Comments on: Is the 401(k) a good thing? A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: targetpredators Sat, 25 Jul 2009 15:16:00 +0000 ”Well, of course you’re right, Felix. We are always better off when someone more intelligent and capable is looking out for our interests. We even have a name for them; we call them Democrats”

As everybody knows, we are the best to decide what is best for ourselves. That way, we get health insurance that covers what we do not need and pushes us towards bankruptcy, invest in retirement having no idea of the risks involved, buy ”explosive cars’ (a.k.a. Ford Pintos) and so on.
Of course, as we are left in the hook for the whole bill others make fortunes out of it
We even have a name for those who predate on others’ ignorance and make tons of money out of it: Republicans.

Prof. Zvi Bodie wrote quite a bit against making financial experts out of the average Joe; but if you believe otherwise, I suggest following Bodie’s advice: next time you need surgery just get a pamphlet of what the surgery is about and operate yourself. Sounds idiotic? Well, it is what most of 401(k) holders do.

By: ang Thu, 23 Jul 2009 17:08:09 +0000 I don’t think Mike was trying to suggest that 401(k) has been a positive development, just significant (as in affects a lot of people, involves a lot of money).

By: MattJ Thu, 23 Jul 2009 16:57:40 +0000 The best thing about the 401(k) is that it shifts the taxes paid by middle and upper income Americans from when they are high earners and low users of government services, to when they are low earners and high users of government services.

From that viewpoint, the advent and expansion of the Roth IRA and Roth 401(k) were gad things, as they shifted federal tax income forward rather than delaying it.

By: mattmc Thu, 23 Jul 2009 04:26:51 +0000 Better off than what? Defined contribution beats defined benefit hands down.

That said- most mutual funds aren’t a great deal. I rollover my 401(k) plans into IRAs as soon as I can for investment flexibility. The best plan would be to switch everything to Roth style accounts- post tax, free growth.

By: Richard Wed, 22 Jul 2009 20:39:02 +0000 Retirement planning is an unexpectedly subtle discipline. Even if someone knows how to calculate a present value or future value—surely a small proportion of the population, in my experience—they are unlikely to (a) discount the accumulated values by inflation to get the “true” dollars that this will purchase, (b) will overstate the risk equity premium and view that return as an absolute value rather than the most likely single value (c) will underestimate their own life span. Pension actuaries don’t do that, and defined benefit plans in general do a good job in providing a benefit (both by doing the planning and making sure that the normal form of the distribution is an annuity).

By contrast, a 401(k) is a salary reduction plan—the participant’s current income is reduced to fund the plan. These plans were first popular with high-tech firms, which paid pretty good wages but couldn’t afford the pensions that some of their employees were clamoring for. Note that when every company offers a 401(k) that salaries are inherently overstated and savings for retirement is a hidden, personal choice—which is exactly what you don’t want in public policy.

As for being portable—a defined benefit plan could also be portable, if vesting were immediate. The real difference is that defined benefit plans inherently favor the older members of the work force.

My own personal hobby-horse: annuitization is largely underpracticed in retirements. Permit cash “opt-ins” to social security that would provide a life annuity, inflation-adjusted, with extremely low expenses (two of the reasons annuitization is so low is the administrative expense and credit risk of insurance companies).

By: John P. Crowley Wed, 22 Jul 2009 20:25:13 +0000 What good is a 401K ? I’ll educate all of those who think you buy, put away, and forget about stocks… is called investing for your future.

Say for one moment your 401K is representative of the Dow Jones Industrial Avg. The investment I am thinking of would have required 45 of them to buy one basket of the DJ 30 stocks in 1997. Today, in spite of a run in 2007 to record high of 14,198, I can buy a basket of DJ 30 for only 9 of them. Based on what I am thinking of, you’ve lost 60% on your money over a 12 year period. Me? I’m prepared to make more. What do I own ? You can’t own it in your 401K …Ha ha ha !

By: Fred Engels Wed, 22 Jul 2009 18:41:17 +0000 I think that one of the perverse consequences of the 401k is that everybody wants shares to go up, because that makes them richer.

Therefore everybody prefers lower interest rates and the end result after 15 years of cutting rates is a colossal misallocation of capital and now collapse.

Essentially the 401k has co-opted the man on the street , and has convinced him that he as well can be rich through stock ownership. Its the old popular capitalism idea of Maggie Thatcher.

However owners of all these 401k do not see that they are actually poorer in relative terms , even if their account shows healthy rises.

Insiders make much more money in this game of inflating share prices. Either people who work in the companies( through option schemes and scams) or people who owned companies and floated them.

People that are fundamentally workers ( meaning that their main source of income is their working hours) have accepted to have much lower wages , because they believe that with their 401ks they will partake in the spoils of capitalism.

Sadly they end up with a much smaller part of they pie, but oh how they are happy!!!

By: Ianthe Zabel Wed, 22 Jul 2009 16:25:34 +0000 I’m writing from the Investment Company Institute, the national association for mutual funds. More than 40 percent of the assets in 401(k) plans and individual retirement accounts are in mutual funds, so we take a strong interest in retirement issues.

401(k) plans have a remarkable track record of success in providing Americans incentives to save, invest, and think long-term. Consider the numbers. Even though 401(k)s have been around for less than 30 years—not even a full working career—Americans have accumulated $2.4 trillion in these plans. And that doesn’t count hundreds of billions of dollars saved in 401(k)s and rolled over into IRAs.

Assessing the significance of that accumulation, economists James Poterba of MIT, Steven Venti of Dartmouth, and David Wise of Harvard conducted a detailed study of 401(k)s in 2007. They concluded: “Our projections suggest that the advent of personal account saving will increase wealth at retirement for future retirees across the lifetime earnings spectrum.” The Employee Benefit Research Institute and the Investment Company Institute got similar results in 2002, when they projected what 401(k)s could accumulate across a full career under a range of participant behaviors and scenarios—including modeling various long-term market returns that included significant historical market downturns (e.g., 1931, 1937, 1974). That study found that 401(k) assets could replace at least half of pre-retirement income for more than 60 percent of 401(k) participants reaching the age of 65 between 2030 and 2039. Add in Social Security, and median replacement rates range from 106 percent of pre-retirement income for the lowest income group to 84 percent for the highest.

We think Americans are well-served by 401(k)s and that we can build on their success. We should preserve the best attributes of 401(k)s: portable benefits, fiduciary standards for plan decisionmakers, diversification opportunities, and the ability to take advantage of catch-up contributions and employer matches. We should also improve disclosure, encourage more employers to offer plans, and make financial literacy a national priority.

Thanks for the chance to comment – Ianthe Zabel, Investment Company Institute

By: Curmudgeon Wed, 22 Jul 2009 16:10:08 +0000 @Max: We already do that; we call it a Roth IRA. The problem is that you have to offer some incentive for people to save in a defined contribution plan. It is probably better to make that incentive immediate rather than deferred, but I don’t feel strongly either way (even though I understand that the Roth is a better incentive in the long run).

By: Curmudgeon Wed, 22 Jul 2009 16:04:45 +0000 @John: The problem is that I know of only a few companies that have outlasted my career, and I have worked for none of them. Further, I have no idea why, on an economic basis, the auto industry pensions continue to survive (although I do on a political basis). Companies simply don’t survive for any given career these days. To even offer the option of a pension based on a lifetime with one company seems criminal. The only option is for all of us to work exclusively for the government.