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Losing more than 70% in a 401(k) plan
Old 10-14-2012, 10:34 AM   #1
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Losing more than 70% in a 401(k) plan

Interesting article in the NYT : Should the 401k plans be reformed or replaced ?

http://www.nytimes.com/2012/09/12/bu...ntspecial&_r=0

"JOHN GREENE worked for 30 years at an Oscar Mayer plant in Madison, Wis., deboning hams and loading boxes of hot dogs. His 401(k) plan grew to $60,000, and soon after retiring he began withdrawing $3,600 a year from it, money that allowed him and his wife to take what he called a wondrous two-week trip to Scotland, his ancestral homeland.
The Greenes lost about 70 percent of their 401(k) savings in the market downturn. Some experts wonder if the 401(k) rules need to be revised.
But when the financial markets plunged four years ago, his 401(k) dropped to less than $18,000.
“We lost more than 70 percent,” he complained, even though a highly recommended investment firm was managing his 401(k). “They’re very risky.” "
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Old 10-14-2012, 10:47 AM   #2
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"JOHN GREENE worked for 30 years"

Sorry, but if he was in the 401(k) plan with a moderate degree of risk, he would have done much better during the 80's through 2000's period, assuming he did invest in other than a MM portfoio.

FWIW, I don't think he contributed agressively, nor took the risk in equities during a period in time that was "better than most" for equity markets.

How do I know? I (along with DW), have been there.

Another article based upon somebody that (unfortunately) made a poor decision.

Even if we discount the last decade of returns, he should have had a better outcome, IMHO...
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Old 10-14-2012, 10:51 AM   #3
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I've never heard of a "managed" 401k plan but I have heard of services offering to tell you how to allocate amongst your plan's choices. I suspect he was in managed funds that were probably inappropriate for his financial circumstances.

I doubt he had a "wondrous two-week trip to Scotland" on $3,600. He probably took out the cash for this trip in addition to his $3,600 annual withdrawal.

To lose 70% in the market downturn says that he was in very aggressive funds. The S&P lost about 50% so even conservative investors were body slammed. If he stayed in he would have recovered much of this. No mention about a panic move to cash. It also wasn't clear if his plan is down 70% due to losses and withdrawals or if it was just market movement.

This seems to be a standard article with an anecdotal "ain't it awful" that then recommends the government "do something." What would they recommend for me where my savings have increased by 20% (or so) since the 2007 peak? Being the NY Times, I have a good guess in mind.
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Old 10-14-2012, 10:56 AM   #4
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Did he sell his stocks at the very bottom of the market? If he didn't, and if he just held on, and if his money was in any "normal" allocation of equities, then he should be just fine right now (not down 70%) and he can still afford his trips to Scotland (if he ever could).

I see Ms Ghilarducci is quoted again. She's not a big fan of people controlling their own property. Apparently she's got a lot of fans in the media.

Another "people are too dumb to ever learn how to do this" article.
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Old 10-14-2012, 11:00 AM   #5
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This doesn't add up. How much did he invest for "30 years" to end up with $60,000? I've been at my current job less than 3 years and I have $60,000 in my 401k. Also, I watched my investments drop frighteningly 4 years ago, but by holding on, saw them rebound in the next 4 years and am at new highs now.

All I can see is he must have invested minimal amounts over the 30 years. He's drawing 6% (well above SWR) and retired at an historically bad time to be overly aggressive with withdrawals. Also, since he's 77 now, how long did he withdraw this 6% from his account. If he's been drawing it for 12 years, then no wonder his account is down, he's been pulling too much out for many years. It's not market risk it's bad choices.

In any case, by providing only sketchy details of his situation, the author is trying to make the case that the problem is with 401k. But without details it's impossible to tell if there really is a problem or if this is just an example of someone who spends too much using up their money.

If the "fault" is that people can make bad decisions, then the "cure" is likely to be very restrictive.
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Old 10-14-2012, 11:06 AM   #6
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What would they recommend for me where my savings have increased by 20% (or so) since the 2007 peak? Being the NY Times, I have a good guess in mind.
Oh my! Of course you would have to share that windfall!

Seriously, I have seen some 401k plans with a bewildering choice of MFs, some no doubt of a very aggressive nature. On the other hand, my wife's 401k plan with her former employer (one of the Dow 30), has a more limited selection of more conservative MFs: 1 global bond MF, 1 international equity, 1 US large cap, 1 US small/mid cap, 1 stable value, and 1 with the employer stock. They used to allow 100% going into the employer stock, but have restricted it to something like 20% perhaps 10 years ago.

The way to avoid people taking too much risk is by education, not by the nanny state taking control of people's money.

PS. I monitor my wife's 401k for her. I do not believe any of the choices above dropped 70% in the Great Recession, except perhaps for her employer stock fund. Even that has recovered.
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Old 10-14-2012, 11:06 AM   #7
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I think having a balance of enforced retirement contributions (social security) and 401K is a good idea. It encourages, in a small way, a bit of self reliance. The only reform I think would be good would be requiring employers to give access to some of the big brokerage houses like Fidelity or Vanguard so there is a bigger choice of funds.

In terms of this story, with $60K in the plan I doubt they were paying anyone to manage it. Likely they did not pick funds that were appropriate for their risk tolerance and timeline for getting the money out. Perhaps Oscar Meyer never offered any education on the 401K plan. But in my own experience, even with great education on financial management offered, many employees simply won't attend. A small core group comes to everything. The rest of the folks are why SS exists. Because most folks can't or won't be able to manage their own money.

I suspect their plan had a money market or stable value fund alternative that they did not invest in because they wanted bigger returns. At their age with only $60K in assets they should have moved it all to the stable value fund and settled for taking $3600 per year for 16 yrs.
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Old 10-14-2012, 11:10 AM   #8
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Another "people are too dumb to ever learn how to do this" article.
Apparently, many people really are "too dumb to do ever learn how to do this". Check out the attached study recently done by the Library of Congress.

http://www.sec.gov/news/studies/2012...tudy-part2.pdf


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Since 2006, academic researchers, financial-industry associations, and other interested organizations have conducted various surveys of financial literacy among retail investors in the United States. These studies have consistently found that American investors do not understand the most basic financial concepts, such as the time value of money, compound interest, and inflation. Investors also lack essential knowledge about more sophisticated financial concepts, such as the meaning of stocks and bonds; the role of interest rates in the pricing of securities; the function of the stock market; and the value of portfolio diversification (spreading investments across asset classes to reduce risk). Surveys also demonstrate that investors lack essential knowledge about investment fraud and the importance of investment costs and expenses.
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Old 10-14-2012, 11:19 AM   #9
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Some people will never learn, whether they are too lazy or incapable of, and I guess that what SS is for.
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Old 10-14-2012, 11:32 AM   #10
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Originally Posted by Gumby

Apparently, many people really are "too dumb to do ever learn how to do this". Check out the attached study recently done by the Library of Congress.

http://www.sec.gov/news/studies/2012...tudy-part2.pdf
Usually people hang out with people of their own ilk. Therefore many here many be a little naive to how dumb the general population is. Some are incapable, while the most just can't make themselves concentrate/focus long enough to learn. Many of these people only are able to learn from mistakes. Unfortunately retirement planning and implementation is one area where the penalty for this strategy is penal. Most of my friends are college educated and couldn't pay attention long enough for me to complete a sentence about financial planning. Three of my best friends all in their 40s, don't have $5000, between the 3 of them, but fortunately for them they will all be able to access colad pensions of at least $80k each. They will be able to make it to their deathbed clueless about anything financial, but will survive just fine.
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Old 10-14-2012, 11:46 AM   #11
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In many UK retirement savings plans the default is to buy an annuity to fund retirement. Unfortunately this provides ample opportunity for the investment firms to charge big fees, but people do get guaranteed income. The idea of self directed investments in equity and bond funds to provide retirement income is not common outside of the US. The reality of the situation is that most people fail when required to manage their own money. The 401k/IRA etc has obviously been a success for those on this board, but for the majority or americans it has been a failure.
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Old 10-14-2012, 11:58 AM   #12
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I guess it boils down to the philosophical question of how much freedom we should allow the individual to have.

Do we trust them to buy only enough houses and cars that they can truly afford, eating the right food, not engaging in leisure pursuits where they can get hurt such as bike riding, skydiving, mountain climbing, driving powerful or fast cars, etc...? Quitting a safe job with a megacorp to pursue an entrepreneurial dream? Or even ER? Move to a remote valley in Colorado to be a hermit? These are all endeavors with financial risk, and often also worse risk of loss of limb or life.
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Old 10-14-2012, 12:15 PM   #13
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I guess it boils down to the philosophical question of how much freedom we should allow the individual to have.
Agreed. I'm a libertarian by inclination. I'd love to do just what I liked and never be bothered by society or government. But that's an idealistic fantasy. I look at the failure rate of 401ks and the current system isn't doing what it set out to do.....so it should be changed, that might include restricting the type of investments offered if you want to get the tax deferral.
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Old 10-14-2012, 12:22 PM   #14
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Three of my best friends all in their 40s, don't have $5000, between the 3 of them, but fortunately for them they will all be able to access colad pensions of at least $80k each. They will be able to make it to their deathbed clueless about anything financial, but will survive just fine.
I would not mind having a pension like that either. But if we make universal pension for everybody, is that really risk free?

I thought that pensions were the way US retirees all had in the past, but so many plans have gone under. I am willing to bet that 99% of Greek retirees are on pension. They are in big trouble now. So, pension for everybody is no sure solution. Here, we have SS and it is also running out of money.
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Old 10-14-2012, 12:58 PM   #15
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Hard to say from the article how he got into this situation. But the S&P "only" lost 50% and recovered during the meltdown. What in the world was he invested in to lose over 70% ? Sounds like he was way to aggressive for is age, being retired and withdrawin funds, I would have pulled way back on stocks by then. As mentioned he was withdrawing far more than safe would allow.

There are bad plans out there though. Back when megacorp was much smaller they had a company "savings plan", managed by a local bank. Just so happens the CEO was on the board and his wife a major stock holder. How'd that work out ? It managed to lose money for us during part of the biggest bull market ever. Later they got real 401k managed by Trowe.
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Old 10-14-2012, 01:48 PM   #16
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Interesting article in the NYT : Should the 401k plans be reformed or replaced ?
What reforms/replacements would you suggest?

-ERD50
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Old 10-14-2012, 02:09 PM   #17
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What reforms/replacements would you suggest?

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Not to speak for obgyn, but I'd like a generous cola'd pension provided to me for "free." You can trust that I'd spend it wisely and be a model citizen.
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Old 10-14-2012, 02:16 PM   #18
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Sounds like he was way too aggressive for his age.
There's the understatement of the day! I can't imagine what he was doing inside a 401k where he permanently lost 70% due to the recent market downturn.

I wish him well.
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Old 10-14-2012, 02:19 PM   #19
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The 401k/IRA etc has obviously been a success for those on this board, but for the majority or americans it has been a failure.
The 401K and IRAs didn't fail. Where failure occurred, it was due to the participants.
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Old 10-14-2012, 03:17 PM   #20
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Sorry for a short post, as I am volunteering at a free clinic today. To answer your question, I like the idea of a compulsory contribution to more rigid 410k plans, with restricted and much safer options than equities. My view only, and I know many here will disagree with me.
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What reforms/replacements would you suggest?

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