Those policies combine the worst of both worlds. The “putting all your eggs in the one basket” of the company provided pension with the “your are on your own” of 401ks. I saw that myself in a couple of the places where I have worked. There should be regulations limiting the amount of company stock forced into those companies employees retirement plans. An advantage of working for a non-profit is that you don’t suffer from those kinds of shenanigans.
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I agree that the principle benefit of 401(k)s versus employee sponsored plans is to avoid the dependency for the sponsoring firm to stay in business, and also the need to stay at a single firm for a tremendously long time to earn a good pension.
But defined contribution versus defined benefit is a bad idea. There was a good HBR article (https://hbr.org/2014/07/the-crisis-in-retirement-planning) pointing out how defined contribution approaches are broken.
I think ideally there would be a 401(k) wrapper around a fixed annuity that is offered at a reasonable rate, so people could put their investments into a product that would more likely to offer the direct salary replacement income which they would like. Unfortunately, that doesn’t seem to be likely to happen any time soon. Fixed annuity prices are very poor investment opportunities for most people. And even if the prices were better, most 401(k) plans don’t seem to offer fixed annuities.
Maybe sometime after the Trump administration we’ll see reforms which get us to a better place.
A target date fund is supposed to do this for you, no?
(Knocks on wood)
For sure I think 401k funds and the whole concept of dollar-cost-averaging are for suckers. There just aren’t a lot of better ways to invest our money for the long term. None of us tiny retail investors should be in the stock market all. But we all already have full time jobs, so we don’t have a ton of time available to spend managing any other type of long-term investment.
Alternatively, you’ve got to know when the hold 'em, know when to fold 'em, know when to walk away, know when you can’t really walk away because somehow the government has mandated that you play.
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They do, but even at low-cost providers, the target-date funds charge a management fee 7 to 10 time as much as their own index funds.
(grammar fix)
This bears reposting every time the topic of 401(k)s come up.
A target date fund comes with management fees that may absorb most or all of your gains. Index funds have a lot lower fees.
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I do not disagree, as most of my money is in index funds, or at least sector funds. This is the monies I have set aside for long term goals. Paying fees is not always bad as the core of my investments were bolstered by the Magellan fund in the 80s. I rode Lynch,but cashed out by the time Vinik changed the funds philosophy. Presently 0.68 is way to high for what Magellan offers now, especially since it’s size mostly makes it an Index fund. As for individual stocks I dabble in industries that I understand. Some people do fantasy football or golf, I follow the markets. Missed on TEVA but hit on Ferrari.
Except you do.
Every study says that dollar cost averaging and index funds give you the most bang for the buck.
If you don’t have a low fee index fund in your choices, ask the company why not.
If we could depend on any other kind of retirement planning, I’d be with you. But we can’t. And Republicans have now proved they will kill any program - especially if it works well like Social Security - if their donors want it gone.
Frankly, with the multiple bankruptcies Trump has, I’m not putting all my bucks into Treasuries either. Once he’s gone, that may be a more sensible alternative - except if high inflation returns.
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It can be at times and, more importantly, it can and has been a negative-sum game.
My theory about markets is that ultimately they become naturally cooperative over time where competition is minimized to ensure a stable return on all investments (even of direct competitors) as competition always injects instability which threatens all businesses. So index funds can take advantage of that natural tendency toward stability. Also I think this is why active trading fails to follow the lead in terms of growth. How do you outperform as an active trader against the collective action of firms in a given industry when they’re naturally avoiding competition and maximizing their profits on all fronts?
In fairness to the author, you have to remember that any funds you expect to need in the next three to five years should NOT be in stocks.
The people who got badly decimated in 2008 weren’t folks like me who were heavily weighted in stocks because I could ride the recession out. The folks who were planning on retiring in 2009 or 2010 lost a great deal of the value of their 401ks when they needed the cash.
The mantra I was taught was - Bulls make money, bears make money, pigs get slaughtered.
Any monies you’re going to need in three to five years need to be in cash or treasuries. If your kid is going to be a freshman in 2021, move the tuition money into cash for that year. If you’re going to retire in 2020, move the first two years of money into cash or Treasuries.
Yes, you will lose the phenomenal gains the stock market will no doubt spring in those two years. But you will also have the cash on hand if instead we have another crash.
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Ya know, working the rest of my life doesn’t bother me too much. What is the alternative (retirement) saying? “I’ve contributed enough to society. Now society owes me a living.” I think I will probably work as long as I can, regardless of how much “wealth” I manage to accumulate. I would add, that I hope that when “can’t work” comes, death will follow quickly. I’m a DNR kind of person.
Problem with that is some professions or trades require a certain amount of physical work that can not be continued past a certain age. I am in a field where 40 years of experience is worth over $100 K a year, but the problem is you need to climb a ladder to get to it. That is why we invest heavily in our working years, so that when our knees and spine discs wear out we can still eat. I will be retiring on my planning, and who knows maybe I will write uplifting poetry that will benefit mankind, but don’t count on it.
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I get it–pensions are better. But what do I do besides invest in the 401(k) I already have? I appreciate the political theorizing, but for those of us already in this situation, there’s not a lot of solid practical advice on what to do next.
This is my understanding, too. And to the point the author of the NYT piece, it removes you yet another step away from the actual thing/entity you are invested in. There’s the company whose stock we are investing in, then there is the mutual fund that owns the stock, then there is the target fund that owns the fund that owns the stock.
That is the point of the column, pension funds were like investors that are unionized/collective, but then 401k’s are breaking up that collectivity.
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I don’t plan ever to stop working. At some point I plan to stop working for corporate overlords, and that is likely to mean being formally ‘retired’. And I don’t expect to recover anything near what I paid into various retirement funds. But they should still be flexible enough to allow me more choice of what to work on. I have parts of a couple of books written, open-source projects on the shelf, volunteer work in my community that needs doing. So many projects, so little time! But none of them pay enough to live on, so that’s where ‘retirement’ would come in.
If I didn’t transition to formal ‘retirement’, I’d not be able to ‘pay it forward’ with the above. Moreover, I hear from the younger folk that I have a duty at some point to step aside and let someone younger take my job. (Which is fine, if I get to work on all that other stuff!)
My wife and I have been frugal all our working lives - partly to keep our chances alive in the retirement lottery, so that we could at some point p*ss off and start working at more important things that don’t pay.
(That said, my employer’s pension fund is grievously underfunded, and I wouldn’t be surprised if my mutual funds are invested in counterfeit shares. So I’m likely hosed anyway.)
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That’s no way to invest your money.
It is supposed to go inside the mattress.
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