Quote of the Day – Retirement Edition

“What starts with f, ends with k, and means screw your workers? That’s right—401(k).” – James Ridgeway

A great line, even though I disagree with his premise.

He’s arguing that the rise of privatized retirement was the doom of the relatively short-lived social contract that arose in the postwar years in which employers and the government ensured that people would be able to retire in relative confidence.

The problem with that is:  1) it never really existed for most people; 2) company pension plans can go under, too; and 3)  investing in the market remains a good long-term strategy.  If you’re within 10 years of retirement and still had all of your money in stocks, on the other hand, you’ve ignored best advice of most financial planners; you’re supposed to diversify more of your money into bonds and other low-risk securities as you near retirement.

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James Joyner
About James Joyner
James Joyner is Professor and Department Head of Security Studies at Marine Corps University's Command and Staff College and a nonresident senior fellow at the Scowcroft Center for Strategy and Security at the Atlantic Council. He's a former Army officer and Desert Storm vet. Views expressed here are his own. Follow James on Twitter @DrJJoyner.

Comments

  1. Dave Schuler says:

    “Buy and hold” doesn’t look quite as good as it did and that old prevailing wisdom you’re quoting, James, may not prevail a lot longer. Right at this moment the long-term prospects of equities don’t appear to be a lot better than those of other assets.

    A good deal depends on how you measure: peak to peak, trough to trough, peak to trough, etc.

  2. Herb says:

    “If you’re within 10 years of retirement and still had all of your money in stocks, on the other hand, you’ve ignored best advice of most financial planners”

    I have to say…

    Events of recent years have not really bolstered the conservative argument that people are best trusted to spend their own money.

    I’m not prepared to say that the government is better equipped…because I think we can all agree that’s not the case at all.

    But there’s too many people in foreclosure, bankrupt, or ignoring “best advice of most financial planners” for me to say with conviction that individuals have some magic ability to look out for their own interests in a competent way.

  3. JKB says:

    Well, those who with supposed safe pensions that invested in Chrysler bonds are about to learn a hard lesson about risk.

    But then, the defined benefit pension relies on taking from current and future workers when the fund performs badly, i.e., a company has to keep down payroll costs and can’t expand when the revenues are going to cover pension shortfalls. Again, Chrysler will be the poster child.

    Well, if you look at the near-term in a down market, buy and hold always looks problematic. You also still have to be choosy and buy when a stock is out of favor. I’m doing reasonably well, although down from the peaks, because I bought stodgy old economy stocks during the internet bubble. They weren’t sexy or popular but had the advantage of actually making a profit.

    Shifting into bonds and other lower risk investments as you near retirement is the old adage but bonds haven’t been low risk for sometime due to rating agency shenanigans. Now we see that even being real conservative and only buying bonds in companies with capital assets on hand to cover your claim isn’t a reasonable investment due to governmental reshuffling of the claim priorities. So other low risk investments is good advice but bonds are not low risk investments anymore.

  4. odograph says:

    If you’re within 10 years of retirement and still had all of your money in stocks, on the other hand, you’ve ignored best advice of most financial planners; you’re supposed to diversify more of your money into bonds and other low-risk securities as you near retirement.

    This is true, but it was actually a bit worse. A long term bull market had all kinds of experts migrating to recommendations of higher equity (stock) holdings.

    This, on top of the well known tragedy that the investment vehicles most marketed by brokerages (and 401K managers) are not necessarily optimized for your profit.

    So things were not easy. The question, with respect to government involvement is what we think the average worker is capable of in planning and investment, and how compassionate we are when they fail.

    As I’m blogging a little later today, most Americans don’t even know what a trillion is, numerically. Approx. 80% of those surveyed couldn’t say how many times a million is a trillion.

    Yeah … let’s give all those their own brokerage account …

  5. Phil Smith says:

    Well, those who with supposed safe pensions that invested in Chrysler bonds are about to learn a hard lesson about risk.

    No. Chrysler, Ford, and GM bonds have all been rated junk for years now.

  6. JKB says:

    Well, reports are that pension funds hold this junk, probably via hedge funds or one of the banks, so now the beneficiaries, who thought they had a good pension, are going to learn about the risks of junk bond investing.

  7. Speaking as a bonded 401(k) Plan Administrator, Mr. Ridgeway doesn’t know what he is talking about. I don’t control a single dime of anyone’s contributions or the company’s contributions to their accounts aside from my own. My fiduciary obligations preclude me from offering advice to the participants in the plan, though there is a great deal of support and advice available to them if they chose to use it. I can’t make people do what they need to do to diversify and protect themselves and I cannot take the responsibility to guarantee their returns with no risk.

    Mr. Ridgeway’s real complaint seems to be that people have to be responsible for themselves. Presumably he prefers that the company/the bosses/the government/whatever have all the risk and liabilities while he/the workers/the proletariat/whatever have all the rewards and assets. Nice work if you can get it. Check back with the UAW in about ten years and see how this worked out for them.

    The biggest problem is Mr. Ridgeway’s imagined memory of a utopia that never really existed concerning pensions, but longing for a gloried socialized past that never was is a feature of Mother Jones’ writers.

  8. odograph says:

    Charles, the simplest question to ask you is: “do 401k providers give their clients equal access to bond funds?”

    I’ve heard from more than one person in the investment forums that they’d like to allocate to a Total Bond Market fund, but simply don’t have access.

    If we wanted to drill down even deeper than that we could turn to the composition of “Target” funds. It is a great concept to balance funds for a target retirement date, automatically shifting from stocks to bonds year by year. All the investor needs to do is pick the date they wish to retire. But I gather that since the Target funds are compared one against the other for short-term performance, there has been a great temptation to “goose” with higher stock allocations. That’s all fine … until somebody gets hurt.

    Finally, I’m sure you know that “diversifying” between two 100% equities funds and one target fund is not really diversifying in any meaningful way … but many 401K advisers not only “let” their clients do that, they “sold” that.

    I’ve heard from quite a few folks who said (even here at OTB) “but I was diversified!”

  9. odograph says:

    I found an interesting page on 401K reform, though I only used it to pull a factoid:

    The average 401(k) plan offers employees nine actively managed investment choices, according to the Employee Benefit Research Institute (EBRI), although some offer unlimited choices.

  10. odograph says:

    This thread encouraged me to go see what the Bogleheads are saying.

    They have an interesting thread of their own.

  11. Well, speaking only for myself, our 401(k) plan has a selection of twenty-six mutual funds to select from including a money market fund, three different bond funds, very aggressive to very conservative stock funds, retirement date targeted funds and various blended funds.

    Given the decline in the markets over the past couple of years, only the money market fund has completely avoided a loss for any period, though the bond fund losses have been negligible, which sure beats losing it as most of us have in most equity investment vehicles.

    I was fortunate to have good experiences with the 401(k) plans at my corporate employers in the past and used those experiences to select my company’s 401(k) plan. The problems being mentioned are not endemic or systemic to 401(k) plans per se, but the quality and care of those administering the plans.

  12. odograph says:

    I … partially agree, Charles. I think the stat above is a bit worrying though, with 9 actively managed plans. We can probably assume that 4 or 5 of those are often Target funds leaving fewer as true diversification tools.

    I agree that a lot depends on company management, and how they choose a plan administrator. I was fortunate at my last W2 job to have a company president who cared, and tried to choose well. We even got an S&P 500 index fund in the mix!

  13. And, of course, all of this pension praise and 401(k) bashing seems to be done with blissful ignorance of the problems looming just over the horizon from the severely underfunded pensions programs in corporate America and in state and local governments.