Passing the Blame: Some Thoughts on the 401(k) Crisis

A couple days ago at the doctor’s office, I picked up the newest issue of Time, which featured a cover story entitled “Why It’s Time to Retire the 401(k)” (and you can read the article online).

The article was filled with lots of stories about individuals close to retirement age who lost a large portion of their retirement savings in the stock market market downturn of 2008, including some who were forced to return to work. The article concluded that the 401(k) system is thus broken, since it’s letting down the people who rely on it.

Here’s the problem, though: 401(k)’s aren’t at fault. Personal responsibility (or a lack thereof) is.

A 401(k) plan is basically just an investment opportunity where employees can put in their money before taxes, then pay income taxes when the money is withdrawn much later in life. While the money is inside the account, account holders have a wide array of investment options. Some of them are very stock heavy and, yes, include a lot of risk; others are more diverse and offer lower risk. The choice of options is left up to the individual investor.

In the end, the investors who suffered a disastrous, life-altering 2008 in their 401(k) accounts were either contributing too little and essentially gambling with it or they didn’t bother to learn or understand how investing works.

A stock fund with a 10% annual return is not a guarantee of a 10% return each year. Minimal reading and investigation into investing reveals this to be true. Thus, if you need that balance to be there for you, you shouldn’t have it in stocks.

Some of the people who are suffering right now were not aware of this fact. They either didn’t bother to investigate their investments further or they simply chose not to think about it at all.

In either case, they chose to invest their future into something that they didn’t fully understand. That’s an incredibly dangerous individual choice.

And, honestly, my sympathy for them is somewhat limited. To build up the large balances that they had in their 401(k)s requires years and years of regular, steady investment – a substantial portion of the financial output of their life’s work. Yet, in many cases, the investors never bothered to truly learn about their investments or make any effort to diversify, using other funds or balancing things out with a conservatively-invested Roth IRA.

There’s a lesson to be learned here. Know where your money is going. Know where your investments are placed. If you can’t afford to take a loss on that money, move the money to something safe, like bonds or treasury notes. If you’re young and have many years until retirement, carefully investigate your options and know that investments in stocks will go up rapidly and down rapidly over and over again with, over the long term, a general upwards trend that will usually beat more conservative choices.

Should special help be given to people who have to re-enter the workforce because their 401(k) didn’t hold up? No. They made the personal choice to expose their investment to a lot of risk when they most needed it. If you argue that they didn’t know, I say that they didn’t bother to educate themselves about the very investment that’s supporting their entire lifestyle – another personal choice.

401(k)s are not the magic answer to retirement problems. They’re a tool, one that requires careful reading of the instruction booklet to use properly. And this time, you need to read the instructions, because if you use this tool wrong, you can cut years of healthy, happy retirement living out of your life.

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  1. Shaun says:

    I agree totally. Also, I believe your link at the top is broken.

  2. Jeff says:

    I like the idea of the 401(k), and I take full advantage of my employer match, but I would still argue that the system is in need of a major overhaul. The lack of transparency regarding fees and the limited investment options alone make a solid case for reviewing the system.

    I also agree with you that personal responsibility is key in making the 401(k) work, but we’ve seen over and over again that many people will not take the time to manage this properly. Pension plans were a much better system for that segment of the population.

    I think we need to change something about our retirement system, but I don’t know what direction to go in. Maybe both at the same time – some sort of default plans for people who choose not to be bothered with investing, and wider more transparent options for those who want to be hands on.

  3. Robert says:

    “Personal responsibility” is, sadly, something that became extinct at some point in the past 50 years, along with many other things that made this country great. I fear we’ll never see any of them again.

  4. Eve says:

    From the TIME article: “The idea that we could ever save enough to pay for 30 years of leisure is a relatively recent invention. … Indeed, Americans have more saved specifically for retirement than ever before.”

    It seems to me that Americans as individuals *are* stepping up and taking responsibility, by saving more. However, it’s one thing to be an amateur investor doing the best you can to read articles here and there to guide you, while mostly focusing on your actual job that you get paid for. It’s a very different thing to be a professional pension fund manager. A different level of education, of expertise, a whole different level of time and focus you can bring to the task of maximizing returns.

    From the TIME article, according to the NBER, “The average 55-to-64-year-old should have a 401(k) balance of $320,000.” Ernie Lucantonio “retired from Occidental with $350,000 in his 401(k). That’s a hefty sum, but he can withdraw just 4% of it annually, or about $1,200 a month, to limit the chances of outliving his money. That’s 60% less than what the traditional pension would have paid him.”

    So, Mr. Lucantonio took personal responsibility for his retirement account, succeeded in growing it to larger than the recommended average, and still has had to “unretire into a new job.”

  5. Lana says:

    I agree with this post in part. Yes, people need to take personal responsibility for their finances. But both my mother and my stepmother will still be receiving pensions at jobs where they put in 20+ years – which is how retirement used to be. It seems to me that the switch from pension-based retirement plans to individually managed retirement plans was bumpy – people are now responsible for their own funds, but during the switch-out, it doesn’t seem like there were any programs or strategies in place to make sure people knew what that really meant.

    Just like a child who turns 18 now needs to know about his or her own finances, that child could’ve been helped along the way with a proper education from his or her parents.

    Employers who sign up new employees to automatically contribute to their 401(k) plans have the right idea, however, they still skirt the very important issue of making sure their employees know what that means.

    Unfortunately, I think people who are naturally interested in retirement and finance are in the minority – as a 26-year-old with a modest 401(k) plan, I find I’m often the only person asking questions or getting interested in the (very dry) annual meetings put on by our financial group. We should be giving everyone else a hand by making sure they know the basics.

  6. Amanda says:

    “Personal responsibility” is a personal choice. It is not dependent upon the era we grew up in. There have always been entrepreneuers who failed such as those who trailed the California gold rush. Land rich – cash poor, debtors prisons; these ideas and sentaments existed centuries ago.

    And there have always been those who went a different way. I’m 27 and feel as though I take personal responsibility for the things that are mine.

    Complain about the lack of personal responsibility in those around you, but certainly don’t assume that all of society has abandoned it.

  7. Johanna says:

    Well, yes and no.

    On the one hand, I think you can understand how stocks work, that they’re risky, etc., and still be unprepared for the market to take *such* a big dive in such a short period of time.

    On the other hand, I think that if a 20-30% drop in your portfolio means the difference between retiring and not retiring, then you were cutting it too close to begin with. And I think that anyone nearing (or already in) retirement ought to have had a sufficiently conservative portfolio that their losses in the recent downturn would not be more than 20-30%.

    On the third hand, it’s easy for those of us with decades to go before retirement to say that the current generation of retirees just did it wrong and it’s all their fault. Remember, the people retiring right now are among the first to have been expected to save for and fund their own retirements. They didn’t have a previous generation of mistakes to learn from.

    Also, it’s easy for those of us with good college educations, above-average intelligence, a natural talent for mathematical and analytical thinking, and a natural interest in financial matters to say, “Well, people just need to educate themselves about what they’re investing in.” True, a little bit of reading reveals that the stock market doesn’t guarantee a 10% return each year, BUT it has to be the right little bit of reading. If you happen to choose the wrong little bit of reading (such as one of the many, many books and articles out there designed to “simplify” the concept of investing for people who aren’t as mathematically inclined as we are), and you can easily come away convinced that the opposite is true.

  8. jc says:

    Jeff said most of what I wanted to say.

    And though I agree that personal responsibility plays a role, ascribing it 100% of the blame does not account for investor psychology (which works against nearly everyone at every turn, including the pros) or the those who lacking sophistication or patience to work through the materials that often seem designed to obfuscate (by using word like obfuscate–who talks like that?)

    Missing from your analysis, too, is the massive shift in responsibility that this has entailed, with huge public policy implications. As I told my polisci undergrads for years: losers in the markets will seek retribution in the political arena, and will often seem to win (but often creating lose-lose situations for everyone!)

  9. Karen M. says:

    The people in this article are in their late 60s or early 70s. These are the people that entered the job market where a defined-benefit pension was normal. People worked for one company for thirty-five years, and the company took care of its own. From what I gather after reading the article, the pensions were dropped from their company in the early 80s and the 401(k) was the only route available to them. The IRA was not available at that time (not until 1986 or -7, I believe) and the Roth IRA wasn’t available until the late 90s (98, maybe?). “Balancing out” their investments with a Roth wasn’t possible.

    The article stated that around 15% of people who have 401(k)s are invested only in bonds, and 25% completely in stocks. That means that about 60% of people with 401(k)s are attempting to diversify.

    You are speaking from the viewpoint of someone in his early thirties, with the twin benefits of lots of time to work, save and invest and the lessons learned by this crash and recession. Those of us saving for retirement now can use all this information to help and better our situation– and THAT is the lesson to be learned here. But the current retired generation cannot be judged by the same yardsitck a thirty year old uses to measure himself.

    I think this article would have been more successful (for me) if you had used to Time piece as only a jumping-off point to an article about good saving and investing now, rather than including a condemnation of the retired workers in the article who didn’t know how something brand-new in 1983 (when they were about halfway to retirement) worked.

  10. Jill says:

    2008 was a bad year to retire because it wasn’t just the stock market crash; it was also the housing market crash and there seem to be a ton of people in the 50-65 age group who had come to rely on a big windfall profit from the sale of their homes in order to finance 20 years of relative comfort in a cheaper cost of living location.

    I’m in my 30s. Current job doesn’t pay terribly well, but I’m actually vested in an old school pension plan through that job. They did have a 401K option you could pick instead, but if you were going to be in the system for more than five years, it was amazing how much better the defined benefit plan ended up being than the estimated returns from a defined contribution plan were, even during a time of reasonably good market growth.

  11. “If you’re young…know that investments in stocks will go up rapidly and down rapidly over and over again”

    I think now is quite possibly the worst time to learn this lesson people entering the workforce. Since I started working this summer, I have seen the markets only increase. My 401(k) is doing great (with a very small amount of money) and it seems like I should be very aggressive. However, this won’t last forever, even though it seems like it will.

    I would not be surprised to see young people be overly aggressive with their investments and face a harsh reality the next time the market drops.

  12. George says:

    401Ks are broken as healthcare in the USA is broken. You are limited by what your company offers and the transparency of what they provide you is lacking. Not all employers offer them.

    Personal responsibility is broken, too. People are not saving enough and borrowing too much.

    30+ years of retirement is definitely a new concept for the masses as up until the ’60s, people expected to live 10-20 years after retiring at 65.

  13. Fred says:

    Bonds aren’t necessarily the “safe” investment. I had a significant portion of my 401k in bond funds. These funds declined in value just as much as my stock-based funds did. The only “safe” investment is a cash fund.

  14. Faculties says:

    In an ideal world, everyone would study money management and investments, and choose the right mix of diversified low-cost funds, etc. But people have a whole lot on their plates. It’s challenging to juggle everything in modern life and keep all one’s balls in the air. Some of these people — well-intentioned, good people — are going to make the wrong choices, or not have educated themselves fully enough. I don’t think it’s fair to say “They didn’t take enough personal responsibility for their 401(k)s, so they deserve to be impoverished in retirement.” If a significant proportion of people aren’t managing the level of knowledge it takes, then it ought to be easier. Is our goal to make sure everyone has a secure retirement, or to punish people for not meeting a certain level of financial sophistication? I would rather that no one slipped through the cracks. I wish the old pension plans were still around, and I welcome whatever new, simpler vehicles for secure retirement companies can design.

  15. Andre says:

    I agree with you that it’s the individuals responsiblity to know what sort of risk their money is taking on. I personally think everyone should try to adhear to life cycle investing. This allows them to hedge risk as you get closer to retirement.

  16. Rick says:

    @Fred:

    I’m not sure which bond funds you hold, but most bond funds did not lose nearly as much as stock index funds did. Look for instance at the Vanguard Intermediate Term Bond Fund (VBIIX). From peak to trough, it lost about 11%. Even so, not even a month later, it had already recovered most of that loss. Now, a year later, it is even higher than it was before the crash last year.

    Bond funds are indeed much safer than stock funds.

  17. Amy says:

    I DO sympathize with a lot of these people. For many of them, their employers didn’t offer them traditional pensions, and then those employers advised them that a 401K was “just as good”. As for learning where your money is going…. I have a graduate degree and consider myself intelligent, yet I find just filing income taxes to be confusing. Your average person, who is most likely overworked to begin with, may not be able to become knowledgeable about investments even if he/she tries. If after trying to learn it they still feel befuddled, well, I guess their only safe option is FDIC-insured accounts (which don’t feel as safe as they used to) offering all of 0.5% interest.

    Remember that there are a lot of people out there for whom this stuff is incredibly difficult to understand, no matter how hard they try. And remember that just a few years ago, our then-President was trying to convince us we should turn social security into private investing — because everyone could make such smart decisions and make a killing on the market.

    Sigh…..

  18. Great Article. It is important to understand what you are getting yourself into. Also great to take personal responsibility for your life. Very freeing.

  19. Johanna says:

    Another thing: It’s easy for those of us who have had internet access for all or almost all of our adult lives to say to these people, “You should have educated yourselves.” Not so very long ago, “educating yourself” on any given topic took a lot more initiative than just typing a few keywords into Google. Even looking up information in the library has gotten a lot easier, now that we have access to scads of online reviews to help us determine which books are most helpful, thorough, and accurate.

    Sounds obvious, but as Karen M. points out, it looks like Trent’s suggesting that people should have opened Roth IRAs before Roth IRAs even existed, so maybe he’s not fully considering how much has changed in the time since these 60-somethings opened their 401(k)s.

  20. Dave says:

    At the risk of overgeneralizing, there are several compenents to creating a successful personal 401(k) and most folks can’t grasp some or all of them. And leaving out any one component leads to failure. Those components are:
    1. Contribute as much as you can from your first day on your first job. A 5% or 10% contribution isn’t going to cut it. You need 15-20% right out of the gate.
    2. Leave it alone for 20, 25, 30, 35 years. Money needs lots of time to compound to grow. There comes a time when the returns on your investments will dwarf your contributions. But that only comes after many, many years. That means don’t cash out the 401(k) when you leave a job and never borrow from your 401(k).
    3. If you don’t need the money for at least 10-15 years, invest it in riskier assets i.e. U.S. stocks, international stocks, REITs, etc. The money you need in less than 10-15 years needs to be in cash and bonds. That means the closer you get to retirment, the more money you need in cash and bonds. If those retirees profiled in Time had 10 years worth of retirement income in cash and bonds last year, they wouldn’t be in such bad shape. The person who retires with 80% of their money in stocks is courting disaster.
    4. Don’t panic everytime the market goes down. If anything, cough up a little more money to buy stocks when they are cheap. How many people out there bought stocks in March when the DOW hit its low? I learned my lesson way back in 1987 when the DOW dropped 22% in one day and gave me the gift-horse buying opportunity of all time.
    5. Here’s the kicker….you have to do all of the above to make the 401(k) work. Do one thing wrong i.e. start contributing late, contribute too little, invest too conservatively while you are young or too risky when you are old and you’ll have trouble retiring.

  21. Bill says:

    Take all of the personal responsibility to Wall St. They are the purveyors of credit default swaps that even their own people didn’t understand. They caused this 401k crisis by giving AAA ratings to crap. Then when Joe from accounting decides after 30 years it’s time to enjoy his retirement money and travel it’s gone.

    The 401k is a tool but how responsible can the investors be when the investments are misrepresented?

    Of course the Michael Moore argument is you should have known something was wrong. I can agree with that but so many more people thought real estate would never decline.

  22. Matt says:

    You missed the point here in terms of trying to relate to the article. Please read the whole article as most of the commenters did before you jump to the broad conclusion that anyone who fails to save is personally irresponsible. Furthermore, the 401K system is seriously flawed and I would like a post on why it is so good. IRA’s make up 25% of the max contribution, thus 401K’s have to be very good for the system as a whole to be good.

  23. Maya says:

    I’m really disappointed and saddened by the overall tone of this post.

    I’m in my early 30s and I strongly believe that people do need to take responsibility for their actions. However, I think that Trent’s post misses an important point that the definition of personal responsibility usually operates under society’s version of conventional wisdom.

    During the mid-to-late 20th century, many of our parents and grandparents thought they were being responsible by listening to their employers’ encouragement to put money in a 401(k). Many people had not experienced a company betraying its own employees, so there was not a lot of incentive to question how companies handled 401(k)s or any other part of business for that matter.

    So now, they realize that they were wrong. But simply saying “You should’ve known better” to those who clearly didn’t know better doesn’t solve anything.

    And limiting your sympathy for those who made these mistakes only results in limiting your own understanding of human behavior and therefore, limit yourself in learning how you and others can avoid making the same bad decisions.

    I find it interesting that this post about having a “limited amount of sympathy” for a group of people follows a post that encourages readers to help others (“Fifteen Things More Important Than Money”).

    I hope that adult workers of all ages will learn from the mistakes pointed out by the Time article. That would be a much better use of our time than simply blaming people for their own mistakes.

  24. chacha1 says:

    Johanna, your comments today are great.

    I didn’t read the TIME article, so I can only chime in with this: my 401(k) – invested in stocks I personally chose – lost about 18% between 10/07 and 10/08. It has now recovered to over the starting balance of 9/07. my IRA – invested in managed funds – lost nearly 25%, but has now recovered to well over the starting balance. I’m 44 and started investing in the early 1990s.

    Meanwhile, my Dad, a certified financial planner who just turned 71, still had nearly all his retirement funds in stocks and took a major hit from which he and Mom are still recovering. Now, *that* is someone who should have known better.

  25. I am really quite stuck by the lack of compassion in this post. I agree very much with the sentiments expressed by Johanna and others, namely, why *should* we expect everyone to be able to be educated on everything? For myself, I am trained to understand numbers and probabilities and so they just make sense to me, but I can understand how they can be confusing to other people. Those people need to rely on finance professionals even more than analytical types like us do, in order to make sense of the stock market. However, as has become abundantly clear in recent times, the professionals do not always give good advice. Part of the problem is that they make more money for some sales than others — which biases their advice. As the authors of “Your money of your life” repeated say…repeat after me. “A stock broker is a salesman…”

    Anyway, what I am trying to say is that we cannot all know everything about what we are invested in and use. For instance, I write this from my house, but I have no idea if the joists used in the framing of my bedroom are done correctly — I have to trust the opinion person that inspected our house for us. We *have* to rely on professionals and sometimes those people let us down. Should we blame those that were given the bad advice? OR those that gave it?

  26. Trent says:

    I’m actually stunned that people disagree with the idea that if you invest in things you don’t understand, you deserve to take the losses. Is there really no personal responsibility any more?

    As for the IRA part and the suggestion that they haven’t been around long enough to have an impact, traditional IRAs have been in existence since the mid-1980s. If you didn’t like your 401(k) choices, invest elsewhere!

    The material to learn more about investing has always been available at one’s local library or, for a fee, with a financial planner. I do not feel sympathy for people who bet their whole future on things they didn’t bother to understand and thus misused.

    To me, it’s similar to someone who decides to install a window without knowing what they were doing and cuts a giant hole in their house. Should I feel sympathy for them? Should society jump in and fix their house?

  27. They did invest in something that they didn’t fully understand, yes, that is what really happened. It was just gambling to them.

  28. Elizabeth says:

    Trent, you say “If you didn’t like your 401(k) choices, invest elsewhere!” But we didn’t have that choice when I started working at Sprint in 1997. I lost 80% of my 401k in the dot com mess because my money was all in Sprint stuff–which it HAD to be. So maybe you can do a little more research before wielding your big broad brush of blame.

  29. jc says:

    Okay, Trent, since you’ve come out firing without responding to any of our substantive points, here it comes, full force:

    You are well-educated, young, love what you do, and you’ve “got it all figured out” (I think you know better, but you’re displaying it poorly this morning). Most people who are stunned by all this worked their butts off for years at a job they hated and were promised a golden parachute, not like Fortune 500 execs, but enough that they could visit their grandkids, or volunteer, or everything else. And most of them DID NOT GRASP the massive shift in responsibility from Defined Benefit to Defined Contribution plans.

    Can anyone save them from this? No more than the government is going to fix your hypothetical homeowner’s house. BUT if people in positions of authority address their plight with the lack of sympathy you’ve displayed here, we’re likely to end up with systems that are worse for EVERYONE.

    We get it, Trent, you’re smart and have done your homework. So have many of us. So have many whose 401(k) tanked, and they’re now scared. How will anyone respond to their very real fears? As I see it, you deserve an A+ as a morality crusader, but an F for empathy, an F on the public policy implications and an F for helping anyone find a way out of a mess that is certainly not 100% their fault.

  30. Sheila says:

    Regarding investing elsewhere, you can only put so much $ in an IRA–a lot less than what you can put in a 401(k) plus many employers match up to a certain point. Every financial planner tells you to at least put enough $ in the 401(k) to get the match, and if your choices are limited, you’re stuck. Should you know what you’re investing in? Sure. But I agree with others that it’s incredibly difficult to figure out what to invest in, especially if you have no background in investing and little time. And can you really trust financial planners? Wasn’t Bernie Madoff a financial planner? I’m assuming you have no sympathy for his victims.

  31. kristine says:

    I do feel sympathy for people, (like a hard working 6o something woman I know), who were intimidated by the 401K, so sought and paid for a reputable financial planner through a mainstream bank, had their funds invested poorly, and have to work till they drop. My friend also spent a lifetime as a single mother caring for a disabled child who will never be able to get by without her care. She did what you would have advised, and was bit on the tush. There is no way this woman could have taken on the additional burden of educating herself about stocks.

    Just a note: all libraries are not created equal. library had a few old mangy books on college choices- out of date, and no information on my chosen major at all. I got lucky, and met someone who new somone, who gave me ideas- but I could easily not have, too. You can’t assume that what is available now, was years ago.

    I have no sympathy for anyone I KNOW to be lazy and not take care, nor do I have sympahty for the house-hungry mcmansion owners who brought the country to its knees by overextending and expect the rest of us to pick up the tab.

    But I do feel sympathy for those who were mislead, or preyed upon into financial ruin in any scenario. Not everyone is smart, and that’s no crime. There is a decent percentage in this boat.

  32. Johanna says:

    “To me, it’s similar to someone who decides to install a window without knowing what they were doing and cuts a giant hole in their house. Should I feel sympathy for them? Should society jump in and fix their house?”

    Let’s make this analogy a little better: Suppose there’s a new law that requires all homeowners to install five new windows. The penalty for noncompliance is a fine that will pretty much doom you to a lifetime of poverty (similar to the fate of people who fail to open a 401(k) or other retirement account at all, and are therefore faced with the prospect of retiring on Social Security alone).

    All of a sudden, a whole bunch of contractors go into the window-installation business. Maybe some of them are honest and know what they’re doing, but other ones are just looking to sell you the most expensive windows possible, even if they’re not the best (or even safe) for your particular house. You could go with one of them, or you could try to do it yourself, perhaps with the help of one of the many “Window Installation for Dummies” books, of varying quality, that have come onto the market.

    As it turns out, a big fraction of the people who try to install their windows themselves end up cutting giant holes in their houses. A big fraction of the people who hired the contractors end up with giant holes in their houses too. Now, do we say, “These people were all stupid and should have educated themselves more about window installation”? Or do we say, “Maybe the whole mandatory window installation thing wasn’t such a great idea to begin with”?

  33. George says:

    I couldn’t even finish reading the article. It made me want to puke. I don’t understand how people can possibly think they should not be responsible for managing their own retirement. Do you not take responsibility for the safety of your belongings by locking your home and car?

    If you want to buy a new car, you need to figure out how you will finance it, correct? Whether it be through money you have diligently saved for that purpose or through an auto loan, you must decide before you purchase the vehicle how you will finance. If you are going to to take TWENTY OR THIRTY YEARS of your life off and have vacation for TWENTY OR THIRTY YEARS, don’t you think you ought to figure out how you’re going to pay for that? It’s the same as deciding at 30 years old you’re going to take 20 years off from work. Why don’t you do that? You can’t afford it.

    Common sense.

  34. annk says:

    You also don’t address issues of uncertainty/ irrationaliy. We don’t know what the obama administration and Congress will do. Aren’t they still planning to eliminate the tax savings for higher-income people enrolled in 401(k)s?

  35. Ashley says:

    Trent,

    Where’s the love, man?

    Hindsight is 20/20. I suppose when folks were allocating their 401K fund choices three years ago, they should have been asking questions like:

    Hey, what if we spiral into a depression? What if the banks are actually bankrupt? What if corruption is the only element that thrives on Wall Street?

    Like all investments, 401Ks carry risks. But most didn’t invest with the knowledge that the system was broken.

  36. James D says:

    #28: IRAs… Enough said. I specifically don’t take advantage of the 401k offered at Marriott because I don’t like its fund options. Maybe you should have taken the time to learn about diversification before putting all of your money in a 401k that focused almost exclusively on its own stock. Like Trent said the material is and has been available for some time.

  37. Tom says:

    @johanna,

    The penalty of noncompliance is poverty!? It is an EXTREME leap of faith to say that. If you don’t feel comfortable about investing in a 401(k) then just put it in the bank!!!! If you reach the $100,000 FDIC limit, put it in another bank! Lifetime of poverty?! It’s your responsibility and choice to save money. If you choose not to save, then you choose the lifetime of poverty!

    As for everyone who says there is no time to learn and educate themselves… give me a break!

    Everyone uses that BS excuse, so you’re saying you are busy every single minute of every single day? Seriously? Spend 1 hour doing some research, the library has books and computers. The lack of time excuse is crap!

  38. Maya says:

    Trent,

    Yes, if you invest in something you don’t understand, you’re going to pay the consequences.

    But in order for any information to be useful, you have to know it exists in the first place.

    I’ve made plenty of mistakes (financial and otherwise). The most important way I learned from those mistakes was when someone chose to help me see what I was doing wrong. Then I was encouraged to start educating myself to prevent repeating those mistakes.

    So, to use your window istallation analogy, let’s say that the person who cut a hole in their house was my neighbor. I would feel sympathy for them because contrary to the old cliche, ignorance is not bliss.

    I would then go over and talk to my neighbor. And in talking to my neighbor I might learn that he/she got their advice from an inexperienced home repair person. And my neighbor learned of this person’s incompetence after ending up with a hole in their house.

    I know nothing about window installation. But I would try to help my neighbor connect with a reputable window installation company or drive them to a home supplies/repair store for advice. If nothing else, I could at least invite them over for a meal while their home was being repaired.

  39. Kirk Kinder says:

    I think what is also lacking in all of these discussions, including Time Magazines, is how pensions are not the saviors they claim.

    In the private sector, most of the pensions provide no cost of living adjustment. This was fine when life expectancies were in the 60s and early 70s, but with life expectancies passing 80 years of age, this will put many retirees in a tough spot.

    Also, many, if not all, of pension funds are facing severe shortfalls. For the public sector, some pension plans only have enough to pay 50% of the future projected benefits. So we face a situation where public pensions will either cut benefits, eliminate cost of living adjustments (highly probable IMO), raise taxes to cover the shortfall (tough to do in this environment) or take extreme risk in hopes of a higher return (not smart).

    So we will start to see the remaining pensions taking a hit shortly as well.

    I do think the 401k can be improved. I have seen several comments that better choices, fee disclosure, and transparency are needed, which is true. I also think that people are going to have to face the fact that their future is in their hands. Finance is dry, but it isn’t that difficult. With a few hours of education, you can navigate the maze. And, for those of you that say people don’t have the time to learn this stuff, then I say that those people don’t really deserve great success. Stop watching shows on Kate and John and use your time wisely. This is important stuff. If you don’t want to deal with it, find a good planner who isn’t paid by commissions to help you.

    Like it or not, this is the reality. Accept it and you will understand that action needs to be taken. And, you will take the necessary action if your financial future is important to you.

  40. Debbie M says:

    I also didn’t like that article. However, I will never fully understand what I am investing in. Does that mean I should put everything under my mattress? No.

    I understand average risks, but you never really know what is going to happen with any investment. What will happen to the economy, to different sectors or industries, to the assumptions and rules underlying different investments (and whether a thief will find your stash or your mattress will catch fire) are things we will never know.

    Also, diversification didn’t even work during this drop. Stocks, bonds, and real estate all plummeted and they did so all around the world. And this all happened when food and energy prices were going up—so mattress money was losing value, too.

    I saw that some of those mortgages were stupid, but I didn’t realize how many people were getting them or that this would lead to a crisis in the finance industry and a plummeting of real estate prices.

    I also think it’s fair to say that no matter what your strengths or intelligence level, you have to teach yourself about an area that’s so impossible to understand that professional investors do worse on average than market-based indexes. I definitely like the idea of setting up reasonable defaults that people can make changes to as they learn more. There are a lot of skills we “should” know, but it’s very difficult to know them all.

    FYI, when Roth IRAs became available, the maximum amount you could contribute was $2000/year. I’m guessing regular IRAs were the same in the late 1990s and probably less in the 1980s. I’ve been investing the max in Roth IRAs since they were introduced and I still don’t have very much money in there.

  41. Joanna says:

    @Johanna: “Let’s make this analogy a little better: Suppose there’s a new law that requires all homeowners to install five new windows. The penalty for noncompliance is a fine that will pretty much doom you to a lifetime of poverty (similar to the fate of people who fail to open a 401(k) or other retirement account at all, and are therefore faced with the prospect of retiring on Social Security alone).”

    Your basic message to Trent is solid, you don’t need to muddy it with gross exagerrations of reality. A 401(k) is not your ONLY retirement investment option. By no means does NOT investing in your 401(k) relegate you to a “lifetime of poverty”. A 401(k) is nothing more than a way to postpone taxes on your investments as well as your contributions. Every employee can invest in cash under the mattress, treasury bonds purchased with their after tax money, a friend’s business, real estate or anything else to fund their retirement dreams.

    Guys, let’s come back from the edge on both sides. Trent, it’s fair that people should understand their investment vehicles, but, you come off harsh when you say you have very little sympathy. As several folks have pointed out, the issue is a lot more complex for those retiring right now. They grew up & started working in a very different environment than we have. Tough love still loves.

    And to those who don’t agree with Trent, surely you can concede that understanding money that you are investing and diversification are not new concepts. Many people who have invested poorly in 401(k)s would NEVER have given money to a friend who wanted to start a business without understanding said business. And the saying “don’t put your eggs in one basket” isn’t new.

    All in all, I think the lesson here is to not allow the talking heads and the feelings that their words create inside of us to dictate our actions. The future is an unknown for EVERYONE. Including the so-called experts. So when they say, that you must buy a house now because of the $8000 tax credit and because mortgages and home prices are at an ALL TIME LOW!!!, you take it with a grain of salt, review your own finances and know whether or not you’re ready for that step. The same is true for investing in 401(k). When the Enron exec is telling you to put 100% in Company Stock, let the tightening of excitement in your chest be your sign that some skepticism is merited.

    BTW, to the person who said she was *required* to put her money in company stock. I don’t believe it’s legal to *require* employees to invest in 401(k)s nor to dictate investment choices for employee contributions. Perhaps you are talking about the Employer Contribution?

  42. Matt says:

    I agree with you 100% trent. The problem seems to be people didnt understand the risks, which is the problem. If you are of retirement age now, even if your portfolio dropped 50% in the last 6 months, you should have still made some return on your original investment, And if you played the game smartly (ie shovel money back into stocks while they are down) you should have been able to come out ahead (especially in the last few months). If the recent blip in the market altered peoples plans, then they really weren’t prepared for retirement in the first place. Even with the argument that it started off as a trusting just use it sort of thing, as information has been available for the last decade with the click of a button there in no reason people couldn’t have educated themselves in the more recent short term and actually have planned for retirement rather than roll the dice and hope for the best.

  43. Rosa says:

    It ought to be possible to encourage/reward personal responsibility on an individual level, and still recognize that this is a problem for our whole society.

    I mean, are we going to accept the kind of widespread poverty and homelessness among elderly people that existed before the social security system was put into place, because “they should have known better”? Are we going to continue to let employers shrug off all those costs, and then pick them up at the end by increasing benefits so we don’t have that kind of widespread poverty? Let them all work til they’re 80 so nobody else can ever get a job? This is a big enough problem that it’s not really about individual choices.

    I don’t get why we expect everyone to be a investment expert – oh, and also manage our medical care *and* billing, and be on top of education for ourselves and our kids, and do our own home repairs…

    We need systems that work even if people aren’t perfect because people AREN’T.

  44. almost there says:

    Trent, you are off base on your comments. Not all 401ks are created equally. Mine with the state of Colorado didn’t offer a match for years. It constantly changed administrators. Did not offer a money market fund to keep the principle safe. I took a 30% loss on my investments when I retired last year and transfered it to an IRA. I couldn’t wait to get out of a bad 401k and into a vanguard fund that I could direct myself. My IRA is almost back up to what I had invested in the 401k.

  45. Tom says:

    @almost there…

    Then why did you continue to invest such a terrible program? You could have invested the money yourself.

  46. Jim says:

    I both agree and disagree.

    Yes I agree it all comes down to personal responsibility. The 401k is working exactly as intended and in that respect its not broken at all.

    But on the other hand if most people can’t invest well then expecting them to do so is not going to work. If the 401k doesn’t work well for most people then its probably not the best overall solution.

  47. Dar says:

    I really can’t fault the people in the article. They’re from a different generation and different circumstances.

    If this article had been written 20 years from now, then perhaps my opinion would be different. After all, there is such a wealth of information on personal finance, investing, and saving for retirement available–for FREE–online and through the library that you’d have to be a fool not to educate yourself on the basics at least.

  48. Jen says:

    I’m torn as to how I want to respond to this. Yes, I believe in personal responsibility and in understanding an investment before you buy it. And I would effing LOVE to have an income of $1200/month right now. At the same time, I took away a completely different main point from the article. What struck me was the explanation of the history of 401(k)s and how they were never intended to replace pensions as the sole source of retirement income. That is the cultural shift the author is describing: the workers profiled entered the workforce at a time and in a situation when their companies pledged to provide their retirement income. This was understood by both parties. Then, midway through their careers, the companies broke that agreement and shifted the planning burden onto them. That was the first blow. The workers then proceeded to do what was (and still is) widely considered the best course of action: contributing to a 401(k). Then the bottom fell out of the market and devastated their funds. That was the second blow. I’m not saying that the workers are blameless, but I can certainly understand why they are upset. While I don’t believe that a pension system is necessarily practical anymore, since spending 30 years with one company is highly unlikely these days, the 401(k) isn’t perfect, either, and it wasn’t designed to be. Unfortunately, the workers in this story were part of the group that got the wost of the transition.

    I wonder if coming years will bring a rise in the number of annuities sold.

    Side note: for most of history, all but the richest people have taken it for granted that they would work until they were incapable of doing so. What does it say about us that we expect to spend (and afford) decades of idleness (in terms of income, anyway)? I’m not knocking retirement, but it is an interesting thought.

  49. Elizabeth says:

    @ #36 James D

    I didn’t say anything about other retirement funds; I spoke only about the 401k situation at my place of employment. I’m really not sure why you made the assumptions you did but whatever ::shrug:: lots of assumptions being made here today.

  50. Rick says:

    I do agree that people should be responsible for their investment choices. At the same token, I think that a good system should start with good default choices to aid the lazy or clueless.

    #1 Have automatic entrollment so a user has to opt out of the plan rather than opt in.

    #2 The default investment should be one people can stick with like a target retirement fund.

    Many 401K plans don’t have the best investment choices, so I would like to see the ability to move 401K funds into an IRA at any time right now I believe you need to change employers. That extra competition should make plans much better over all.

    -Rick Francis

  51. Joanna says:

    I agree with your last statement, Jen. I think it certainly says *something* that we expect to retire. Perhaps simply that we’re a wealthy nation.

    Part of any retirment discussion is the fact that here the norm is that elderly parents do NOT live with their children. That is not at all the norm in many countries. And I don’t believe it was for us either, historically. Seems to be a recent occurrence.

    Interestingly enough, that overlaps w/ the recent discussions of multi-generational families.

    Good discussion guys. This has been thought-provoking.

  52. Dar says:

    #50 — Rick, I like both of your ideas. If they set up this automatic enrollment for each person in a targeted fund based on age (perhaps based on when the person would reach 65) that maintained a proper diversity of investments and risks, that’d be outstanding.

  53. Joanna says:

    Rick,

    I like the second idea, but the first one I gotta say I’m not a fan of. I don’t like the idea of being “automatically” enrolled in anything that is going to cost me money & I actually question whether or not that would be legal.

    You could cause a lot of problems (albeit they’d only need to be short term) for people who weren’t paying attention. Think, can’t make the rent at the end of the month.

  54. wanzman says:

    So apparently Trent believes that every American should have a solid knowledge base of investing.

    OK. Consider this: The average American has, what, $10,000 in credit card debt? If most people are paying on credit card debt, it is probably a good bet that they are not exactly concerned (and thus, not educated) about investing.

    Trent, you like to talk a good game now that you have your financial life turned around, but if I remember correctly, is was not that long ago when you were headed toward financial disaster. It seems that you have forgetten where you came from. Shame on you for being so judgmental.

    I do agree that some level of personal responsibility is needed in the United States, but I am just not sure if every American can be depended upon to make life altering investment decisions.

    Even the investment “professionals” in our country have a pretty poor track record over all. How can we expect every American to perform the investing function well for themselves?

  55. wanzman says:

    Oh, and another thing. Perhaps I am just angry today, Trent. I am not sure who in the hell you think you are. You are always talking such a great game and preaching to others about saving money….making your own laundry soap, re using ear way as hari gel, etc. But you really only practice what you preach when it is convenient for you to get what you want.

    But then when you feel like getting a new car….well I guess it would be OK to finance this new car becuase I don;t have enough money to pay for it.

    That will wipe out your gains from making home made soap, I do believe.

    Your posts lately have me shaking my head.

  56. Jim says:

    Trent,

    Have any of your relatives or friends taken major losses in their retirement funds? What if it was your dad or grandma or uncle who lost 30% of their retirement? Would you not have any sympathy for them and declare they shoulda just educated themselves? What if they simply aren’t good at that kind of thing?

    Should we all be expected to be good at investing?

    Theres a big difference between education and aptitude. We all have different skills and some people aren’t very good with finances.

    You’re a gifted guy. How many years did it take you to get your financial act together? Imagine the struggle that someone with poor math skills might go through when they try and figure out finances.

  57. kristine says:

    This whole thread leaves me the same thought I have on a lot of these heated discussions…

    I’ll bet the Amish don’t have these problems!

    Very interesting point about the later the financially bereft work, the smaller the job pool. effecting everybody. So is it better to subsidize these people so the jobs are open, or to make them worK? It would be a complicated scenario to run the number on…what types of jobs do the very old hold? No longer ad exec, I’m sure. They would probably compete directly for the lower paying jobs, making the lowest tier of income earners even more strained.

    Instead of gov subsidy, how about the gov putting many to work providing child care for single parents, so they can get ahead, and have a shot at rising above? The Senior Americorp!

  58. Shakela says:

    I really like this site, but today’s posting scares me a little bit. Yes I agree that people need to be responsible for themselves. And I agree that people need to understand their investments. But… you can understand your investments and still get messed up. This was the worst financial calamity since the great depression. And there’s a ton of change happening right now, health-care changes (something more retirees are going to be worried about because of there age). We can’t all be advocates for ourselves on everything. Let’s cut them some slack ok?

  59. Ari says:

    “if you invest in things you don’t understand, you deserve to take the losses.”

    Understanding is analog not digital. One understands an S&P index fund 90% of the time beats actively managed fund, but does he understand how much an S&P index fund could drop?
    One understands a bond fund is safer than a stock fund, but does she understand that a bond fund could also drop in value?

    I believe those who invested their 401k in stock fund had the understanding, but that understanding may not be enough to act on to avoid the drop.

    I think 401k should not have much choices. Just like pension is not managed by the person himself, 401k should be in stable value type of investment by requirement. It is after all for the pension purpose.

    Having the ability to select ones own pension money, that spells trouble. I am not talking about irresponsible behavior, but simply the unpredictability of stock market.

  60. craig says:

    Part of personal responsibilty is to know that what things you arent good at and that you need to get help!

    Did it never cross these peoples mind that they want to retire soon and will need to live off this chunk of money in their 401k? And that maybe they should have some kind fo idea about how this money is invested?

    C’mon people. Take repsonsibility for yourself. You shouldnt need anyone to tell you to get this figured out.

  61. Amy B. says:

    What about those who followed the prevailing advice and invested in dividend-yielding stocks as a source of income and are now going without income that they had come to rely upon? Those who followed professional advice and had some portion of their money in savings, and now that balance is drawing down due to living expenses and earning a pittance in interest?

    My grandfather has expertly managed a lump-sum trust for almost 30 years. He received the bulk of this money from mid-life savings and the sale of his business. I would give him an A+ in attentiveness to his investments, beyond an A+ in frugal living, and and A+ in smart, reasoned money management. Still, he (and his portfolio) is smarting from this economy.

    I think that the bottom line is – Can we really fully hedge against periods of extreme risk through personal responsibility? If the answer is no, where do we place the remainder of the risk-management responsibility?

  62. craig says:

    @54 – The average american cant be depended on to make their own financial decisions.

    seriously?!? do you really beleive this? who should be making these descisions? the government? your savior Barack?

    do you really want the government making desicions on your own finances? what else do you need them to do for you? tell you where to work, where to live? what to drive? howmany kids to have?

    You are headed down a dangerous road…

  63. imelda says:

    I don’t feel like sloughing through the comments just yet. To respond directly to you, Trent: you’re right, the reason people got so screwed is because they didn’t fully understand what they invested in (that’s a tall order, though– I’m really into PF and have read many books and still don’t totally understand my own investments).

    While it’s true, it doesn’t address a deeper issue: since the 80′s, more and more companies have dropped pension plans for the sake of 401k’s, saving them lots of money and passing little of it on to their employees. It was supposed to be a fair trade-off for the employees… but we’re seeing now that, in practice, it makes a HUGE difference and can leave people broke or unable to retire. It’s simply not a good system for supporting the retire-at-65 expectations we ALL have.

    Either the government has to tell us that retirement is no longer possible, or we’ve got to come up with a better system than the 401k.

  64. almost there says:

    Tom #45, I had invested myself the max into a roth Ira. I was trying to maximize my 401k investments the final year when the bottom dropped out of the market. All a matter of timing.

  65. Ms. Clear says:

    What we’re really talking about here is the reality of downward mobility that most Americans are facing. 401Ks are part of that picture.

    This article was not helpful and does not make me want to read this site.

  66. wanzman says:

    @ #62 (craig):

    I did not say that every American should have their finances handled by the governement. I am just pointing out that expecting everyone to grow a million dollar portfolio on thier own is a large expectation. Americans, in general, do a very poor job of managing their finances.

    “your savior Barack?”

    I am as Republican as they come, let’s not resort to political flaming. This is not a political discussion to me.

    I think the past months have proven that, yes, in an ideal world, people will take care of themselves. But the Republicans AND Democrats have proven that when people fail miserably, people will still be bailed out.

    The costs to society, theoretically, would be less if we just had a bailout at the beginning, instead of letting people first lose all of their money.

    I am trying to look at this reasonably. I believe everyone will be headed down a dangerous road if we all react as you have.

  67. kristine says:

    craig,

    Good point about government intrusion (and I am a socialist). Since all intellects are not created equally, how about we educate our kids in school about personal finance, make it mandatory, and make them pass a test to make sure they at least have a clue how to manage their money? Most people learn from their parents- even a bad place to even learn how to drive!

    And to all the people who presume info is just a “click” away, only about half american households have a computer, let alone the internet. And the people who do not are the ones who likely feel they have no money to invest, and no one in their social circle to tell them otherwise, and possibly even no easy way to get to a library. Not excusing, just posting a very common reality.

  68. PJA says:

    Hmm.

    Seems to me that is was a matter of not predicting the future with much accuracy. Who could have possibly known all this was going to occur last year, much less ten years ago.

    And it may happen to current 401K accounts holders who are doing everything right. In one of many imaginable scenarios they may save up for years have everything right and then a change in tax law by an administration in need of revenues. And these need may be very well justified and supported – but it will bust those of us (myself included) if it occurs.

    It doesn’t seem fair to blame the folks who played by the rules and ended up broke because things didn’t work out.

  69. in response to Trent’s analogy, which I am going to modify below…

    To me, it is as if everyone around a person tells them that they should put a window in their house and then points them to the only contractor they can use. Then the contractor hands them off to a salesman who’s job it is to do is to really sell the guy on the expensive windows (ie. managed funds). The salesman spends all sorts of time taking about how this window is going to make the house really really great and super-double-awesome (which sounds good), but fails to really drive home the fact that the widows have the habit of breaking fairly often. So our homeowner decides to listen to the sales guy since (i) who does not want super-double awesome and (ii) he was recommended by the contractor. And besides, as the salesman likes to point out, the homeowner is not an expert in windows, but the salesman certainly is. Shouldn’t he trust the expert?

    And so our homeowner has the window put in — actually has 4 windows put in for 8X the super-awesomeness — and all is well until all four windows break. Now he has 4 holes in his house, just for following all the advice that he got from an ‘expert.’ Also, now both he and his family are freezing at night and are getting sick.

    So the question is this…do you help your poor neighbor? Or do you just say “you should have researched windows. You don’t deserve my help.”

    I would like to think that I live in a world where there are at least some people that will help those that need it — whatever the reason.

  70. imelda says:

    Whoa. I just sloughed through the comments. I assumed Trent had written this post to be inflammatory, and then I saw comment 26. Trent, are you SERIOUS? If so, I’m horribly disappointed and disillusioned with you.

    I don’t need to restate the excellent points that have been made above. Trent, I urge you to step back, take a breath, and approach this with an open mind. Then read comments 32, 46, and especially 54. See if you don’t change your mind at least a little bit about sympathizing with those who were hit so hard by this recession.

  71. Sandy says:

    I think making everyone individually responsible for their own retirement was just a huge boon to Wall Street…really, what choice did people have beside what their employers were telling them to do after years of an understanding that if they work for X company for 30+ years, they will have a guarenteed income for the rest of their lives.
    Just like Bush wanted…Wall St. was eyeing up all that cash in SS. Just like Insurance and “Health” Care industry wants 80 year olds to sift through 300 mediacal plans to determine “the right one for you”. Hell’s bells Loretty…most people just need a basic retirement plan and a basic health plan and why should we all have to support Wall St. and Insurance companies with all our money?
    We spend so much time, my MBA husband and I, every year, poring over health care plans from work (they change every year) and our 401(k) and IRA statements. Trying to decide what the right decision is for us. I would SOOO love to have the seemingly carefree days when someone’s whole job was to make sure that their employees were well situated at retirement time. I don’t remember my factory working father spending even 10 minutes on his retirement plan or our insurance plan. Yet, he (fortunately) collects pensions from 2 different sources plus SS, and he was able to save a sizable amount as well, in a very boring passbook savings account from our local bank. Whenever the topic of the stock market comes up, he always says how glad he is that he never had to gamble with his money like that. And to me, that’s really all the stock market is in a sense…a gamble that you invest the right amount, the right timing, the right stock, bond or other fund, the right fund managers, the rating of the company, the load one pays, the degree of agressiveness on a particular fund, the ethics of your fund manage (Madoff?), and any one of hundreds of ways to screw up while investing. Everyone of us is liable to miss something in the course of our investing years…and that 1 small screwup can ruin a lifetime of savings.
    Please don’t be so harsh on those who aren’t experts like you, Trent. You have organized your life around money, whether you relaize you have or not.

  72. Ari says:

    Great post, Trent! I completely agree. I feel that a lot of what society views as “problems” are really just a lack of personal responsibility. I also admire that you are honest about your limited sympathy for these individuals. Keep it honest.

  73. Jill says:

    Trent,
    You should maybe re-think your comment you made (#26)..
    As another commenter had pointed out, “For instance, I write this from my house, but I have no idea if the joists used in the framing of my bedroom are done correctly — I have to trust the opinion person that inspected our house for us. We *have* to rely on professionals and sometimes those people let us down. Should we blame those that were given the bad advice? OR those that gave it?”

    What about those that received poor advice from someone they trusted – i.e. financial advisor/planners/employers?

    I think you owe an apology..

  74. akb says:

    #13 Fred @ 9:07 am October 16th, 2009

    Bonds aren’t necessarily the “safe” investment. I had a significant portion of my 401k in bond funds. These funds declined in value just as much as my stock-based funds did. The only “safe” investment is a cash fund.

    ahem.
    stocks can go to 0 net worth.
    until obama declared otherwise, with bonds you were protected to at least get back what you put in.

    judge teh investment based on what you put in, and when you pull out, not based on what peaks it reaches in the middle.

    just saying. and i could be confused.. but isnt that why bonds are safer?

  75. Johanna says:

    @akb: Bonds most certainly can drop to 0 value, if the bond issuer defaults. That’s not likely to happen with bonds issued by the US government (although there are some who disagree with me on this), but it can and does happen with other types of bonds, especially high-yield “junk” bonds.

    Also, bond *funds* can decline in value for reasons that have nothing to do with defaulting. (And I guess individual bond values can too, if you’re trading them on the secondary market – that is, selling a bond you own to somebody else before in matures.) When interest rates rise, bond prices fall – because nobody wants to buy your old low-interest bonds when they can get nice new high-interest bonds of their own. Similarly, when interest rates fall, bond prices rise.

  76. akb says:

    yes, bonds can default, but then they have to go through bankruptcy (until recently) so you were far more protected. and junk bonds, are, as named, risky.
    and yes, bond funds are different than bonds themselves..
    theyre not exactly saving money under a mattress, but they are much safer than stocks , which is why traditionally they have less return, and less interest. boo to vanguard for not offering bonds in my account :(

  77. Rosa Rugosa says:

    Wow – where to even begin??
    Trent, I am blown away by your lack of compassion. You even descend from little sympathy to no sympathy as you try to clarify your position. You just come across as so smug, cold, & sanctimonious, that I cannot believe you’re the guy who wrote the blog about 15 things more important than money! I almost get derailed from the finance topics at hand by the attitude you project. I know plenty of people who have made poor life choices and suffered the consequences, and they do indeed have my sympathy. No, I don’t bail them out, pay their bills, or invite them to live with me, but they certainly have my compassion. You can always have a beer and cry on my shoulder! I feel sorry for all the people who are losing their homes, although many of them should never have bought them in the first place. I’ve never had a personal financial meltdown (and that’s probably not just due to dumb luck), but I can empathize with those who have (like a certain PF blogger who will go unnamed). I cetainly think many of us can learn a lesson or two from recent events, and realize how important it is to make informed choices, but let’s keep our humanity in the process.
    @Rick #50 – Love both suggestions. My company auto-enrolls (Johanna, this is legal, and you can opt-out with a couple of mouse clicks). I’ve read interesting stuff about stacking the deck in a way that makes doing nothing(in this case, not opting out of a great 401K plan)the option that is best for us. They’ve recently added a targeted date fund, so that should be a good tool as well. I am fortunate enough to have an employer with both a DC and DB plan, and the 401K is a great one, with a generous company match.

  78. AnnJo says:

    I’ve always assumed full financial responsibility for my life, and understood that if the breaks worked against me, my standard of living would take the hit and no one would bail me out. I may have been mistaken, but I thought this is what being a responsible adult required.

    For those who argue that 401k plans (and presumably any other self-directed retirement plans) don’t work because too many people cannot spare the time or lack the ability to undertand investing and therefore need the government to secure their retirement, I have this question:

    Are those people supposed to get a vote equal to mine in electing the government officials who will run, supervise and tax me to support whatever alternative you want?

    If people are not educated or intelligent enough to assume personal responsibility for their own lives, how can they possibly be educated or intelligent enough to choose the people who will do it for them?

    And if they don’t trust their own judgment as it applies to their own lives, why must I trust their judgment in electing those who will rule my life?

    We either are a democracy of fully responsible citizens – if you’re old enough and smart enough to vote, you’re old enough and smart enough to take responsibility for your life – or we need to accept that an elite aristocracy will be doing the real deciding for us, and the whole “voting” gig will be about choosing the celebrities who will be the popular face of that aristocracy. I prefer the former, but it does seem that a lot of people are ready to surrender their autonomy to the latter.

  79. heather says:

    With pension plans, large companies hired experts to figure out what investments would yield the appropriate gains given their workforce age/etc. And when these experts failed, there was the PBGC. And you had pools of money that could ride out booms and busts. Now we’ve got individuals trying to figure out how to invest their money for retirement. And if you retire during a boom, bully for you; if you retire during a bust, well you are just hosed. It seems like something is wrong here.

  80. Amy says:

    Trent, in comment #26 you say:

    “To me, it’s similar to someone who decides to install a window without knowing what they were doing and cuts a giant hole in their house. Should I feel sympathy for them? Should society jump in and fix their house?”

    So in other words, you’re saying the person who doesn’t know how to install their own windows should turn to professionals? Which is what everyone who was doing 401Ks were doing.

    At the risk of repeating myself, I have two Master’s degrees and I find this stuff confusing. What about the factory worker who works hard but had to struggle to graduate high school? They’re supposed to figure out all this stuff? Some people are simply less intelligent and simply less capable of understanding this stuff no matter how hard they try.

    What about the single mother who works two jobs? She’s going to learn this stuff how and when? You worked hard on your blog but you also got lucky, with the result that you can now spend a huge amount of your time on this. Most people cannot.

    Remember, employers were advising employees to use 401K plans. Employers people trusted were advising them. Every financial planner in the country — the equivalent of the window professionals — was saying to use these things.

    For all of those who say “they just should have invested elsewhere”, well, personal investing wouldn’t have gotten the tax breaks that 401Ks had.

    I’m impressed with what you’ve accomplished, but I’m seriously unimpressed with your lack of empathy. Not everyone has it as good as you do, even people who have worked hard their entire lives.

  81. CB says:

    My father researched and bought stocks based on extensive study, and also because he believed that the report he was studying were honest. That turned out not to be the case. The people cooking the books were crooks.

    All of the emphasis on quarterly profits and short-term gains, and the pedal-to-the-metal maximizing of employees to make the most gain for their “shareholders” (read executives) makes me sick.

    I have a 401(K) that is not matched, and that has crappy options. I have 60 percent in a money market fund. I have put the maximum in a SEP IRA. The fact that company X’s or company Y’s stock increases is not necessarily connected to any real value. The stock market is all about making profits for the financial industry, otherwise, the quarterly this and that would be minimized compared to long-term goals.

    A huge amount of money each month is funneled into the stock market and to financial entities thanks to employee payroll deductions. It keeps the markets propped, but may fall fast when boomers are not contributing

    The dismantling of pensions and the ascent of stock investments was a gift to corporations and the financial services industry. As for the actual people affected, let them fend for themselves. Even a chimp throwing dice at a stock market ticker can fare better than the paid money managers.

    We will continue to have “the best government money can buy” (Gore Vidal said that) until we have publicly financed elections.

  82. Rosa says:

    @AnnJo #78 – wait, there’s no topic in your life you’re not an expert in? You’re prepared to do your own carpentry and educate your own kids and you can direct the surgeon when you need brain surgery? I bet you design highway bridges and cell phone systems, too, right?

    Nobody knows how to do everything. That’s why we’re better off with all the citizens having a say instead of a cadre of “experts” who can’t see outside their little silos, or a tyrant.

  83. K says:

    Also have to remember it’s been a generally trying decade for investors, professional or not. Index funds as the core of a diversified portfolio:

    Vanguard 500
    10/15/1999: 115
    10/16/2009: 100

    So, that core is down more than 10% (yes, doesn’t count dividend reinvestment, but also not in inflation adjusted dollars….)

    So, yes, personal responsibility, but also compassionate to all who’ve been hit….

  84. Kyle says:

    I’m definitely not saying tough luck or laughing in the face of people who lost so much.

    But it takes five minutes of investment research before a complete neophyte is told, in big bold letters, the closer they are to retirement, the less volatile their investments should be.

    People started doing the math on 8% returns per year in stocks, got greedy, and got burned. I don’t want to leave anyone in poverty, but we’ve got a funny idea of what constitutes poverty in this country.

  85. GayleRN says:

    Let’s see. In my twenties my husband landed a job which had a pension benefit and a 401K with the choice of the company stock. Had it made, right? Several months before he would have been fully vested in a wonderful pension plan, the company went bankrupt. No pension. The value of the 401K went from $70,000 to $700 literally overnight. Well, we’re young we can start over.

    In my thirties, IRAs came on the scene. We immediately maxed out our contributions. As a nonworking spouse at the time I was allowed the magnificent sum of $250 a year. AS the working spouse he was entitled to $2000 a year. The new company also had a 401K allowing you to buy company stock. No pension plan. 15 years later the company was sold. Now we have stock in an entirely new company, a bank, which was eventually sold to another bank, which is now virtually worthless also. Fortunately (sort of) after the divorce I sold that stock while it was still worth something. Unfortunately, I only made 1/3 of his income. Well, I can work some overtime and keep funding that IRA.

    In my forties I joined a company that had a defined benefit pension and a 403b which I maxed out. In my fifties they froze the pension and are now in the process of dismantling the matching. You have your choice of 5 really crappy funds. I am now funding a Roth IRA as much as I can afford. I also have about $100K stuck in funds that I can’t change without quitting my job, which is a restriction I totally do not understand.

    So Trent, every single decade of my life so far the retirement scenario has completely changed its rules. What were wise choices at the time they were made, were made fruitless when either the circumstances of life changed or the rules were changed by either the government or the company or both. You are still young Trent, you have a lot to learn about life. Don’t be criticizing people who made choices that turned out poorly because the rules were changed in the middle of the game.

  86. Rob says:

    Trent,
    2 things:
    1)All due respect, I don’t think you’re aware of how limited some 401K options are. There is little to no regulation about what a 401K can or can’t offer, and it is an entirely possible to find oneself with few good options on that front. I know of one small business that only offers investments in the owners speculative land deals!
    2)I’m a little sad and the steadily increasing harshness on the Dollar. There is a lot of positives to Larry Winget and Ramit Sethi’s work….but you’re not them, and I like it that way.

  87. Lou says:

    You are being way too tough on oldsters, Trent. Your generation has been raised to read about the stock market – you grew up on stories about how Social Security wouldn’t be there for you.

    My generation (I’m 67) grew up on the idea that SS, savings and a pension would be there for us. The idea that pensions would go away and be replaced by investments was daunting to many.

    Personally, I only invested in an employer investment plan(403-b) because I wanted them to pay what I was worth & that, I thought, included the match! I have an MBA, so I learned to actively manage and balance my portfolio. Lots of others didn’t.

  88. DD says:

    The main thing that I took away from the article wasn’t that 401ks are evil, but that pensions were better.

    Another point that stood out to me was that these people didn’t expect to pare down their lifestyle much once they entered retirement.

  89. Amateur says:

    Trent, what happened, man? I know you’re pushing out articles with personal opinion but it’s coming down pretty hard on people. Most 401k plans are not that great, high fees, limited fund choices, and IRA’s aren’t the complete solution, either. How are people to save? Stuff everything in all different banks buying govt backed bonds and money markets? Yes, that can work for sure, but that really does not replace a defined pension plan, either.

    What’s the new plan of action? If your company 401k plan stinks, I mean to the point no matter how much you look at it and try to manage to get the best out of it, how do you manage that? I’d say get the match and dump all the money mostly in safe funds to preserve your original investment plus the match. Use the self managed IRA to foot the rest of it, and shove some cash if there is any left over into a bank or banks buying bonds, money market funds, etc. Do people need to be smart enough to figure that out? Yes, they do.

    I’m talking about a brand new way of looking at work. People are not able to stay at their jobs for more than a few years at a time these days, dumping in 10% of income into a crappy 401k plan in high fee funds with very little returns the first years would eat up the money invested and the company match if there is one, only to leave the job in a few years? That doesn’t even make sense.

    Also bear in mind that shoving the money into banks and what not would be taxed on any interest earnings, unlike defined retirement investment plans. How on earth would people get the best bang for their bucks? It’s a lot to think about when people are just barely getting by their jobs.

  90. almost there says:

    Sometimes I feel that Trent’s writing shows a lack of depth, most likely due to being a young man without the lifetime of experiences that older people have to offer to the conversation. I am sure he will grasp what seniors are saying when he gets there. I did all the right things investing the max into IRAs (growth mutual funds with big fund families) since ’84 and even with the return of the market this year have but a 3.8% avg return on my investments including 25 years of cap gains and dividends. I would have done far better putting the investment in 5 year cds and rolling them over.

  91. sbt says:

    I think that Trent has a point that we should learn about investing. I also think he is way off base to be so critical of people who lost big in their 401k account in the last year or so. It seems to me that nobody, not nobody, writing in the field of investing was predicting the kind of crash that occurred in the markets. Most experts were advising those getting close to retirement to leave a large percentage of their savings in the stock market so that the money would last for 20 years. Many people who studied, read, and took what was considered very sound advice still lost a huge chunk. So please, Trent, be a bit less judgmental in your tone.

    My husband and I got lucky. We withdrew a large portion of our mutual funds and put the money into a real estate purchase that has held its value quite well, (we don’t live where that the real estate bubble really hit). My nephew the stock broker thought we were making a terrible decision and called my sister to get her to talk us out of it. We held firm, because the purchase had a moral imperative for us. It really turned out to be the right thing to do in both the moral and financial realms.

    At the lowest point last fall, our remaining mutual funds were worth just about half what they had been, and our real estate appreciated slightly. Moral of the story, yes, diversify, but nobody has a crystal ball. Wise investors can get caught. It happens.

  92. tentaculistic says:

    Trent, I generally think you are a lot kinder and more empathetic than this article makes you seem, which is where so many of our negative reactions come from. Honestly, I’m really confused, this isn’t your usual style.

    Talk all the crap you want about people who bought McMansions when they could barely afford to buy McHappy Meals, they deserve it… but don’t piss on old people who had the retirement rug jerked out from under their feet time and time and time again.

    This article wasn’t really up to what I have come to consider as your standards. I think you’re better than this, both as a writer and a person.

  93. Golfing Girl says:

    Personal accountability? I thought that was a thing of the past!
    Trent, thank you for stating the facts, though hard to swallow for some folks (my father included). He had no business putting 90% of his portfolio into stocks at age 65, while already retired. Had I known, I would have shared some articles and rules of thumb with him regarding his portfolio mix. Instead, he took a much bigger hit on his retirement accounts than I did (he lost close to 60% and I lost around 35%).
    I think people were just being greedy because times were good instead of sticking to the rules of diversification of portfolio as you grow closer to retirement age.

  94. PJA says:

    GayleRN has it right. The rules constantly change and there is no reason to believe that will stop when other people make the rules.

    And I think many people think that because the market average returns are fairly good they can smooth out that average for forecasting their own projections.

    Below is an example where the average annual return is 8%. One is the way most advisers calculate it – the ending total 37K. The other scenario, also with an average return of 8% is $27K. And this is only over ten years with small sums of money and not counting the unknown tax rates or management and brokerage fees for ten years from now.

    Starting investment = 10,000 + 1000 added per year, tallied at end of year.

    Year S&P 500 return Year end balance
    1 8.00% $11,880.00
    2 8.00% $13,910.40
    3 8.00% $16,103.23
    4 8.00% $18,471.49
    5 8.00% $21,029.21
    6 8.00% $23,791.55
    7 8.00% $26,774.87
    8 8.00% $29,996.86
    9 8.00% $33,476.61
    10 8.00% $37,234.74
    Av annual return 8.00%
    total $ $37,234.74

    Here is that same average annual return may lumpy.
    Year S&P 500 return Year end balance
    1 22.00% $13,420.00
    2 25.00% $18,025.00
    3 24.00% $23,591.00
    4 40.00% $34,427.40
    5 11.00% $39,324.41
    6 8.00% $43,550.37
    7 -12.00% $39,204.32
    8 -5.00% $38,194.11
    9 -25.00% $29,395.58
    10 -8.00% $27,963.93
    Av annual return 8.00%
    total $ $27,963.93

  95. Michael Kane says:

    Betting in a system where the house odds are not even printed anywhere. That really does not sound like a win win situation..well of course, it can be.. if it is corrupt and some pyramid or ponzi scheme is set up
    .

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