401ks Aren't the Problem

We had quite a good discussion breakout after Monday's post, which was about an article in Time Magazine that averred for doing away with 401k plans because they essentially "don't work."

First things first, get rid of the 401k? No sale here. As one reader mentioned, the company match alone probably makes it worth it. I wrote a theoretical post in January about investing 401ks in the cash option in such a way as to take full advantage of employer match and put whatever else you can save above and beyond the optimal amount for matching into an IRA of some sort.

The idea was that if you get $0.50 on the first $6,000 or $8,000 or whatever, it is like getting a 50% return with no stock market risk (remember the theory was to just put it into the cash or stable value choice).

It is pretty clear to me that the wrapper is not the problem. A lot of plans have lousy choices, which is emblematic of non- as opposed to mal-feasance on the part of someone at the company. The two biggest obstacles to success appear to be human behavior and unfortunate timing.

Behavioral issues are not confined to 401k participants. Are the endowment guys the smartest guys in any room they go into? Well, whether they are or are not they collectively missed badly on understanding the consequence of having too much in illiquid assets. The combo of declines and future capital commitments to illiquid assets had meaningful effects on these schools.

Who doesn't know that putting a lot of your money into illiquid, alternative assets is a bad idea? While we're at it, who doesn't know that too much leverage is a bad idea? Yet, very smart people get into trouble with these things all the time. For people willing to spend the time, many behavioral issues can be mitigated by learning from other people's mistakes. I learned all I needed to learn about leverage from the Long Term Capital affair. I don't know where my disdain for locking money up comes from, but I don't even like CDs (it's not fear of failure thing but an access thing).

Further, as I have said many times before, every so often the market goes down a lot and many times this occurs after it has done well for a while. Although I have been mocked for this type of thinking, the odds of a big decline are a lot less after a big decline and a lot greater after a big lift. A 12-year-old can grasp this.

In September 2001 (that's right) I got laid off from Charles Schwab, best thing that ever happened to me professionally. I knew months and months ahead of time that there would be layoffs and that as a somewhat expensive employee that's not part of any diverse demographic I was vulnerable. I put my 401k all in cash in case things got so bad after the layoff that I'd need to tap that money to live on (thankfully it never came to that). Anyone, anyone can make tactical moves like that in their 401k. People need to take more ownership and a more active role in navigating their finances.

Things are different now, but not as different as some folks think. 401k accounts allow the opportunity for people to pull themselves up by their own bootstraps and in part determine their own fate but they need to invest time to do this successfully because clearly Time is right about one thing; investment results for most people have been bad.

As for the idea of planning to retire when it turns out the market cuts in half, there are no easy answers. At any point in time you have what you have. Nothing else matters (like what you used to have). If what you have when you need it is not enough then something has to give. While this situation is reasonably very depressing for people it does not change the reality. If you need $1.1 million and you only have $600,000 then something has to give. The circumstance of not having enough might matter to you but you can only live with what you have not with what you think you should have. If you live a $1.1 million retirement with $600,000 you will go bust quickly.

I can appreciate that this sounds very harsh but what other choice is there? If you do not have enough then something has to give. A lot of the writing here (smoothing out the ride) and elsewhere is about how to have a better chance of getting closer to whatever number you think you need. If you retired in 2008 and the equity portion of portfolio only went down 20% thanks to tactical action you took, then your plan is much closer to being on track than many other people. And if you took tactical action described above then that means at some point you took the time learn something. Success or failure in this regard has nothing to do with the 401k wrapper.

For a little context on where I come from on this, my parents made horrible financial decisions in their 30s and 40s which I have learned/benefited from. Being rich doesn't have to mean having a lot of money because I don't. It can mean having very little overhead which means a greater margin for error as you accumulate your savings. I never want to stress out about money, living a $2,000-$3,000 monthly lifestyle, regardless of income, makes this much easier to do.

Comments

[debtacid:]

Blah, blah, blah. 401Ks are just another "financial product" used by insiders to fleece the sheeple. The entire financial product paradigm must be rejected in light of the massive fraud and manipulation in the markets. In addition, there can be no sound financial products without sound money and the fed has done nothing but debase the dollar since 1913. Why should I lock money away for 30 years that will only lose half or all it's value by the time I need to use it?

Oct 13 01:04 PM

[notsosmart:]

debtacid.right on.this author doesnt even mention the hidden high fees of these 201ks that the employee cant even question for fear of losing the job. then the limited options come into play.all fees should be paid by the employer on top of the match.that would change things in a hurry.some employers after getting rid of defined benefit in favor of these plans have now dropped the match.screw you middle class dumb-dumber sheeples.most deserve the fleecing as they dont check on their plans but can tell you the sport scores or where they are in the pool or fantasy.

Oct 13 06:04 PM

[bigmoney:]

I like my 401k. Choices are kind of lousy, but there is S&P500 index, and intl large cap index, with ultra low fees, along with cash & bond fund, including TIPS bonds. Employer provides 6% match. If I leave my job, it can be made into rollover IRA brokerage accounts, with access to ETFs and plain ole stocks.

The problem with 401k's may be that they expect layman to really understand finance. And they disguise their products. In the old days my choices included "high growth". Who doesn't want high growth? But that was a euphamism for NASDAQ, which collapsed around 2001.

Oct 14 09:47 AM