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» The Ornery American Forum » General Comments » "Retirement Crisis: The Great 401(k) Experiment Has Failed for Many Americans"

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Author Topic: "Retirement Crisis: The Great 401(k) Experiment Has Failed for Many Americans"
philnotfil
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What do we do when reality doesn't match the theory?

nbcnews.com

quote:
The reasons for the shift are complex, but Ghilarducci argued that in the early years, "workers overvalued the promise of a 401(k)" and the prospect of amassing investment wealth, so they accepted the change. Meanwhile, companies found that providing a defined contribution, or DC, plans cost them less. (Ghilarducci studied 700 companies' plans over 17 years and found that "the amount employers contribute to pension plans is lower the larger the DC share of the employers' total pension costs.")
quote:
Fees have been another problem. Webb has studied 401(k) fees, and he concluded that that "as a result of high fees, fund balances in defined contribution plans are about 20 percent less than they need otherwise be."
The federal government tried to require more disclosure of fees, but the industry turned anti-capitalism and blocked increased information for the consumers of their products.

quote:
Berkeley's Odean and others have studied the effect of investment choice on 401(k) savers, and found that when investors choose their asset class allocation, a retirement income shortfall is more likely. If they can also choose their stock investments, the odds of a shortfall rise further.
Different from what the theory says. In theory individuals investing will do better than some company hack with no skin in the game.

quote:
The result of all these shortcomings? Some 52 percent of American households were at risk of being unable to maintain their standard of living as of 2013, a figure barely changed from a year earlier, even though a strong bull market should have pushed savings higher and the government gives up billions in tax revenue to subsidize the plans.
Theoretically I like the idea of doing away with Social Security and letting individuals manage their retirement. In practice it doesn't appear to be a viable strategy.

It would be interesting to calculate the amount of money that would be available to retirees if companies weren't dropping pension plans for 401ks versus the amount of money that is currently available to retirees. The follow up would be informative, what happened to the money represented by the gap between those two numbers, where did it go?

[ March 23, 2015, 10:33 AM: Message edited by: philnotfil ]

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yossarian22c
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401k's in theory will almost never return as well as a well managed pension fund. The theory with a 401k is that you will achieve basically stock market returns for 30-40 years and then retire shifting it into bonds for your remaining years. However as a worker nears retirement they should (and are typically advised) to move more of their portfolio into bonds (safer and lower rate of return). The result is that they can never get the 8% returns during the years when they have the most invested. A pension fund which always has a longer time horizon can maintain a higher risk portfolio to achieve the higher rate of returns in perpetuity.

That is just a fundamental problem with the theory of 401ks. Also all the high fees, and people not reacting with a long term horizon to fluctuations in the market makes the practice even worse than the flawed theory.

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Pyrtolin
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Keep in mind, also, that banks have successfully lobbied to prevent laws that would require them to give good advice to 401k investor and plans- they're explicitly allowed to sacrifice the performance of those funds to make their private investments more profitable, all while taking a cut off the top, win or lose.
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TomDavidson
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quote:
The follow up would be informative, what happened to the money represented by the gap between those two numbers, where did it go?
The financial services industry. I am not joking or being tongue-in-cheek. That is precisely where that money went.
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Rafi
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I have a pension and a 401k. The 401k consistently outperforms the pension by a wide margin. Where did the idea of a 8% ROI come from? If anyone thinks pensions can exist in perpetuity, you should google pension funds and find out how underfunded many are - especially in the public sector.

It does not surprise me NBC News pretends to be confused about 2013. They never miss a chance for a good pro-government propaganda push.

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TomDavidson
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quote:
The 401k consistently outperforms the pension by a wide margin.
I don't think you understood yossarian's point. When you are old enough to begin protecting your 401k, its performance will plummet as you transfer funds to bonds.

quote:
Where did the idea of a 8% ROI come from?
Interestingly, that is also the number promoted by the financial services sector as the average expected rate of return for long-term stock investment.
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Pyrtolin
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quote:
If anyone thinks pensions can exist in perpetuity, you should google pension funds and find out how underfunded many are - especially in the public sector.
Sure, now. In the 80's the argument (from the financial service industry) was that they were overfunded and had to be drained a bit. So they were. And now, magically, they're underfunded and the financial services industry would be happy to take them over fur us so they can get their cut and tank them whenever needed to help bolster their big money investments and keep the labor market flooded so wages stay suppressed.
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Seriati
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Any investment return is going to be colored by the risk profile the investor is willing to accept. There is absolutely no doubt that bigger portfolios (such as pension funds) are capable of greater diversity, including a consistent risk level, that generally means they flatten both losses and gains. Individuals are always going to be able to beat that return by taking on more risk. But there is no "great benefit" of a pension plan versus keeping your 401(k) invested in large mutual funds, except the potential for a government to back stop it - and that's NOT investment return.

You can not assume for anyone that they will be forced to protect their investment by transferring it into bonds, though many will rationally do so and it will certainly be recommended that they protect at least a portion. But there will be plenty of people for whom their 401(k) does not represent their entire retirement plan, they will account for social security, they may have full or partial pensions, the may have substantial equity in their homes, who knows.

And the 80's "argument" was self serving when it was made. It has always been the case that politicians promise pensions and put the costs on their successors. It's the best of both worlds from their point of view, they get the current rewards from the unions/employees who benefit and pay them back electorally, face none of the harms to their own budget and are out of office when the bill comes due.

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yossarian22c
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quote:
Originally posted by Seriati:
Any investment return is going to be colored by the risk profile the investor is willing to accept. There is absolutely no doubt that bigger portfolios (such as pension funds) are capable of greater diversity, including a consistent risk level, that generally means they flatten both losses and gains. Individuals are always going to be able to beat that return by taking on more risk.

Always? I know you were around for what the market did from August 2008 - March 2009 where funds invested heavily in the stock market lost half of their value. It took years for the market to recover that ground. If you are within 5 years of retirement it is unwise to maintain a risk portfolio that would allow you to typically outperform a pension plan.

This ignores that most 401k plans have limited investment options for the employees. They get a list of mutual funds to choose from, selected by their employer. Since a majority of mutual funds under perform the market (a huge majority when you take into account the fees). Most peoples 401k plans are going to under perform the market regardless of their financial acumen.

I honestly don't see how you think individuals can always outperform a pension plan when most mutual funds fail to outperform the market.

quote:

But there is no "great benefit" of a pension plan versus keeping your 401(k) invested in large mutual funds, except the potential for a government to back stop it - and that's NOT investment return.

The ability to maintain a constant risk profile and maintain a long term horizon that lets you ride out the huge drops is a benefit. If you want to plan on retiring in 5 years then you need to move more of your assets to safer investments to avoid crashes like 2008. However that safety leads to lower rates of returns during the years you have the most invested.

While a pension plan that automatically rebalances their asset allocation will buy stocks all the way down and then sell them back off on the way up. A good pension fund can do this in a more efficient and smoother way than any individual can.

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TomDavidson
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quote:
It has always been the case that politicians promise pensions and put the costs on their successors.
When was the last time you saw a politician promising a pension, as opposed to promising to do away with pensions and throw people on the mercy of the market?
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Seriati
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quote:
Originally posted by yossarian22c:
quote:
Originally posted by Seriati:
Any investment return is going to be colored by the risk profile the investor is willing to accept. There is absolutely no doubt that bigger portfolios (such as pension funds) are capable of greater diversity, including a consistent risk level, that generally means they flatten both losses and gains. Individuals are always going to be able to beat that return by taking on more risk.

Always?
Always able, yes. Risk and variance means that many will not do so, but that doesn't change that they will be able to.
quote:
I honestly don't see how you think individuals can always outperform a pension plan when most mutual funds fail to outperform the market.
Can and will are different things. Most mutual funds (and Pension Plans for that matter) are not designed to "outperform" the market, that would taking on a ridiculous amount of risk. They are designed to decrease volatility and obtain a sustainable return. Pension plan investment returns only deviate and increase when they take additional risks on (how many took a bath when Madoff went under?) that individuals and even mutual funds may not be able to emulate (or may even be barred from).

In fact if you look at any Pension Plan's portfolio, you've seen an increasing shift into far more risky assets than they had even 10 years ago. They have no choice but to take on risk to meet their known obligations to beneficiaries.
quote:
I know you were around for what the market did from August 2008 - March 2009 where funds invested heavily in the stock market lost half of their value. It took years for the market to recover that ground.
And? If you stayed in an index fund you fell hard and have recovered just as hard. You weren't however exempt from that impact if you were invested in a Pension or Mutual fund. Unless you're confusing Pension fund's investment returns with the "guaranteed" payments to beneficiaries?

What happens to those guarantees when the Pension Plans can meet them from available assets?
quote:
If you are within 5 years of retirement it is unwise to maintain a risk portfolio that would allow you to typically outperform a pension plan.
Again, that depends on a large number of factors, including the size of your investment portfolio and your cost of living. For me personally I agree, taking on extreme risk late in the game makes less sense, but for people with very little or lot that's far less true.
quote:
This ignores that most 401k plans have limited investment options for the employees. They get a list of mutual funds to choose from, selected by their employer. Since a majority of mutual funds under perform the market (a huge majority when you take into account the fees). Most peoples 401k plans are going to under perform the market regardless of their financial acumen.
Not sure I follow this claim by the way. I have 3 different 401(k)'s and each of them has an index fund, which is essentially the "market". They all have other funds that do different things as well, some outperform their reference market others underperform (for it to be an average that has to be the case doesn't it?).

The biggest reason you can't get "pension fund" returns is that you are prohibited from investing in the types of sophisticated investments they use to generate those returns. Consumer protection regulations "protect" you from outsized gains, to ensure you don't take on too much risk (upto and including total losses).
quote:
quote:
But there is no "great benefit" of a pension plan versus keeping your 401(k) invested in large mutual funds, except the potential for a government to back stop it - and that's NOT investment return.
The ability to maintain a constant risk profile and maintain a long term horizon that lets you ride out the huge drops is a benefit. If you want to plan on retiring in 5 years then you need to move more of your assets to safer investments to avoid crashes like 2008. However that safety leads to lower rates of returns during the years you have the most invested.
You can achieve those goals in mutual funds as well.
quote:
While a pension plan that automatically rebalances their asset allocation will buy stocks all the way down and then sell them back off on the way up. A good pension fund can do this in a more efficient and smoother way than any individual can.
So can a mutual fund. But I don't think you understand the scale of what a Pension Fund actually is if you think they are essentially day trading to rebalance upon allocations. Their public equities portfolio allocation is almost certainly massive and either changes not at all or in massive dollar amounts, their actual public equities trading is handled by the same people who do the mutual funds, and is largely indistinguishable from them. Favors long, value investing.

The biggest difference is their access to non-public markets, which you generally can't access at all, but you as the individual don't see any benefit from that as they don't share outsized gains with you in any meaningful way. It just gives them more capacity to absorb risks and losses.

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Seriati
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quote:
Originally posted by TomDavidson:
quote:
It has always been the case that politicians promise pensions and put the costs on their successors.
When was the last time you saw a politician promising a pension, as opposed to promising to do away with pensions and throw people on the mercy of the market?
I have never seen it not occur during an election. There is always a politician that promises, in exchange for union support, to protect their unsustainable pensions (or to minimize the harms). And no matter what "reforms" they present to the public, the deal they actually sign always contains back-ended payouts.

I still think they should be required to fund all contributions in the current budget. That would properly align interests.

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TomDavidson
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quote:
I have never seen it not occur during an election.
Can you provide a link to a politician in the last year promising to protect unsustainable pensions?

Note that this is distinct from promising to actually defend union contracts from corporate malfeasance.

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Seriati
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quote:
Originally posted by TomDavidson:
quote:
I have never seen it not occur during an election.
Can you provide a link to a politician in the last year promising to protect unsustainable pensions?
No. Because no politician is stupid enough to state something that expressly.

But you can, with about five minutes effort, pull a list of local, state or federal endorsements by any major union and do a search with the politician's name, the word "quote" and the word "pension" and find an uncountable amount of articles on the various promises and cozy relationships that exist. And then if you really want you can follow up AFTER the election season and after the press stops looking and see what the deals actually look like.

When you start looking at the budget crises that exist in city after city over unfunded pension obligations, and back track to where those deals were signed, who they benefit and who the benefitees endorsed and worked to elect the self dealing circle is obvious.
quote:
Note that this is distinct from promising to actually defend union contracts from corporate malfeasance.
What "corporate" malfeasance would that be for public employees?
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TomDavidson
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quote:
What "corporate" malfeasance would that be for public employees?
*grin* Ironically, here in Wisconsin, that's not merely a vapid question. Public employees are having their livelihoods destroyed by idiots bought out by corporations.
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The Drake
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As a sophisticated investor, I am in favor of, but not satisfied, with 401k.

401k doesn't let you invest in all the market vehicles of an IRA. Specifically, you can't invest in bonds, just bond funds which are VERY different. A corporate bond can guarantee you 5% interest unless the company files bankruptcy. A bond fund can tank badly if interest rates change, or there is an embargo, etc. Usually you have about 15 funds (at most) to choose from. Not good enough, because usually there are only two options at most for a risk profile.

I'm always thrilled when I get to move my 401k money into a full brokerage account, usually because I changed jobs.

I'd much rather see IRA contributions where you get to choose your own broker, your own investments, etc. That would be free market retirement planning.

Government pensions for military, federal, and state employees make sense, because they can't be easily unwritten or renegotiated. Private pensions are nonsense for the sheeple. UHHH I just wanna work for the same company for 30 years and get my gold plated watch. Go screw, idiot. The world doesn't work like that anymore.

Of course, even worse is the SSA "lock box".

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NobleHunter
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I don't mind being on a defined contribution pension plan, though maybe because I've heard too much about pension plans collapsing and falling short. It appeals to me that I own my retirement money and don't have to worry that I'll get screwed because 20 or 30 years from now the company blew up or something. The market might explode, but there are ways to manage that risk.

It occurs to me that I'd better not count on the Canadian Pension Plan given the tendency of "conservative" governments have towards kleptocracy--I mean free-market principles(speaking of Wisconsin). While Harper hasn't done much--I don't remember if he pulled off increasing the eligibility to 67 or not--odds are we'll have at least another round of it which makes expecting the plan to be available when I retire kinda chancy.

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The Drake
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Personally, I don't think I understand the difference between SS pension and welfare, except that it is a different set of taxes and you don't have to prove need. And that there is a maximum amount at which you stop being taxed (currently 118.5K), which is bizarre but part of the original statute.
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philnotfil
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quote:
Originally posted by NobleHunter:
I don't mind being on a defined contribution pension plan, though maybe because I've heard too much about pension plans collapsing and falling short. It appeals to me that I own my retirement money and don't have to worry that I'll get screwed because 20 or 30 years from now the company blew up or something. The market might explode, but there are ways to manage that risk.

Most people would be fine with a defined contribution plan rather than a defined benefit plan. Unfortunately what most often happens is companies drop the pension plan and tell employees that the company will set up a 401k program that the employees can contribute to. It gets sold as giving the employee power over their retirement, but it is really just a pay cut.
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NobleHunter
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It does help the switch occurred before I got access to the defined benefit plan. The mandatory employee contribution was just another deduction on my new paycheck rather than pay cut.
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Rafi
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quote:
Originally posted by The Drake:
Personally, I don't think I understand the difference between SS pension and welfare, except that it is a different set of taxes and you don't have to prove need. And that there is a maximum amount at which you stop being taxed (currently 118.5K), which is bizarre but part of the original statute.

The only difference is that one is designed to secure the vote of the elderly and the other to secure the vote of the poor. Buying votes requires a little segmentation of the population, keeps them divided for proper manipulation.
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