Interesting Article on 401k plans

[hankster]

Meltdown calls 401(k)s into question - MSN Money

As I read about the ways 401k investors hurt themselves (making emotional decisions) I was reminded of a recent conversation with a coworker. He had been checking his account daily and agonizing over the plunging portfolio. Finally in November, he sold out of his index funds near the bottom and put 100% into (Drum roll please).... OUR COMPANY'S STOCK!!! NOOOOOOOO!!!

I tried to explain to him why nearly every advisor alive would say that's a bad idea, but I soon realized I was wasting my breath. I'm not saying that Big Daddy government should control our AA, but Jeeez! I don't know what the answer is, but the market meltdown, combined with poor decision making, is raining on a lot of folks' retirement parades.

 

[ziggy29]

Interesting. A talking head in the defined-benefit pension industry says 401Ks have failed and a talking head for the 401K industry says they are working. I never would have guessed.

Also from the article:

But the [target date] funds haven't offered investors much protection. The average target-date fund dropped 32% last year, slightly better than the Standard & Poor's 500 stock index's 38.5% decline.

A portfolio with a 32% decline needs to gain 47% to get back to flatline. A portfolio with a 38.5% decline needs a 62.6% gain to get back to break-even. Sounds like pretty decent "protection" in those terms...

 

[Koolau]

Meltdown calls 401(k)s into question - MSN Money

As I read about the ways 401k investors hurt themselves (making emotional decisions) I was reminded of a recent conversation with a coworker. He had been checking his account daily and agonizing over the plunging portfolio. Finally in November, he sold out of his index funds near the bottom and put 100% into (Drum roll please).... OUR COMPANY'S STOCK!!! NOOOOOOOO!!!

I tried to explain to him why nearly every advisor alive would say that's a bad idea, but I soon realized I was wasting my breath. I'm not saying that Big Daddy government should control our AA, but Jeeez! I don't know what the answer is, but the market meltdown, combined with poor decision making, is raining on a lot of folks' retirement parades.

Hank,

I hereby nominate your coworker for the RE Darwin award. I'm sure s/he will be a shoe in to win!!

 

[ziggy29]

I hereby nominate your coworker for the RE Darwin award. I'm sure s/he will be a shoe in to win!!

Agreed. I mean, did they NOT pay attention to what happened to Enron 401K plans invested in company stock?

Having said that, we do have an ESPP at Megacorp where we can buy shares at a 15% discount. I put a small amount of money in that -- about $1000 a year -- just to capture some discount and the potential to flip shares. But in a typical 401K plan, company stock isn't sold at a 15% discount. And in that case, you're putting not only your job but also your retirement at the mercy of one company? Darwin, indeed...

 

[samclem]

But the funds haven't offered investors much protection. The average target-date fund dropped 32% last year, slightly better than the Standard & Poor's 500 stock index's 38.5% decline. Funds with a target date of 2010, designed for investors on the brink of retirement, didn't fare much better, losing nearly 25%

A portfolio with a 32% decline needs to gain 47% to get back to flatline. A portfolio with a 38.5% decline needs a 62.6% gain to get back to break-even. Sounds like pretty decent "protection" in those terms...

Right. And, what was the average target retirement year for these target retirement funds? If it was 2030, then we shouldn't be surprised that they have a lot of equity exposure. The target funds aren't marketed as "offering investors protection" at all times, just a reduction in risk as they approach retirement. It sounds like they are doing that.