready to retire. “We’ve put people close to retirement in a very challenging position.”

Only if they kept their money in risky stocks.  Most retirement programs are designed to skew more conservative the closer you get to retirement. This is actually the 401k program succeeding by shedding some of the unrealistic gains the market made in the last few years and punishing the investors who unwisely gambled that the market would keep going up.

The most obvious pitfall is that 401(k) plans shift all retirement-planning risks—not saving enough, making poor investment choices, outliving savings—to untrained individuals, who often don’t have the time, inclination or know-how to manage them.

As opposed to the professional managers who have used their expertise to bankrupt almost every single investment house, bring the entire financial system to its knees and leave defined-benefit pensions almost bankrupt.  Yeah, it would be much better if we left this to the professionals.

I’ve mentioned this before but Dateline once did an experiment where they had stocks picked by a professional broker, a classroom of young kids and a monkey pulling cards from a rollodex.  The professional manager came in dead last.

Congress has begun looking at ways to overhaul the 401(k) system. At hearings in October, the House Education and Labor Committee heard from a variety of witnesses. Some proposed setting up “universal” retirement accounts, which would cover all workers. One such plan called for establishing accounts that would receive annual contributions from the federal government, and would offer a guaranteed, but relatively low, rate of return.

Yes, you see, we already have this.  It’s called “Social Security”.  And it’s going bankrupt.  What is this going to be?  Social Security II?  Son of Social Security?  The Return of the Killer Social Security?

Part of the problem, critics say, is that the 401(k) is trying to fill a role it was never designed to play. The plans were born with little fanfare in 1978 when Congress added section 401(k) to the Internal Revenue Code. Initially, many employers saw them as a supplement to company-funded defined-benefit plans and Social Security—and a way for executives to stash some of their compensation in tax-deferred accounts.

But the legislation marked the beginning of the end of professionally managed pensions that provided guaranteed benefits to retirees. As big employers recognized that 401(k)s are substantially cheaper than defined-benefit plans, the employee-managed accounts moved from supporting role to center stage. Many workers didn’t even participate in the voluntary plans, which meant that employers didn’t have to make matching contributions. What’s more, employers aren’t required to contribute to the plans at all.

On the other hand, the automakers stuck with defined-benefit pensions.  And their workers are doing great!  Until the entire ponzi scheme collapses, that is.

I do agree with some of what she says.  Some 401k’s do have lousy options and don’t have a cheap index fund option that many workers would take.  I would not object—since these plans are partially funded by tax breaks—to federal rules mandating that an index fund be made available or that companies be restricted from forcing their employees to invest in company stock.

But the basic premise underlying this and other recent critiques of the 401k remains the same.  You are stupid.  You are irresponsible. The market has collapsed all the way back to its 2005 level.  Everybody Panic!

Comments

Posted by InsipiD on 01/19/09 at 10:48 AM from

Ok, I just got my 401k statement on Saturday.  I read it on the toilet, because nothing better was close at hand and it seemed appropriate.  It has lost about 23% of its value this year.  While that sounds bad, it beat the S&P;500 and NASDAQ.  It also contained a list of all the funds to which I can contribute, and none of them did a whole lot better except for bonds.  The funds I contribute to have a history of going up for the last 8 years and are still up relative to the bonds.  Those bonds, however, still did better than the 1% she listed for the money market.  Perhaps she needs to talk to her 401k manager.  If she’s unwilling to take some risk, there are still better solutions than 1%.

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