… Absolutely, for 90% to 95% of the working population. If you weren’t able to “out-invest” a professional defined benefit pension fund manager, you were going to have less for retirement. And to top that off, the fees you were paying on individual accounts significantly reduced your return.
But like Medicare Advantage, 401(k)s were an easy sell to the ignorant and innumerate. It’s all about personal freedom and choice. Nobody ever looks at the “skim” being collected by the promoters of these scams. {{ LOL }}
Would that include a 4.5% employer match? That is something I always had. The first 3% I put in was matched by 3% from the company. My next 3% was matched at 1.5%. This allowed me to put 10.5% away at work. And we always had a nice selection of funds to choose from.
If you’re a Federal Employee putting your money in the Thrift Savings Plan (TSP) with an expense ratio of 0.03%, you’re collecting almost a “skim-free” return on the S&P 500.
If you’re a Texas teacher in a retirement plan managed by VALIC with up to a 3.00% skim rate, much more than half of your earnings are lost to the “skim” over your investing lifetime.
And don’t forget, that 3% (dropping to 1.5%) employer contribution is supposed to be making up for the money they’re not paying into the defined benefit pension plan.
Again, there’s no magic to it. It’s just arithmetic. Even a small fee makes a big difference after decades of compounding. You can do very well as an investor merely by preventing yourself from getting screwed (you don’t need to invest in the next Dell Computer). Wall Street’s business model is based on the vast majority of people not understanding that.
I agree with you on the fees. And I invested on my own away from the limited choices that the company 401k’s offered. But I just never could resist the match that the company offered.
Sorry, but this is clearly incorrect. Before the 80s, it was mostly true, but after the 80s it was clearly not true. Why? Because if you stayed at a company for 10 or 20 (or 30+) years, you received a decent defined benefit pension at the end. But beginning in the 80s, people started changing jobs MUCH more often, and defined benefit pensions would have resulted in them getting a pittance at the end. The only exceptions were the rare cases where their defined benefit pension was portable (like government workers or a few union workers where the union manages the pension* instead of the company).
* Of course sometimes the union screws you. My grandfather was part of a garment workers union in NY for decades, and the union leaders stole almost all the pension money and he got close to nothing in the end.
That’s true about pensions and job hopping. But the problem is that the average 401k investor is getting a small fraction of the S&P 500 return. Dalbar has been doing studies for years (decades) showing that the average investor is getting something like 2.5% annualized return during a period when the S&P 500 is averaging 10% plus. You compound that delta over 20 or 30 years and it’s a fortune.
Of course, most of the people posting on this board are in the top 5% or 10% for whom the 401k was a benefit, that’s not true for the average person with little understanding of investing.
But, most importantly, it “unburdened” the “JCs” from having any responsibility for providing pension benefits to people who gave 20-30 years of their life to the company.
Was the 401k a result of a more mobile workforce, or was the more mobile workforce a result of the “JCs” treating them like expendable meat, and taking away all incentives to stay with the company?
“Experienced meat” is generally not the most productive. In engineering, the sweet spot is usually people with 5-10 years experience. They can handle most projects. You only need a few people with 25 years experience.
There’s a reason the military is “up or out” in their promotion practices. They don’t need very many gray hairs in the ranks. That’s true of most private companies, too.
Well, my 401K was, for quite a while, rather remarkable as WeCo split off as Lucent, working a lot of OT, working wife, so as much as I could, with heavy matching, was lured into LU… Great, but, as we worked all the OT, saw lots of future projects, had my finger on the button to move a big chunk out to safer funds, but at the last moment, mad the mistake of cancelling that order… Held about 10K shares as it rose to new heights, got to busy to pay the attention it needed, so rode it down to maybe cab fare… Painful lesson… Other shares held, on other split offs, but the bulk, poof, gone…
My uncle did the same thing. He died. My aunt sold the Alcatel it had morphed into for a pittance. At least he had a pension, rather than a 401k.
Of course, the people at Enron were all pressured to put all their 401k money into Enron. poof Former Tandy unit Color Tile put all it’s employee’s money into Color Tile stock. Color Tile went BK. Everyone’s retirement savings went poof Sticks in my mind there is a “big gummit” reg now that doesn’t allow companies to put all of their retirement savings into company stock. RS had a retirement fund, filled entirely with Tandy stock and debt. If people didn’t sign up willingly, they had their arms twisted off. Seems that companies like paying their employees in script, instead of cash.
Indeed, after retiring in '02, Alcatel, then Nokia bought what had been Lucent, and so far pension, medical, dental, drug coverage have gone on OK, no COLA, dental is rather minimal, but medical is still our best option… There was a buyout option as far as the pension, pretty fair actually, I could match the money OK, but not the benefits, so we declined…
Anyway, yes, I was not alone, my 2nd level manager and several other co-workers, were also messed up, didn’t pull out anywhere near the highs, or during the slide…
Luckily, I had also invested elsewhere, AAPL, T, VZ, so dividends help… Overloaded in AAPL, but… So be it…
I remember when that was going on. We had a switchman that retired, took a buyout, and invested all of it ( no exaggeration, all of it ) in Lucent stock. It went very badly for him. He was able to get a job with either Lucent, or a company that subcontracted with them. I’d run into him in the different CO’s, he was always up on a ladder or up in the cable trays pulling cable. He was a really good guy, always liked working with him, but that was the ultimate “all your eggs in 1 basket” mistake. Your early Apple purchases greatly exceeded your LU losses, so well done on that !
I’m not sure the 401k was a mistake per se, but it hasn’t worked out as well as maybe people expected. But it is important to remember, it was supposed to be PART of your retirement, that included social security and pensions. Pensions are going away, and SS is in trouble and being attacked.
My problem with the pension is it is not legally your money. Another problem is how it has very little value until you have been with the company for a long time. And that creates another problem, in that you become more expensive to your employer over time due partly to that. This, and the fact that it rewards you staying in place and not looking for better opportunities.
My dad (80ish) had several 401ks in his life, but none of them had company match. And I’m not sure how good the fund options were for him.
Problems with the 401k are poor choices, expensive fees, not everyone matches.
I’ve never understood why IRAs and 401ks have such wildly different rules, especially about contribution limits. They are both fundamentally the same - pre-tax retirement accounts. Or why 401k plans are so expensive for a company to offer, let alone contribute to. Why is it so hard for small employers to offer a plan. Why not just let everyone have IRAs, with $25,000 annual limits (or whatever), with the ability for an employer to contribute directly as well. Why does that not make sense?
We have discussed various bits of the story before. My uncle took a buy-out and retired from Western Electric in 83-84. He had worked there since the 50s, and had a defined benefit pension. We both remember when Henry Schacht went around to cities with concentrations of LU retirees, telling them not to sue to restore their health benefits the company had reduced, or the company would declare BK and they would get nothing. Then, the company, “too broke” to honor it’s promises to it’s retirees, handed then CEO Pat Russo a $20M bonus.
My uncle’s T from the 50s through the 70s morphed into four figure blocks of T and VZ, plus all the dreck from various other divestments, mergers, unmergers, and buyouts. Besides the dribble of Alcatel, USWest became Qwest, which merged with Century, which changed it’s name to something else. He had some Frontier too. iirc, Frontier went BK some years ago, so that stock probably went to zero.
I used to have my aunt’s portfolio on my U-Verse home page. U-Verse changed their log in thing, several years ago, so that you need to enter a cell phone number, and they send a code via text, to “verify” yourself. I don’t have a cell phone, so have not been able to log into that home page, for years, so my customizations, including that portfolio, have been lost.
IIRC, that’s because the average investor gets nervous when the market goes down and sells. They get back in the market after it has gone up for some time and they feel comfortable.
As someone that often quotes DALBAR, there are a few caveats one needs when considering their results.
People that invest in a 401k almost ALWAYS do worse than the comparable index for a number of reason.
There is of course the cost of the fund. Even with a cheap index fund, individual performance will be worse than the index.
The very nature of a 401k is to dollar-cost average into the portfolio. If you are making systematic investments into a portfolio, you will almost always underperform a comparable index, especially during up-markets. That last dollar invested will never grow as much as that first dollar invested.
The DALBAR study isn’t really about comparing 401k to market performance, it is about comparing individual/personal investing to market performance.
But that being said, since you are quoting DALBAR, I think you should be aware of their other ground-breaking research:
The Quantitative Analysis of Investor Behavior – Variable Annuities (“QAIB-VA”) report is the industry’s most compelling argument for Variable Annuities. This VA research has turned heads with articles in the New York Times, FA Magazine and the Seeking Alpha podcast!
Understanding the behavioral implications of variable annuities is a vital element to effective distribution. By applying over 20 years’ worth of investor behavior research to variable annuities, DALBAR uncovered behavioral trends unique to the subaccount investor. Subaccount investors are more patient and therefore more successful than their mutual fund counterparts.
Yes! I’m a big fan of behavioral economics and avoiding the common human impulses that depress investment returns. I advise people to study that topic, rather than buy an annuity of any type.
Arithmetic says that the best policy is to minimize the skim of fees, commissions, and trading cost, but I agree that many people find it hard to follow the arithmetic.
I posted an article about Warren Buffett a few days ago where a WSJ reporter engaged a couple of finance professors to calculate how much money Warren could have made for himself if he ran BRK with hedge fund fees, rather than the low-cost model it is. Answer: Warren would have an extra $300 Billion in wealth today and his shareholders would have $300 Billion less for themselves.
