Wikinvest Wire

A final obituary for the 401k?

Sunday, October 12, 2008

The new buzzword is "statement shock", a term being tossed around with casual abandon these days in personal finance columns on the internet as 401k investors across the country open up their quarterly statements and gape in disbelief.

Reports of a precipitous decline in participation rates over the last year after the results produced by the conventional wisdom that has aspiring retirees continuing to plow more money into declining stock mutual funds seem to be well founded and set to accelerate.

Some are calling this the "death knell" for 401k plans or, as is the case below, the "final obituary" for these plans as an entire generation comes to grips with the reality of being a stock investor in the middle of a stock bear market.

This Wall Street Journal article($) that also conveniently appears at Yahoo! Finance has all the details:

The market downturn has wreaked havoc on workers' retirement savings and raised more questions about 401(k) plans, which were already under intense scrutiny.

This year through Thursday, the average 401(k) account balance dropped roughly 19% to 25%, depending on the participant's age and tenure with the plan, according to Employee Benefit Research Institute.
IMAGEThe downturn comes at a time when regulators and lawmakers were already taking a hard look at 401(k) plans. Major pension legislation passed in 2006 encouraged employers to automatically enroll workers in 401(k)s to help get retirement savings on track.
Some retirement-plan experts see current market conditions dealing a decisive blow to 401(k)s. Teresa Ghilarducci, professor of economic policy at the New School for Social Research, calls the downturn "a final obituary" for these plans. She adds, "Even with all the financial education in the world, [workers] can't control how old they'll be when there's a financial downturn."
There's a bit more detail in the WSJ story about the dire consequences of poor choices made by plan participants and this report in the Washington Post is worth a look as well (actually, the WaPo article is quite good and comes with a photo of a distraught Homer Simpson doll on the floor of a stock exchange).

The 2006 legislation that resulted in automatic enrollment wasn't such a bad idea, but legislators may rue they day they made the default option stocks instead of stable value funds or money market funds.

I suppose this is all just part of the "ownership society" that has been in the process of tumbling down all around us over the last year or two.

The whole concept of having individuals manage their own retirement accounts always seemed to be fundamentally flawed except in rare cases where individuals choose to spend about half of their waking hours reading and writing about these things.

Even then you don't always get the results you desire.


This week's cartoon from The Economist:
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Anonymous said...

I have 20 years till retirement. My bi-weekly paycheck still contributes. Dollar cost averaging into foreign markets. At some point, I expect us to remove our head from our collective asses and produce things of value. What else do I do?? Life goes on.

Oh, I refuse to look at my latest EuroPac statements. I have a pretty good idea what it says. No need to abuse myself.

Anonymous said...

They're bullshitting on that 'only'20% average loss to the typical 401k, I'd be willing to bet that it's more in the 40-60% range.

Hell, I was conservatively invested and took a beating of almost 35% in my 401k. (65% stocks, 35% bonds)

Of course, it doesn't help that so many 401ks also had many shitty funds in them.

d said...

If this is deflation, this is a dream come true.

When people withdraw money from 401k's, they will be paying 30-40% less in income tax.

adamtopher said...

401k will continue, people who can't stand a little risk will move on to some other form of savings, but stock markets recover and so will 401ks.

Anonymous said...

Within the next year you will see another drop of 40-50% in your 401K. It should take 10 - 15 years to return your gains. Boomers should be aware, the politics is that the US economic system cannot afford to have you retire, the reality is that you are not deserving of your 401k wealth while not working.

This is a setup to secure a working population for keeping social security solvent through the next several decades. Most of you will be working till you are well into your 70's.

Sorry, but you are the largest segment of the working population that is use to paying taxes, working long hours, and supporting the Government spending needed to support younger and older Americans.

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