They’re another place for your family wealth manager to stash some cash and balance the portfolio when you literally have too much money to know what to do with it all.
It’s it’s just a mathematical concept that is easy for the average 401k contributor to understand.
Then there’s the fact that many wealthy Americans don’t want to be perceived as being “elitists”. Despite the self-delusion, I kind of like that everyone aspires to be seen as middle-class. It contains within it an unspoken assumption that a strong middle class is the cornerstone of liberal democracy.
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That’s because the country has bought into the idea that if you live under a roof and can afford food - you are middle class.
This is due to a systematic effort by the rich to make people believe that having (gasp!) refrigerators makes them ‘not poor’.
To be middle class (as it meant to someone who was in the 50’s - thus ‘as America was great’ per say) you need to make around 130k a year on a single salary today. Then you can afford your bills, car, house, and a yearly vacation while putting your kids through college (that last part… perhaps not these days) and not be in debt up to your eyeballs… like someone in Middle class should be able to.
The sad fact is that most of the people look at the median (average 50K a year for a household) and assume that ‘middle’ salary = middle class - without actually understanding that you can have no Middle class at all and still have a ‘median’ salary.
replying to the correct post
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Dad is that you?
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American style defined benefit pensions were not great either. They were good for people who got the most benefit from them, but even at their best they were highly exclusionary. They typically had very slow vesting that harmed people who for whatever reason changed jobs or even careers. Pensions tied to unions were a bit better than ones tied to employers, but still problematic. Retirement benefit was often defined proportional to your income at retirement or in the handful of years before it, which benefited people who got promotions late in life, or who were able to work extra overtime or bonus hours in those critical years. These bonuses were disproportionately allocated to white males. They intrinsically benefit the people with the highest life expectancy (again, white, upper middle class). So while they provided comfortable living for the black and hispanic men who had them for the relatively short post-retirement life expectency, they didn’t help build nest eggs for the next generation that many many white families enjoyed. They were more strongly tied to “traditional family” models, providing income to legal spouses after the death, but screwing divorcees, gays, and other non traditional families. They have zero ability to be tapped in an emergency. While that is risky and financial advisors strongly recommend against it, there are still times when it would be preferable – especially if the consequence of not having the money on hand is the inability to work and then losing out on vesting.
A lot of this could have been solved,or at least improved if they had stayed around. And DC retirement accounts have their whole list of problems as well. But I think it is important not to look at the past too favorably.
Somewhat ironically, the one criticism of defined benefit pensions that you actually hear about is completely wrong. Despite anything you have heard, DB is cheaper than DC, at least if you evaluate it fairly (i.e., on providing a certain level of retirement security to a group of people) precisely because it stops when you die. DC requires individuals to save for the “worst case” to avoid running out of money if they live to 95. An actuary planning to fund retirement for a group of people only has to plan the average case. When people say DB pensions are too expensive, they just mean they want to cut their employees pay.
All that said, I don’t actually think fixing employer (or union) provided defined benefit pensions is worth the effort or even really a good idea. We already have one defined benefit plan that works, has solved many of the problems I listed, and operates much more efficiently than privately run insurance providers. Shore up social security, repair the social safety net, and fix income inequality so that saving in those defined contribution plans might actually be practical for the majority of the population.
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That is getting better, slowly. Not that it helps the huge numbers of people who either don’t have access to one or can’t afford to contribute meaningfully, but it is happening. Plenty of 401ks are now at least offering index funds or index fund based target date funds (which I do not like, but are still way better than high fee, low performance funds that still populate many 401ks. Obama’s DOL really pushed regulations on that, including the fiduciary requirement for financial advisers which obviously Trump cancelled because it would cost bankers too much money, but a fair number of plans reformed in anticipation of that change, and a number of lawsuits against companies for screwing their employees over scared a few more into line.
Again, the big problem is not the crappy expensive 401k plans, but the fact that too many people can’t afford any retirement plan.
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One other thing that is misleading is that many people who earn enough to be in the top 1% only do it because they had an event like the sale of a company. So, they may earn $200K per year the vast majority of the years and then sell their business or real estate or whatever and have a one-time $1MM+ pop. And each year, there are tons of people who have those once in a lifetime events. The percentage of people who are in the top 1% of earnings every year is a subset of the top 1%.
For example, when you look at the very tippy top of the food chain: From 1992-2008, 3,672 different people made the Fortune 400 (if there was no churn, only 400 people would have made it). 4 out of the 400 appeared on it in all of those years. Most of the people who appeared had big one-time events.
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Well, here are the countries in the world with higher average incomes than our $58K. Monaco, Liechtenstein, Bermuda, Switzerland, Norway, Luxembourg, Macao, and Iceland.
This isn’t exactly a hellhole. Japan $39K. China $9K. Mexico $8K. India $2K.
I really don’t think there’s any kind of a systematic effort by the rich to do this. Overall, I tend to be very suspicious of any grand declarations about there being deliberate efforts by the rich and the elites to engineer the society to work in this or that way to their advantage; it ascribes too much effort, attention span, and competence to those elites.
Rather, this kind of stuff emerges from the society and its attitudes, generally without any deliberate or conscious effort. A lot of older people are sincere in thinking that, for example, smartphones and flat-screen TVs are somehow signs of wealth and if you have those you can’t be “really” poor. And this is simply because they remember the times when those things were new and expensive and, indeed, status symbols, without having internalized the massive deflation in consumer electronics prices making them everyday items, or the social changes making a cellphone an absolute necessity for most people.
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This especially considering that in raw dollars I recall the old AT&T brick costing more than a modern smartphone monthly - and that was before the 1.48 a minute long distance calls. That phone also came on installment payments.
I do think it’s systematic - but that’s because I can’t see the death of income gains on the low end (with all the profit being taken by the top) along with the media message that started (lets pick a year… like 1980) blaming all the problems in the world on the welfare class and how they were stealing all the gains from the workers.
That said - if you disagree can we at least agree that it’s Systemic?
They may not think of this option, but anybody can transfer part or all of the 401(k) into a self-directed IRA at any time without penalty.
ETA: just be sure to get the maximum of the employer match then move it to something you control.
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That sounds more reasonable 
Be careful though, revolutions like that tend to devour their own children:
Oh, it’s definitely systemic! I just don’t think it’s some kind of a coordinated deliberate effort, rather than the end result of lots of people pursuing their own benefits with no attention to the society’s wellbeing as a whole, and the government not doing anything to counteract that. 
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But his point that your statement, “when you include property, retirement accounts, insurance policies…most people are actually millionaires…” is problematic. It may not be central to your overall argument – but it bears stressing that actually most people in the US are far from being millionaires.
Indeed, just reading the data in the earlier mentioned link, shows that in 2016 the Net Worth of
- three quarters of the poplulation’s was well under $400,000
- half of the population’s was under $100,000
There are endless disputes about the top ten percent, or the top one percent, or the top .1 percent… but the fact that almost half the population would not be able to pay a surprise $400 expense without selling something or going into debt gives one an inkling of the situation.
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These are the notable items that go into the definition of net worth:
- The market value of your home.
- The market value of your vehicles.
- The money in your investment accounts (including your retirement accounts and life insurance contracts).
- The amount you have in your checking and savings accounts, including CDs and money market accounts.
- Notable items of value you own, such as artwork, furniture, fine jewelry, or collectibles.
My point is that while most people do not have more than $100 in their savings, said savings is not the sole defining value of net worth. And in fact most people have far more net worth than they realize because of insurance policies, retirement accounts, and other assets that they do not think of as part of the equation. Have a pension plan? Yeah…maybe you cannot pull on it for another 25 years…but it is part of your net worth. More people are millionaires or really close to it than they realize.
This is a an internet thread. I cannot call up data from where I am employed that shows this…I’d lose my job. And I am not here to do research on it for anyone else. Additionally, when said “research data” is from a source like this…
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My response is a heavy eye roll. I do not know who they are and I am not taking that resource as vetted just because it says so on their website. I know who I work for. I know what we do. I know what our data looks like.
You and anyone else don’t have to believe me and if you feel some need to win an argument with someone on the internet than you can not reply or @ me either. I am not interested in measuring anything with anyone.
Have a nice day.
I’ve seen that argued, but it’s really because of semantics. We’ve grown to use DCA to include putting in X dollars every paycheck into a 401K or IRA. I guess that’s technically not the case as DCA is with existing assets and payroll deductions are systematic investments. It’s the latter that I’m talking about.
The point that you repeat, that
most people have far more net worth than they realize because of insurance policies, retirement accounts, and other assets that they do not think of as part of the equation
may well be so – but it is not so for a very large segment of the population. According to the 2014 US Census, 36.6% of households had no equity in a home, 49% had no equity in retirement accounts… and a far greater number had no equity in life insurance.
I do not doubt that there are many folks who have greater assets than they realize, but they are hardly the majority. Anyone with eyes can see that there is a large segment of American society that is really suffering economically, and it seems callous to suggest that really most people are essentially millionaires.
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Perhaps. But it’s not a significant number of the population of the USA. Anyone falling into that category is well aware how to calculate net worth. We used to call those people “house poor” as a generalization.
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They are not always house poor, but I do get your reference and it is not totally inaccurate for many.
And you would be seriously surprised at the number of them that very very literally do NOT know how to calculate any of it. It is shocking how many participants enroll in certain things (like a policy or retirement account) and set it and forget it. They never look into the valuations or actively manage anything. They treat their entire financial life like a rotisserie!
This is the primary battle my industry faces with its customers. Even those that have real wealth and assets under management don’t even know most of the time as they use executive services or third party relationship management to handle everything. It is frightening how many people have almost knowledge of their holistic financial situation past the main balances in checking, savings, and a DC plan of some kind.
Which is part of the problem with “surveys” that rely on what someone knows about themselves. Asking someone “Do you know what kind of investments you have in your 401(k) or do you not have a 401(k) at all?” And they answer “I don’t have a 401(k) at all.” when in fact they do. They have a 403(b) or 401(a) or other DC plan based on their employer segment. But because you didn’t ask them the right way you get a faulty answer.
Again…you would be shocked at how ignorant the majority of people are about this and the number of people actually in this boat is much more than you realize.
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