That was the title to a Time Magazine cover story (hat tip to my brother and Calculated Risk).
The article was brutal. It was filled with many hard luck stories, gloomy stats about how little we save, how utterly unreliable the stock market can be, how easily people can be done in by fate WRT to when they end up retiring and as brutal as it was these thing can all be true.
Over the years as I have met people and in the course of normal conversation tell them what I do they sometimes comment about how stressful it must be. I typically always have the same reply that it really isn't particularly stressful, it just that every so often the market goes down and sometimes still it goes down a lot. This has happened before and it will happen again. Invariably the person realizes this is correct. I then ask them at other times that it has gone down a lot what happened next and they say it went back up. So if we know this, and we do, it removes a lot the potential stress.
Now if we do know that at some point after the next recovery there will be another contraction that might be very bad or not so bad, if you know at some point this will occur then it seems logical to explore some way to mitigate the consequences of such an event. This is the reason why I use the 200 DMA as a trigger point for portfolio defense. It is not perfect but has had success.
One big problem with the article that was not mentioned is that after a down decade for stocks, a somewhat rare but not unprecedented event, any statistics or models that rely on stock market growth are probably going to conclude stocks don't work. If someone concludes they cannot emotionally endure another big decline with their current allocation to equities fine but cutting back based on modeling that concludes equities don't work because of the poor result this decade has selling low written all over it.
After such a lousy decade of returns it was probably very easy to find a bunch of hard luck stories to make a particular argument about 401ks. Had the story been done ten years ago then 401ks would have been hailed as being far better than pensions (the article steered toward pensions being superior) because they would have profiled a bunch of paper millionaires, you know like actually happened ten years ago.
About the various Occidental Pete retirees who would have been better off in the old pension plan. Maybe someone can cite the stats for us but pensions are collectively woefully underfunded and I believe it is correct to say the PBGC faces insolvency at some point. The article never touched on the point which I took for ignorance that there is even an issue with underfunding.
The article offered up solutions about a government administered, not run but administered, program of insurance to make sure that the amount people put in (in lieu of a 401k) guaranteed a certain pay out. In addition to that someone concluded that the social security payout should be higher. The way the math was spelled out the two would combine to replace 50% of pre-retirement income. Increase the social security payout, really?
I do not dispute the idea that the entire task of retirement planning and then retirement living is getting more complicated. One of the tenets of this blog has been that US based investors have to invest outside the country to get "normal" returns so I am on board with that part of it. Even with the greater complexity the solutions that will work for most people are the same simple ideas that have always been good ideas; save a lot, live below your means and know your (volatility) limits.
Proud Member Of
Random Roger
© 2009 | Gadget Theme Blogger Template
Original WPtheme By Blogger Template | Converted By Gadget Lover
| Distributed by eFree Blogger Help
Original WPtheme By Blogger Template | Converted By Gadget Lover
| Distributed by eFree Blogger Help
35 comments:
Roger: I wonder if the Time Magazine title (Why Its Time to Retire the 401k) might be analogous to the famous 1979 Business Week headline, "The Death of Equities."
great question
Or "it's time to retire the 401k and force companies to have Roth 401ks" heheh.
I dunno. I contribute max to my 401k. The only reason I dislike it is 'cause my company has a cheap crappy 401k. It's still a good savings vehicle.
I love all the "if they still had their pension" stuff in the article.
Well, sure, if we were forcing the company to guarantee 8% returns to me, then the lousy stock returns of the last 10 years would be irrelevant.
Hussman is wrong about the wall of money out there. Of course his Ricky, Nicky, Mickey explination is correct from a macro economic stand point. But from a microeconomic standpoint after a 50% decline in stocks from an individual perspective everyone is under allocated to equities. It does not matter if they think they should have 60% equities or 90% equities after the decline they are severely under allocated to equities.
So from the individuals perspective they must reallocate to equities and this will drive up prices for a real bull market if the economy also improves or for a cyclical bull market if the economy does not improve.
Either way people think they have excess cash or bonds which cause them to invest and create the bull market we see today.
The Asian philosophy just is a smoke screen for being under invested during this very profitable bull market. What is your excuse for being under invested?
We can discuss cyclical bull vs. secular bull at a later date.
Retire the 401K? Shows this bull market has a wall of worry to climb for the foreseeable future.
Lets give Jim L. a prize :)
The parent company of Time Magazine sure made great investment decisions over the past decade. Seems to me to be the pot calling the kettle black.
T
Most individual investors don't put a lot of thought into bonds. They are mostly, if not all, in equities. So the market's decline does not mean they are under allocated to equities at all.
Isn't the bigger issue related to most people living way above their means? The article doesn't even touch on this issue. It mentions the fact that people don't save enough, but why is that? If people spent less on McMansions they couldn't afford, then they'd have more to contribute to retirement savings.
Bottom line is that we'd all love to have a pension that is guaranteed every month. The reality is that the costs of pensions are killing the companies / government agencies that still offer them.
Stephen Drone,
Your comment that a 401k is still a good savings vehicle is a common one, but you need to rethink the way you think about it. You see, by definition, SAVINGS consist of safe money that is accessible. The 401k can only accomplish the safe money part if your 401k includes such fixed options. INVESTMENTS consist of higher potential yield but with risk of loss. For most people, their 401k fits the definition of INVESTMENTS and not SAVINGS.
The article makes some good points but goes off on a liberal agenda-pushing diatribe on the final page. However, the point of insuring your assets for retirement is THE ANSWER. Successful people have been doing this all along. I would argue, because most of my family has done so and with great success, that things like annuities and whole life insurance (mutual, not stock) should be used to insure and leverage against your other assets (retirement plans, investments, real estate, etc).
The article pushes this new type of pension, but as with any other pension, the problem is that if you (or your spouse if you choose a survivor option) die before a certain period of time, you actually lost out and your kids or grandkids see nothing from it. The pension funds are insured this way. Why more people don't insure it themselves is beyond me.
If the 401k does more harm than good depends on the next best thing that a particular employee would do with their money. One way to look at this would be based on a hierarchy of sophistication for investors seeking to to capture returns from asset class betas.
Basically most 401Ks are better than not saving money at all (0th->1st order below). Also most 401Ks encourage people to invest in more than one asset class through various means (1st order -> 2nd order). Some 401Ks are paternal enough to encourage/force a portfolio near the historical efficient frontier (2.1 or 2.2 below)
The downside to the paternal approach is that the more advanced investment approaches won't fit their half-baked one size fits all approach. The end result is that many 401Ks offer less return for more risk when compared to the admittedly small cohort of successful individual self-directed investors. This is due to lack of asset class options and time based trading restrictions.
Some 401Ks such as Schwab's personal directed brokerage account option give the investor the tools to implement an advanced strategy that gets a lot of return for the risk taken - or blow your retirement on hot tips :->
*Beta Capture Hierarchy*
0th) Saving money
1st) Buy and Hold investing in one asset based on historical returns
- Stocks for the Long Run
2nd) Buy and Hold, Diversifying among asset classes
2.1) Ad-hoc construction
- Lazy Portfolios
- some Financial Advisors
2.2) Optimize on statistical volatility
- Harry Markowitz c. 1952
2.3) Optimize on drawdown (time domain)
2.4) Optimize on future projections
- Permanent Portfolio
3rd) Trading system in one asset class
3.1) "Momentum" 0th order -> choose leader
3.2) Value (mean reversion)
- Warren Buffet (note he also adds alpha besides capturing beta)
3.3) "Momentum" 1st derivative (trend-following) -> velocity
- Stop-loss
- SMA crossing "risk control"
3.4) Value + Velocity
- ValueLine proprietary?
3.5) "Momentum" 2nd derivative -> velocity and acceleration
3.6) Value + velocity and acceleration
3.7) 3rd derivative ?
4th) Trading systems across asset classes (asset class rotation)
Continues... you can probably fill in through the 7th order or beyond if you have understood the preceding.
Conventional 401K investors face risks such as stock market risk, corporate default on bonds, employer/custodian risk during plan modifications, legislative risk around the 401K tax treatment etc.
Pension or annuity investors face different types of risk such as default/insolvency risk which is not very diversifiable not SEC regulated. Inflation and legislative risk are also a big deal with these types of products and need to be considered.
anon 8:21 -
Thinking of savings wrong? As soon as you mention leveraging, you're gonna turn me off. I've looked at annuities extensively trying to find ways to avoid taxes/etc. when saving beyond liquid savings/401k/roth IRA. Annuities would take much more money in fees/charges than my 401k would.
Any stock investment may be accessible, but it isn't safe. I'm also fine with the "accessibility issues" with my IRA and Roth IRA.
My thoughts on annuities tend to go along with this Allan Roth article on Bnet.
Good topic today, Roger. As I've mentioned here before I'm always looking for a better investment vehicle.
For most people, their 401k fits the definition of INVESTMENTS and not SAVINGS.
I respectfully disagree. In my circle, anyway, most people treat their 401K as savings because they have no real savings and when the going gets rough, they shake that 401K piggy bank.
The article failed to mention how many folks have taken money out? That little detail could be part of the feeling that a 401K is a failure.
Either way, it likely stems from irresponsibility, not bad luck like the article seems to portend.
Larry,
I don't follow. Because some people are actively managing 401Ks we should do away with 401Ks?
I don't see a connection between poor investment results and account type for those investments - unless you mean to enforce the "government annuity" route or something like that.
Currently I am working for the Government (FDIC) and I do not advocate a government administered program in the hands of insurance companies. lol
Bill: the purpose of having a 401K for a typical worker was to have a nest egg that would convert to lifetime income replacing defined benefit plan income. The results aren't good in part because people are poor investors. There are other reasons as well such as costly plans with poor investment choices. I also believe that owning company stock in a 401K should be prohibited.
Hi Roger:
I am a long term reader, love the blog. Just wondering what your take is on the great rush into bond mutual funds we have seen in the last year. Contrary indicator or not? ALso curious if you own any such vehicles for clients or if not how you do your fixed income investing...
Thanks, Joe W.
i use a mix of funds, etfs and individual issues.
bond funds have no par value to return to
Wow.
I agree with Larry that company contributions made in company stock should be prohibited. I recall at our Fortune 500 company that's the way it was. Ended up with about 1/3 of the 401k in company stock. Could not sell it/exchange it.
However, doing away with 401ks with a company match seems absurd to me unless you have a better plan to substitute.
Matching contributions $1/$1 or $0.50/$1 is free money. Automatic out of paycheck saving. Compounded tax free growth for as long as you are employed there and tax free rollover to an IRA. What's to to hate about all that?
Without our forced savings into that program for a couple of decades, well I hate to think where we would be without the 401k.
Bluesman
Sox28 at 8:15 stated the truth of the matter.
Larry,
I think the choices are generally abysmal. Most people I know with 401Ks don't know what to pick and only care about the choice when they're down big. So given the fact that most people are never going to care enough about their retirement to properly fund for it, what do you propose?
Oh ya, I'd also like to throw in another wrench, an opt out plan for those that do care enough. Let's not have another social security nightmare.
Isn't the reason most pension funds are underfunded is because the law allows the pension fund to not retain all the money it has received from workers?
In some cases. In many cases it's "we need to get 9% annually to meet our obligations but our investments are only making 8% annually."
Larry,
By your "logic" we should get rid of mutual funds and brokerage accounts because people do not invest wisely.
We probably shouldn't let people buy houses based on recent experience either.
Stop trying to be big brother. The 401K is a significant improvement over simply investing after tax.
Is there data showing results of the same investing scheme done in a 401k and also done after tax?
I'm not sure how you can make the blanket statement that "investing after tax" is better than investing in a 401k unless you start throwing a Roth or other variables. The article certainly doesn't prove anything.
just to clear something up because this came up once with a prospective client, my brother has no affiliation with Your Source Financial where I am the CIO.
The Time article does not develop the idea that the 401k is simply one savings/investment vehicle available for the attainment of the individual’s overall financial goals. The “failure described in the article is not a failure of the 401k vehicle, but rather the failure of investor execution of a necessary plan that must include regular, non tax-deferred savings, Social Security, and IRA’s. The relatively small average size of 401k’s could reflect a failure to consolidate accounts when moving from job to job, or it could reflect a supplementary amount available from IRA’s, savings and/or Social Security that address the individual’s situation to his or her satisfaction. I found the author’s ultimate solution somewhat ironic in that it seems to be a proposal for a parallel Social Security benefit system. To quote: “Altman is not alone. Teresa Ghilarducci, an economics professor at the New School, has proposed a plan in which the government would divert 5% of everyone's wages. In return, you would be guaranteed in retirement a check for 26% of your final salary every year until you died.” Isn’t this a description of a “social security benefit”? I think that before we throw in the towel on the individual’s ability to save and invest for retirement, we should intensify education efforts so that employees are inculcated with basic strategies for their 401k investments. Couple this with regulatory scrutiny of the plans offered for adequacy of investment options and maybe for cost effectiveness (no 401k should be funneled to load funds), along with the “automatic” employee opt-in, and the 401k program could become a positive factor in helping individuals organize their overall financial goals.
I agree with Larry that individuals are generally poor at making and (more importantly) sticking with sound investment decisions. Also don't have a good answer to the 401k/no 401k argument. It's better than nothing at present, and I certainly don't want the govt. taking it over. We recently acknowledged the poor investor syndrome at my company by switching the default fund from stable value to balanced (VWELX).
People obviously can not make good decisions as Larry has pointed out. We should end the markets and socialize everything.
There are 2 problems I see highlighted w the 401(K). The first problem is they don’t perform and haven’t performed for the past decade. For all you mean-reverters out there, take a look at Japan - 401(K)s and the stock market can easily not work for 2 decades, and maybe longer, maybe never again. And it’s not a matter of what you “believe” it’s a matter of what the data show and the lack of a compelling mechanism that says the market “must work” and deliver some minimum return, as oppose to “historically it;s worked most of the time, for a lot of different reasons, sorta”. The data show the stock market is a systemically unreliable basis for pension income. Maybe bonds. Second problem is what’s Joe Schmoe supposed to do with his 401(K). He’s saved and invested assiduously and may have 1 to 2 million - there’s a long line of “suits” out there looking to separate him from his money (many are called registered investment advisers). His only reliable approach is to buy an annuity, for pennies on the dollar w/o significant inflation protection. Likely the single biggest reason investors track this and other boards is that instead of “being retired” they feel a need to actually get some return on their retirement $ - most other people w/o investment experience give up, many get snookered and lose their funds. IMO the current 401(K) based system does not serve the interest of prospective retirees or retirees -it does serve the interests of the professional investment community (brokers love it).
OR you could keep things simple and buy stocks that actually pay DIVIDENDS and not worry about market fluctuation even during a 20 year down trend. If the market goes up you could just live unbelievably well.
Post a Comment