Sticking with 401(k) plans even after painful 2008
Vanguard Group says 84 percent of participants in defined-contribution plans didn't change a thing during a lousy year for stocks. Inertia is the dominant force in retirement decision-making, it says.
Sticking with 401(k) plans even after painful 2008
Mike Armstrong, Inquirer Columnist
Back in October, as the markets went haywire, I wrote about what I was doing with my investments.
I did so because people kept asking me. It was a time of panic with the Standard & Poor’s 500 index falling 38 percent for the year. People wanted to know whether they should buy, sell, hold or fold.
Now, as a business journalist, I don’t give advice and I don’t invest directly in stocks or bonds. But as a wage slave, I do save for retirement in my company’s 401(k) plan using mutual funds. And my response last fall was that I hadn’t changed a thing.
It turns out that’s a pretty typical reaction. Some might call it “resignation.” Vanguard Group, the Malvern mutual fund family, dubs it “inertia” and says it plays a dominant role in retirement decision-making.
Vanguard examined the activity of participants in the employer defined-contribution plans it managed during 2008. (A 401(k) is one type of defined-contribution plan.)
According to a paper by Vanguard research experts Stephen P. Utkus and Jean A. Young, only 2 percent of participants switched their entire portfolio from equities into fixed-income securities during the year. An additional 14 percent made a variety of changes to their portfolio.
That left 84 percent of 401(k) account holders who did nothing, just like me.
The 401(k) is now the dominant system used for retirement savings. But it’s a fragile one, according to the experts at Boston College’s Center for Retirement Research. Many workers don’t partipate in the voluntary plans. Those who do don’t contribute enough and don’t diversify their investments.
I did tweak things this year. I still contribute to my 401(k), but I rebalanced my investment portfolio. Rather, I balanced it for the first time, shifting some assets to bonds and cash after being 100 percent in equities for too long. And I did so after coming to the realization that I am no longer 21 with my whole career ahead of me.
It frustrates me to hear projections that it could take five years for my 401(k) account balance to build back to the level it reached at the beginning of 2008.
However, I intend to keep squirreling money away under the belief that one day I will retire and in the hope that I can afford to enjoy it.
There is nothing wrong with a 401(k). What is wrong is that people's risk tolerance diverges from the rewards they expect. If you want all stocks, be ready for a market crash. If you don't want that much risk, hold a diversified portfolio with mostly Treasuries. Let's face it - for most people, if the government can't back those, we have bigger problems.— NickFromGermantown- I'm still seeing advice that people should to 401K contribution to take advantage of their employer's match. There's a wave of companies that have completely eliminated the match. What should those people do? There's nothing wrong with 401Ks? Really? What's wrong is that people have been lied to? They are constantly quoted the average return. Does anyone receive an "average" return? Nope. Never. They get the return when they sell. If you are about to retire, you just learned the difference between average and actual return. And, obviously, our 401K savings are not well protected. What happened over the last year is theft. The system was manipulated so that our savings could be stolen. People have zero theft tolerance but it's all that we have. Great situation that this country has allowed us to be put in. But it sure is great to control my own destiny! Scamers need to be put in jail.— MikeP
- No one can force you to make investment elections. You take on as much risk as you want. If you don't like risk, then pick a stable value fund or cash. I love this quote: "If you think education is expensive, try being ignorant". 401(k) plans are just a tool. It all depends on how you use them. What do you want to replace 401(k) plans? Social Security is not viable financially. Depend on it at your own risk!— NickFromGermantown
- Considering the current rate of inflation and failure of the SEC to monitor inappropriate behavior; retiring comfortably will consist of working for minimum wages at your local McDonalds or Walmart.— azaan19131
Mike Armstrong blogs about Philadelphia corporations and business-related topics. Contact him at 215-854-2980.
Reach Mike at marmstrong@phillynews.com.
