Author Topic: This is the most ridiculous sh*t. Titled: 401(k)'s are a sham. Idiots.  (Read 6060 times)


clarkevii

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Re: This is the most ridiculous sh*t. Titled: 401(k)'s are a sham. Idiots.
« Reply #1 on: December 08, 2015, 09:12:20 PM »
SAD

I wonder how many people believe this crap

Abe

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Re: This is the most ridiculous sh*t. Titled: 401(k)'s are a sham. Idiots.
« Reply #2 on: December 08, 2015, 09:54:21 PM »
They don't even discuss the valuable tax deferment of 401ks, the fact that pension funds also have overhead costs, and 401k funding is not mandatory.
Basically it's another article for spendthrifts to wallow in self-pity and convince themselves that they deserve other people's hard-earned money more than those people do based on (conveniently) their standards for what a given profession should earn.

sol

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Re: This is the most ridiculous sh*t. Titled: 401(k)'s are a sham. Idiots.
« Reply #3 on: December 08, 2015, 10:18:36 PM »
It's not just a pity piece.  It's trying to address the mid-80s shift from pensions (defined benefit) to 401k style plans (defined contribution).  This was an important discussion back then but I think it's largely been forgotten. 

The old model was that your employer took part of your income and invested it for you, then used those assets to pay your expenses in retirement as your pension.  This meant that there was essentially one investment manager per employer.  The new model was to let each individual invest their own income, which employers like because they didn't actually pay the employees the money that was previously going toward the pension plan, they just took that money for themselves and let employees worry about funding their retirement instead, which is effectively just a wage cut.  This plan opens up the possibility of each and every employee needing to hire an investment manager, so the financial industry was heavily lobbying for it.  They salivated at the notion of fleecing a hundred million individual financially illiterate employees, instead of having most of that money controlled by educated pension administrators at a handful of major corporations.

401ks were designed to transition retirement risk from the employer to the employee.  Pension managers would continue to get revenue from the corporations to fund old pensions but would not have to fund any new pensions, which shored up the existing pension system.  New employees were no longer eligible for pensions and were free to completely avoid saving for retirement and thus retire broke.  That's the demographic this article is addressing, those people who grew up in a time when your employer paid for your old age but were then handed 401k plans instead, and didn't know enough to contribute to them.  There's a whole generation in the middle there that got totally screwed by being financially illiterate right at the transition.

Today I think it's less of an issue.  We all know that a 401k is a vital part of a retirement plan, and maxing it out can even let you retire at an earlier age than you ever could with an old style pension plan. 

The trade off for this benefit is that we are each now individual risk managers.  When a pension plan had 10,000 employees they invested the same way we do, but they always anticipated SWRs of around 6% or more because that's the historical average SWR for a 30 year payout period and most people didn't live 30 years after retiring, so they had to save much less money per person.  Now that we're no longer pooling our risk with a pension, we each have to individually do that calculation and the 50% success rate of a 6% SWR seems pretty risky to folks, so we generally shoot for 4% instead.  That's a 33% increase in the amount we each need to save (25x instead of 16.66x expenses), which keeps us working longer, on average.  Which is also good for the company. 

Basically corporations and the finance industry both benefited by pushing people out of pensions and into 401k plans.  Not everyone benefited from being pushed.

zephyr911

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Re: This is the most ridiculous sh*t. Titled: 401(k)'s are a sham. Idiots.
« Reply #4 on: December 09, 2015, 02:41:13 PM »
As many have pointed out here, the proportion of Americans who previously received pensions is often overstated. It hit a high and then it rolled back a bit. It's understandable, too. Pension programs can become unsustainable for a variety of reasons, and a bankrupt company isn't any good to its pensioned retirees.

Fuzzy Buttons

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Re: This is the most ridiculous sh*t. Titled: 401(k)'s are a sham. Idiots.
« Reply #5 on: December 09, 2015, 02:43:37 PM »
It's not just a pity piece.  It's trying to address the mid-80s shift from pensions (defined benefit) to 401k style plans (defined contribution).  This was an important discussion back then but I think it's largely been forgotten. 

The old model was that your employer took part of your income and invested it for you, then used those assets to pay your expenses in retirement as your pension.  This meant that there was essentially one investment manager per employer.  The new model was to let each individual invest their own income, which employers like because they didn't actually pay the employees the money that was previously going toward the pension plan, they just took that money for themselves and let employees worry about funding their retirement instead, which is effectively just a wage cut.  This plan opens up the possibility of each and every employee needing to hire an investment manager, so the financial industry was heavily lobbying for it.  They salivated at the notion of fleecing a hundred million individual financially illiterate employees, instead of having most of that money controlled by educated pension administrators at a handful of major corporations.

401ks were designed to transition retirement risk from the employer to the employee.  Pension managers would continue to get revenue from the corporations to fund old pensions but would not have to fund any new pensions, which shored up the existing pension system.  New employees were no longer eligible for pensions and were free to completely avoid saving for retirement and thus retire broke.  That's the demographic this article is addressing, those people who grew up in a time when your employer paid for your old age but were then handed 401k plans instead, and didn't know enough to contribute to them.  There's a whole generation in the middle there that got totally screwed by being financially illiterate right at the transition.

Today I think it's less of an issue.  We all know that a 401k is a vital part of a retirement plan, and maxing it out can even let you retire at an earlier age than you ever could with an old style pension plan. 

The trade off for this benefit is that we are each now individual risk managers.  When a pension plan had 10,000 employees they invested the same way we do, but they always anticipated SWRs of around 6% or more because that's the historical average SWR for a 30 year payout period and most people didn't live 30 years after retiring, so they had to save much less money per person.  Now that we're no longer pooling our risk with a pension, we each have to individually do that calculation and the 50% success rate of a 6% SWR seems pretty risky to folks, so we generally shoot for 4% instead.  That's a 33% increase in the amount we each need to save (25x instead of 16.66x expenses), which keeps us working longer, on average.  Which is also good for the company. 

Basically corporations and the finance industry both benefited by pushing people out of pensions and into 401k plans.  Not everyone benefited from being pushed.

An excellent summation all around.

I think this article is fine and raises some excellent, though certainly well-known points.  Fees in 401(k) plans can be huge, and hard for people to understand or see.  There were fees in pensions too, but as a participant you didn't worry about that.  You knew if you worked x years you would get $y thousand per year for life.  Well, unless the pension collapsed. 

Leaving it to people to invest for their own retirement will always mean that a lot of them won't.  The 401(k) benefits are great for people like us who use them.  The fact that you can keep them as you change jobs makes them much better than the old pension system for the motivated employees.  But if you're looking across the whole population, they will always come up short.

So those who won't save are left with the pension system of last resort - Social Security.  And there's going to be a LOT of them who have that and nothing else in twenty years.  That's why I think it's unlikely to ever be drastically cut, let alone eliminated.  Too many people depending on it.  Though I do expect my benefits will be about 25% less than what they say today they will be - because I expect through some type of means-testing they will reduce benefits to those of us who have saved. 

I don't mind.  That's why I'm maxxing out my 401(k).  :)

PhrugalPhan

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Re: This is the most ridiculous sh*t. Titled: 401(k)'s are a sham. Idiots.
« Reply #6 on: December 09, 2015, 03:02:10 PM »
As many have pointed out here, the proportion of Americans who previously received pensions is often overstated. It hit a high and then it rolled back a bit. It's understandable, too. Pension programs can become unsustainable for a variety of reasons, and a bankrupt company isn't any good to its pensioned retirees.
Also today it is less likely for a worker to stay with an employer long enough to get a pension.  401k money stays with you, if you don't vest into a pension (or work somewhere that didn't have one) - too bad for you!  Its not like we can go back to the 60's when employers kept people on for as long as possible (and almost always long enough for a pension), in this work environment a 401k / IRA is probably the best choice for a majority of workers.  Though a pension is great if you can get one.

Beaker

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Re: This is the most ridiculous sh*t. Titled: 401(k)'s are a sham. Idiots.
« Reply #7 on: December 09, 2015, 03:46:24 PM »
There are definitely benefits and risks to both 401k's and pensions. Personally, I like the 401k better but pensions were a lot better for anyone who can't be bothered to learn.

I sometimes wonder why there isn't a private market replacement for a pension plan. Give them cash every year, and they promise you a defined benefit retirement. I get the impression that delayed annuities have some of the features of a pension, but not all of them. Is it just that defined-benefit pensions are fundamentally too risky to run at a price that anybody would pay?

trailrated

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Re: This is the most ridiculous sh*t. Titled: 401(k)'s are a sham. Idiots.
« Reply #8 on: December 09, 2015, 04:37:48 PM »
 I think my brain just exploded.

Their argument is that people do not put any money in their own accounts in the first half of the article.... then the second half talks about how rich the financial industry is getting because of the fees on the nothing that people put into their 401k plans.

sol

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Re: This is the most ridiculous sh*t. Titled: 401(k)'s are a sham. Idiots.
« Reply #9 on: December 09, 2015, 07:34:58 PM »
I sometimes wonder why there isn't a private market replacement for a pension plan. Give them cash every year, and they promise you a defined benefit retirement. I get the impression that delayed annuities have some of the features of a pension, but not all of them. Is it just that defined-benefit pensions are fundamentally too risky to run at a price that anybody would pay?

This is theoretically the purpose of fixed annuities.  Annuities aren't nearly the same as a company pension, though, because a corporation can always supplement a temporary shortfall in their pension system with current cashflow from their operating business.  Annuities don't have an operating business, so they have to maintain a larger safety margin than does a corporate pension officer. 

Pensions are typically about the best return on your money you can find, due to the risk management profile of having thousands of participants all pooled together.  It's much more like an insurance policy than an investment, because people who die early are removed from the pool and don't get paid anymore.  They don't need to maintain enough money to pay each person with a 95% chance of success, they way we typically do on this forum, because they expect (and want) half of their pensioners to die before breaking even, and the other half to live only long enough to cost less than they made in profits off of the half that died early.

Homey The Clown

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Re: This is the most ridiculous sh*t. Titled: 401(k)'s are a sham. Idiots.
« Reply #10 on: December 09, 2015, 10:23:19 PM »
Great points. The other one that hasn't been made is that your pension dies with you, or perhaps your spouse, who usually receives a lesser benefit. Any money left from a 401k goes to your heirs or charity (less taxes, of course). Every time I kick myself for opting out of the pension plan in FL (a good one), my wife reminds me of this.

In Florida, they screwed the investment plan workers more than the pension plan. It used to be that the investment plan was 9% all from the state. Then they decided that workers should contribute, so everybody (pension and investment) had to contribute 3%. Fair enough, but one year later they dropped the state contribution for the investment plan from 6% to 3.3% to match what they do for pension. This, of course, ignores the risk factors mentioned above. So now the investment plan is a pretty crappy deal. Everyone working for the state in Florida should do pension. Under the previous levels it was a toss up.

Marus

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Re: This is the most ridiculous sh*t. Titled: 401(k)'s are a sham. Idiots.
« Reply #11 on: December 10, 2015, 10:01:48 AM »
I read through this and I actually agree with a lot of her points, especially when it comes to fee transparency.  I take issue with her overall conclusion that 401(k)s are a "sham" though.  401(k)s work very well if you know what you're doing with them and you understand how fees work.  I know that's a big if, so it probably would make sense for the government to better regulate the disclosures.  It's insane to me that anyone would have to pay more than 1% in fees on a mutual fund.

If anything I'd like to see the 401(k) structure expanded so that it would be open to everyone and so that everyone would be guaranteed more investment options.  It's not fair that some employees get better investment options than others do.  Whining about the glory days when everyone had a pension (note:everyone didn't actually have a pension) is just pointless.

Jack

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Re: This is the most ridiculous sh*t. Titled: 401(k)'s are a sham. Idiots.
« Reply #12 on: December 10, 2015, 10:37:00 AM »
I take issue with her overall conclusion that 401(k)s are a "sham" though.  401(k)s work very well if you know what you're doing with them and you understand how fees work.  I know that's a big if, so it probably would make sense for the government to better regulate the disclosures.  It's insane to me that anyone would have to pay more than 1% in fees on a mutual fund.

That's more than a "big if," it's a nigh-impossible one. It's fairly obvious that the average American is wholly incapable of figuring out a 401k, and half of them are stupider than that.

You and I like 401Ks because we're way, way above average. (And I like IRAs even better, for exactly the same reasons the article claims IRAs are even worse!) But I can acknowledge that the majority of people are getting swindled by them.

Marus

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Re: This is the most ridiculous sh*t. Titled: 401(k)'s are a sham. Idiots.
« Reply #13 on: December 10, 2015, 12:05:38 PM »
I take issue with her overall conclusion that 401(k)s are a "sham" though.  401(k)s work very well if you know what you're doing with them and you understand how fees work.  I know that's a big if, so it probably would make sense for the government to better regulate the disclosures.  It's insane to me that anyone would have to pay more than 1% in fees on a mutual fund.

That's more than a "big if," it's a nigh-impossible one. It's fairly obvious that the average American is wholly incapable of figuring out a 401k, and half of them are stupider than that.

You and I like 401Ks because we're way, way above average. (And I like IRAs even better, for exactly the same reasons the article claims IRAs are even worse!) But I can acknowledge that the majority of people are getting swindled by them.

You're probably right about that unfortunately.  I can't just assume that what's good for me would be good for everyone else.  For example, we'd probably benefit if social security was privatized.  Most people, however, would make poor investment choices and end up with next to nothing.

Do you have any thoughts on how we could improve the current retirement system (besides just better education and clearer disclosures)?  In theory, I could see expanded social security helping people but I'm skeptical of the ability of our corrupt government to handle it.

Jack

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Re: This is the most ridiculous sh*t. Titled: 401(k)'s are a sham. Idiots.
« Reply #14 on: December 10, 2015, 12:37:17 PM »
Do you have any thoughts on how we could improve the current retirement system (besides just better education and clearer disclosures)?  In theory, I could see expanded social security helping people but I'm skeptical of the ability of our corrupt government to handle it.

Requiring 401k "advisers" to have a fiduciary responsibility to their clients, as the Department of Labor is trying to do (and which Republicans and Wall Street lobbyists are trying to oppose) would be a good start. I'd also like to see all 401K plan administration decoupled from employment (the way HSA investment accounts or 401ks that allow in-service rollovers are) so that employees can escape their employer's shitty choices, but that might do more harm than good for idiots who are too susceptible to advertising.

I do not share your pessimism about expanding Social Security, although I'd be annoyed about how it would affect me (as a mustachian).

Stashaholic

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Re: This is the most ridiculous sh*t. Titled: 401(k)'s are a sham. Idiots.
« Reply #15 on: December 10, 2015, 12:44:29 PM »
A close relative tried to get me to look at a product her new (MLM) company offers that is better than a 401k. Asked me to watch a 20/20 YouTube video from 2009 of the fall out of the 401k. I did and then looked at the products they were selling and they were variable universal life and index life insurances! I just said no thanks. The video is not really helpful anyways since it's back in 2009 and didn't matter that your money was in a 401k or not. If you invested in the stock market it would have lost money then, but look at today and your money should have more than recovered if left untouched or continued to invest. Some people are still fearful and get tricked into products or services that are not beneficial for them.

slugline

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Re: This is the most ridiculous sh*t. Titled: 401(k)'s are a sham. Idiots.
« Reply #16 on: December 10, 2015, 01:13:31 PM »
If your employer has a rating on Brightscope.com you can compare it against plans offered by others in your industry. 401K programs are definitely not the same. Some are barely better than investing in a taxable account. Others can truly be a springboard to FIRE.

skeeder

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Re: This is the most ridiculous sh*t. Titled: 401(k)'s are a sham. Idiots.
« Reply #17 on: December 10, 2015, 01:55:51 PM »
I've been involved at an governmental level for the State's DC plan.  At 7Billion dollars, I can tell you not all 401a's are the same. 

Most articles like this one are born from pension envy or pure anger at the market.  The shift from Pension to Participant Directed happened quickly and it has left many people unsure of how to tackle their 401k questions.  I have my series 7 and 63, been on the sell side for many years, then shifted to the public sector focusing on helping people...what a different perspective! 

I can tell you that 401k's were never DESIGNED to primary retirement income.  They were really designed for those employees who were HCE's (Highly Compensated Employees) that had testing go against them for pensions to put more money away pre-tax. 
https://www.ebri.org/pdf/publications/facts/0205fact.a.pdf

Some 401k's I will admit--are downright scams.  If there is no employer match I will sometimes tell people to avoid them because of the fees.  There are plenty of legal, morally questionable behavior that goes on in this industry.  Unfortunately, efforts to stop it haven't done much good.

Goldielocks

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Re: This is the most ridiculous sh*t. Titled: 401(k)'s are a sham. Idiots.
« Reply #18 on: December 11, 2015, 02:05:48 PM »
A close relative tried to get me to look at a product her new (MLM) company offers that is better than a 401k. Asked me to watch a 20/20 YouTube video from 2009 of the fall out of the 401k. I did and then looked at the products they were selling and they were variable universal life and index life insurances! I just said no thanks. The video is not really helpful anyways since it's back in 2009 and didn't matter that your money was in a 401k or not. If you invested in the stock market it would have lost money then, but look at today and your money should have more than recovered if left untouched or continued to invest. Some people are still fearful and get tricked into products or services that are not beneficial for them.

Not to mention that variable life is also invested in the stock markets....