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Last night, 60 Minutes did a segment (linked below) on the impact of the current market crisis on people’s investment plans. In their typical investigative fashion, they presented contrasting views. On one side, there were representative 401k owners who have seen their savings balances cut in half. On the other side, there was a lobbyist for the 401k industry. (Actually, there were some third parties, critics of 401ks, whose views were also presented. But for the sake of telling this story as I wanted to tell it, I’m going to set them aside for now.) If you didn’t see the program, the transcript of the program is worth reading. You should be appalled by two things: (1) How little those 401k investors knew about investing and how totally defeated they now feel. (2) How callous and uncaring that industry lobbyists was.

Here is a 401k owner:
Alan Weir, who turns 60 this month, showed 60 Minutes his latest 401(k) statement, which he hadn't had the courage to open up.
"I'm afraid," he told correspondent Steve Kroft.
There's good reason for his trepidation: nearly half of his life savings have vanished in a matter of months.
"It went down again," Weir told Kroft, after opening the statement.
Overall, he said he was down about $140,000.
Asked if he thought he'd ever get that money back, Weir said. "I probably never see it come back. I was looking to retire, probably, when I hit 62. Can't do it now. I'll probably be working until I'm at least 70."

60 Minutes then asks: What kind of a retirement plan allows millions of people to lose 30 to 50 percent of their life savings just as they near retirement?

David Wray, president of the Profit Sharing/401k Council of America and a lobbyist for the 401(k) industry, says it's one that empowers people to make their own investment decisions.
"401(k) is the absolute best way people can save for retirement," Wray told Kroft. "They absolutely are the best retirement vehicle we have."
"How can you say it's the best available if it has let down tens of millions of people at the time they need the money the most?" Kroft asked.
"That's not a 401(k) problem. That is our entire investment system," Wray argued. "This is about the markets went down for everybody. Nobody was saved in the current thunderstorm."
Wray says that many people still have more money in their 401(k)s than they've actually contributed. He says everyone had multiple investment options, including low-yield guaranteed returns. And he thinks people who lost money have no one to blame but themselves.
"In America, it's a society based on freedom and choice and personal responsibility," he said. "We need to help them understand these responsibilities and execute them to the best they can. 401(k) is part of that. There are no guarantees."
"What about the people who are 63 or 64?" Kroft asked. "A lot of those people were thinking about retiring. …And now they aren't."
" Well, that was not a 401(k) problem. That's an investment system problem. The markets go up and down. And if those people chose to take equity risk, there was a logical outcome," Wray replied.

If I were a violent person, I’d have shot that lobbyists right then for the lies he was telling and for the harm he is causing. Yes, financial markets are shark tanks. If you go swimming in them, you are likely to get eaten. But who was proclaiming so loudly (before the crash) that the waters were safe? That financial markets were the best and only way to grow investment wealth? That investing was easy and safe? (E.g., “stocks for the long run” and other such nonsense?)

That 401k investor thinks he’ll never be able to re-coup the money he lost, and he is right for the cynical but true reason that he never really understood how the money came into his account in the first place. All he knew was that if he picked ABC mutual fund, it was strongly implied that his assets would grow without any further work on his part. And for a while, such did happen, due factors beyond his control, like the Fed flooding the market with liquidity that went into stocks and created a bubble in prices that subsequently burst. If he truly understood markets, he wouldn’t have suffered the size of losses he did, and he would be right back in the market, fighting to recoup the losses he did suffer. Instead, he has given up, and the 401k industry now has one less sucker from whom it can extract fees.

But the real villains of the story are the SEC and the 401k industry. Neither accepts any responsibility for what has happened, nor do they want to do anything to prevent it from happening again. Both of them depend (albeit in different ways) for their existence on there being a constant flood of dumb money into markets. So, of course, they don’t want investors to avoid markets, or to become knowledgeable participants. Either choice would mean that they would be out of a job.

To access America’s public roads, a driver has to prove competence with a licensing procedure and show proof of insurance. But what barriers to entry are there for financial markets? Age 21 and a check book. If investors had to prove competence before they could participate in markets, even through seemingly innocuous things like mutual funds, a lot fewer people would be losing the amounts of money they are. So part of the 401k problem is a regulatory problem. But I would argue that the regulation has to be a shared responsibility between the government and the individual. And of the two, self-regulation is the far more effective path. Don’t get involved with things you don’t understand. And if you don’t understand how to manage the downsides of an investment (its risks), then you should back away from pursing its upsides (its rewards).

Many people will disagree with me, but I’d claim that bond investing is easier to do well than stock investing, and that Saving (which isn’t really investing) is easier to do well than investing, and that Saving can be a sufficient path to retiring. It won’t offer the huge margins of safety I’d prefer to see people have for themselves. But it is a path –-despite some mistakes I made in my numbers in another thread-- that is available to them that can completely bypass the 401k scam. Once I fix the mistakes that Howard caught, I’m confident –as Locicious has been claiming all along— that an astute saver, using only cash-equivalent instruments, could amass sufficient assets to retire on. Such a person would have a zero margin of safety if the future proves less favorable to cash instruments than the past, and if his personally experienced inflation rate (PEIR) is greater than officially reported inflation CPI). But, even with those obstacles, such a path offers more hope than what is currently being touted, namely equity funds bought and held in 401ks.

Furthermore, if that sadder but wiser Saver would be willing to take on a bit of investment risk – a bit, mind you, not a lot— in whatever investment vehicle he chose to learn how to use effectively, I’d bet that he could easily overcome the two problems of creating a margin of safety and the difference between PEIR and CPI.

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