The 401(k) is a Beautiful Thing So Stop Bashing It

by Darwin on September 17, 2012

After the so-called “lost decade” and the Financial crash of 2008-2009, many people derided the 401(k) as a scammy money-grubbing employer tool that leaves employees ill-prepared for retirement. A “201(k)” became the running joke due to the losses we saw a few years back (which have since been regained and then some). Over the years, we’ve seen criticism of everything from fee disclosure to high fee structurs to lack of choice to the volatility of the underlying investments. The constant bashing from the media and bloggers alike would make one wonder whether the 401(k) is even a good idea at all. Of course it is! And it’s about to get even better. Here are some common complaints and reasons why this is a bunch of BS:

  • Returns: So, we had a lost decade. This should not come as a surprise at all in retrospect as we’ve been living for a few decades now in a period of false prosperity bought with our kids’ money (borrowed at a rate of $1 Trillion per year) with no intent of ever paying it back. If you don’t believe Federal deficits are tied to stock market returns and the goods and services our government provides you with every year then you need to read up on it (alas, with our burn rate of $1 Trillion a year in deficits, we’ve still conditioned our citizens into the Welfare Nation we are now). It’s all tied together and we were due for a crash. Fortunately for people disciplined enough to maintain their long-term investment strategy, they’ve regained all those losses and made some really incredible gains for funds invested along the way. From the pivot bottom in March 2009, the S&P500 returned about 120% with dividends. That’s not too shabby at all, especially compared to hiding cash under the mattress. I’m not making predictions about where the S&P500 will close in a year or two, but I am willing to wager (and I’m doing it in my plan) my entire retirement that in 20-30 years, equities will provide favorable returns.

  • Fees and Disclosure: Granted, going back years, the fees on funds in 401(k) plans have not been nearly as efficient as individually going over to Vanguard (no relation, but I always recommend based on the highest ethics and lowest fees in the industry) and picking the lowest fee index funds yourself.  However, this year, new rules took effect mandating that companies clearly deliver fee disclosure to their participants.  This is one favorable piece of legislation by the Labor Department that was pleased to see.  So, with this new legislation in place, fees should come down and participants should be able to choose the most efficient options.
  • Choices: People complain about not having a lot of choices, but in general, all you need if you’re young is a broad-based equity fund.  And if you’re older, a bond fund.  Virtually all plans at least have that.  Sure, maybe it’s not the lowest fee or “market-beating” actively managed fund, but there are Roth IRA Strategies to beat the market to round out any missing options in your plan if you qualify and trying to invest in gold, time the market with money market funds or trading in and out of sector funds is not a good approach for the long-term investment horizon of the 401(k).
  • Volatility: Can’t handle the volatility of stocks?  Well, you need to.  That’s stocks.  If you have a 15+ year time horizon and want to have a decent real return (net of REAL inflation), you’re going to need to invest in equities, especially considering that bond yields cannot go to negative infinity.  I work with many 20 and 30-somethings that went to 0% equities and totally into money market and bond funds in 2009 at the worst possible time.  This is when the greatest market rally of the past decade and a half began!  They earned probably 20-30% over that period while I earned 120%+.  If you take one thing from this article, concede that you cannot and will not time the market any better than random chance.  You need to have a strategy based on your time horizon and some other factors like assets outside the plan, spousal finances, and such.
  • What About Your Heirs? I know, these days, many people are just looking out for themselves (notice the heads in the sand on the mounting deficits that our children will be burdened with someday). But if you contrast a traditional pension/social security type retirement plan vs. an asset-based plan, there’s a huge difference. I can work my butt off to hit that FICA Cap each year to get the maximum Social Security benefit only to die as soon as I hit retirement age. My kids will never see a dime of that money I (and my employer) plowed into the plan. However, with a 401(k), those assets are kept in the family, after the government gets their pound of flesh of course.
  • Government Pension Plans Do It Better: Many in Congress (shocker) and the left (double shocker) are calling for government-run plans to replace the traditional 401(k) arrangement.  It’s basically another Social Security with some variations.  The purported benefits are that it would be employee funded but guarantee a real return.  However, the returns would be much lower than investing in equities over long periods, so I’ll take control of my finances, thanks.  Then, let’s chalk one up for the law of unintended consequences.  Who would have thought decades back that the Social Security fund would be going insolvent and that an inept Congress would plunder it (sorry, “borrow”).  What do you think would prevent a future Congress from doing the same?  If there is money to be had, the money-grab will transpire.  This is the leadership of our country past, present and future.
  • Who Would Complain About Free Money? Last but not least, who the heck would complain about free money?  Virtually all plans offer some sort of company match.  Let’s say they’re just matching the first 3% of your annual investment.  Well, that’s a 100% return on the first 3 % invested.  Even if you were paying a 2% expense ratio in a fund that broke even for a decade, you got a 100% return (98% net of fees) each year on that money.  This is money the company is giving away for free – who the heck would complain about that?  Better yet, some companies still offer both a pension AND a 401(k), yet employees still complain that their retirement plans are set up for failure.  Is it the plan or the participant?  After all, 90% of Americans Can’t Answer These Basic Finance Questions.
Overall, I’m pretty pleased with my company’s 401(k) plan since they offer a match and some broad-based index-type funds, but I’m happiest of all that I’ve stayed the course during thick and thin.  At my age, there’s no reason to be shifting money into low-return safe investments.

Are You Pleased with Your 401(k) Plan?

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