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. Charliehttp://www.cbsnews.com/sections/60minutes/main3415.shtml
The other thing that this particular guy should realize is the following. First let's assume that he (Alan Weir, the subject of this report), just like most other people, started to seriously save for retirement at age 30-35, or about 25-30 years ago. If he would have instead invested in safe treasuries, he probably would be at the same account balance as he is today (or perhaps even lower due to the massive equity bull market during the 80's and 90's). Charlie, there is no way for everyone to invest in their 401(k) in bonds as you do, or even invest entirely in corporate bonds in any way shape or form because there simply aren't enough corporate bonds to go around. So, by definition, it would end up being, at least partially, put into treasury bonds, and they barely keep up with inflation not to mention attempting to accrue some real gains over the 30 years of saving for retirement.
Charlie, there is no way for everyone to invest in their 401(k) in bonds as you do, or even invest entirely in corporate bonds in any way shape or form because there simply aren't enough corporate bonds to go around. So, by definition, it would end up being, at least partially, put into treasury bonds, and they barely keep up with inflation not to mention attempting to accrue some real gains over the 30 years of saving for retirement.Mark,How big is the corporate bond market compared to the equity market? [Hint: there's plenty of supply. LOL ]How successful have those average equity investors been? [That was the point of the interview. ]Do any of them now have the now-needed investment skills to recover the losses they're suffered? [Few to none]There's a proverb that goes like this Half a loaf is better than none. And there's beaucoup studies that demonstrate that small, but steady gains out-perform higher, but more volatile ones. It's a huge irony that I find myself arguing against taking on investment risk as a means to build retirement assets. But I really believe such a case can be made. It's a slim case and there are genuine obstacles that have to be managed/overcome. But a path can be charted that is far easier for an average investor to understand and to implement than what has been touted in the last 20 years as the one, best path to wealth. Read that 60 Minutes interview or watch the film. What has to be said of those 401k investors is that they were not stupid, lazy people. In their work lives, they were competent, and when they lost their jobs, they went scrambling to find another. That has to be admired. But, meanwhile, the 401k scammers are also telling them. "Oh, by the way. Your second job? the one you didn't ask for but we imposed on you for our own benefit? It has also fired you. Too bad, sucker. See you around.”There is no question in my mind who has the moral high ground in this argument and who deserves help and protection from the 401k predators. At my former place of employment, I wrangled a seat on the 401k advisory committee for company as the only "desk-plate" representative. (aka, a representative from labor, rather than management.) When my son, who works in the financial industry, found out he yelled: "Dad, quit immediately. You're putting yourself into jeopardy with regard to fiduciary responsibilities that will bite you in the butt. Plan participants are not being properly advised, and it won't take a very smart lawyer to win a suit when 401k plans fail to deliver on their implied promises." His wife at the time, a gal who was pulling down $250k/year as a Barley’s rep for marketing pension plans to institutionals, seconded his opinion. The whole 401k thing was a scam that was going to blow up sooner or later, and advisory committee members would be the likely fall guys. The recourse against lawsuits was insurance. Such a thing exists. So I read the 401k laws, argued that the company was not fulfilling its fiduciary responsibilities, and insisted that my participation was dependent on all committee members being insured. I was also extended an invitation (which I accepted) by the plan’s manager to visit their headquarters and to review their fund selection process. So I’ve been a lot deeper into the inner workings of 401ks than most investors get. My final decision? I ran away as fast as I could from troubles I knew would happen. I quit and nominated my stock investing buddy to take my place after expressing to him my fears. Management found him to be a compatible choice and he didn’t share my worries. Now both of us are retired and the problem is behind us. Each of can live off our investing. Both of us have relatively secure retirements. But that isn’t the case for a lot of people who would like to retire and who are being badly advised to take on risks they don’t understand and can’t manage. On a dollar for dollar basis, my investment losses (from the crisis) were as large any 401k participant that 60 Minutes interviewed. The difference between them and me is I got took a serious hit, and they got smashed, both financially and emotionally. I can recover, because I know how to recover. But they have quit, because they know they’ve been beaten. When a person has grown afraid to open their monthly 401k statement fro fear of what they'll see, they've been so badly beaten they will never be able to recover. They've lost the will. That doesn't mean they aren't willing to work hard at things they understand. But it does mean they won't ever invest again, and certainly effectively. Therefore, saving is their only path. I don’t want to make a crusade out of this Saving vs. Investing debate. But I know who has the moral high ground, and I can show how that high ground can be defended. It’s not my path, and it is easy to point to alternatives. But those alternatives require more investing experience and more investment savvy than most people can bring to the task. So it becomes a Midas-muffler sort of problem. “Pay them now (with the education and training they need), or pay them later (when they become wards of the state due to their poverty." Eight years ago, way before the present financial crisis, shrewd observers were predicting that the boomers would go bust if they retired, for typically depleting their assets long before they died. Now those assets have been cut in half, and massive numbers of boomers have been involuntarily retired from the workforce. They can’t work, for there are no jobs, and they can’t invest, because they don’t know how to. Meanwhile, the 401k scammers have grown as rich as Croeseus, and their victims are impoverished. That’s just wonderful. So, yes, I’m outraged and, yes, I’ll question my own beliefs and practices to try to find ways to help people toward a bit of financial dignity. If that means trying to find ways to make an old-fashioned saving ethic work in present, "new-fashioned" times, then that’s the path I’ll take. The tool at hand is used.Charlie
Charlie,Just curious, but with your bonds/savings investing style, what % of your retirement funds did you lose from jan (ish) of 08 to now (ish)? I took a 50-60% loss on equities, and had a cash value pension which didn't lose value, so averaged out, it came out to something like a 20% loss overall. For ease of #s, I'm not doing any fancy calculations to pull out the impact of twice monthly funds coming from my paycheck. I'm lumping it all in togethere, therefore, officially I have lossed more than than 20% averaged.
Foolstreet, My losses from Jan 01, 2008 to present are (-18.41%). The numbers were way worse a couple months back, ~(-25%).The bulk of those losses are due to my own greedy and stupidity. (I was overweight the banksters, and I lost that bet big time.) 2008 was the first year ever I had negative returns. I won't be able to recover all of my losses this year, or likely even the next. But by the end of 2011, I should be even again. Charlie
How big is the corporate bond market compared to the equity market? [Hint: there's plenty of supply. LOL ]Not enough of the kind of bonds that would be "permitted" in a 401(k) looking for safety. If 401(k)'s were comprised of all sorts of bonds, even lower rated ones, then while the stock/bond combo funds dropped 30% last year, those bonds would have also dropped about 20% last year. The number to look at is the total non-financial corporate bond market with ratings above junk (and perhaps even a few notches above junk).Another issue with solely using corporate bonds in 401(k)'s is periods of time, like now, in which there is a dearth of new bonds being issued, and thus a constraint on supply.
How big is the corporate bond market compared to the equity market? Interesting question… I was curious about the real numbers so I looked them up. The debt numbers are especially interesting if we also consider a $10.5 trillion national debt. There sure is a lot of debt out there. I'm still trying to figure out the final outcome.... Inflation or Deflation? Equity Market cap Global Jan 2007.....$51.23 trillionUS May 23, 2007...$15.35 trillion (when S&P was 1522.3)US Apr 20, 2009....$ 8.76 trillion (with S&P at 832.4)http://wiki.answers.com/Q/What_is_the_market_capitalization_... Bond Market Cap 2007 U.S. outstanding public and private DebtMortgage related...$7.2 TCorporate............$5.8 TUS treasury..........$4.5 TMoney market.......$4.1 TFederal agencies....$2.9 TMunicipals............$2.6 TAsset backed........$2.5 Thttp://apps.finra.org/investor_Information/smart/bonds/40100...
The debt numbers are especially interesting if we also consider a $10.5 trillion national debt. Correction: The U.S. national debt is now over $11 trillion and $4.5 is reflected in treasuries debt listed in previous post (probably higher now). The remaining amount of national debt is borrowed from social security and other government trust funds.http://zfacts.com/p/461.htmlAlso, U.S housing stock was estimated by Federal Reserve at $20 trillion in Dec 2007. I’ll estimate $17 trillion now. Minus $7 trillion mortgage debt gives about $10 trillion housing equity.So $10 T housing equity+ $9 T equity market gives total equity of about $19 trillion.Total debt from table (and national debt) is approximately $35 trillion.I know these numbers are not complete, but still, "Lots of Debt to Equity".Howard(This has nothing to do with the thread, but I like numbers)
Charlie, there is no way for everyone to invest in their 401(k) in bonds as you do, or even invest entirely in corporate bonds in any way shape or form because there simply aren't enough corporate bonds to go around. So, by definition, it would end up being, at least partially, put into treasury bonds, and they barely keep up with inflation not to mention attempting to accrue some real gains over the 30 years of saving for retirement.Mark,You are misunderstanding me. And if I'm not mistaken, we've had this sort of disagreement three years ago. You think 401k plans are a good idea. I think they are a bad idea. You favor stock investing. I don't. Not a problem. Each of us has chosen a path that suits our personalities and financial goals. But where you got the idea that I wanted 401k plans to include access to corporate bond is beyond me. Please, tell me where in my original post did I say that? I hate 401k plans because I had one. We had a dollar-for-dollar match up to 8% of our wages. That’s about as good as it gets. But I also had a defined-benefits plan that was far superior in terms of returns, like an 8x factor of difference. So let’s run the numbers. At my company, if I put up $1, my employer matched that dollar. I could then dump that $2 into the GIC fund and earn 5%. Therefore, over a 15-year holding period, my return on that initial $1 would be 9.97% (ann.). Not the best, but not too shabby either. In fact, I would regularly coerce coworkers into joining the 401k plan just to capture the match that amounted to $56/week (based on average wages). It was free money. Why not take it? My company was unionized, as I think all companies should be. But our DB-pensions did not come from the company, as I think no DB pension should. It came from my union of which there were 12 at the company, each according to a worker’s craft. Contributions into our pension fund were part of our three-year wages and benefits contract. The employer’s contribution to the pension plan was negotiated, as were our wage increases. What we wanted to do with those wage increases –whether to take them on our check or to kick them into our pension plan— was decided on a craft to craft basis. Only the machinists would choose to put the money into the pension, and every time it was a fight to get the needed votes. But the math was simple. A $0.25/hour raise was $10/week on the check. Pay taxes on that, and the money would buy a six-pack. But put that two bits into the pension, and the return (at that time) in retirement would be $0.92 on the dollar, every year in retirement. So the argument I’d use was this: “Do you want to drink your beer now, or later?” If that $0.25 went for beer now, it was gone forever. If that $0.25 went into the pension fund, $0.23 of it could be re-spent every year until the worker died. The choice we did not have was to dump that $0.25 into the 401k. But what would have been the result? The employer would match it, and we could invest it. If we chose the GIC, at the end of 15 years, we’d have $1.04 versus $0.92 if we put it into the pension. If we chose an equity fund that averaged 11% annually (the historical return of the SP500), we have $4.78. The first year in retirement, we could buy a cheap bottle of beer for three bits. We’ve now run down our 401k balance to $4.03 and we’d have just $.017 more of union pension money to spend. But what happens next year and all subsequent years? The 401k balance gets run down faster than investment returns can replace those down-downs. The draw-down rate is roughly 15%. Therefore, we are out of 401k money in 12 years. But the union pension money is there for as long as we live. The point of that story is that 401k plans can easily be depleted. DB plans, because they are annuities, can never be depleted, nor do they ever have to be managed by the worker himself. DB plans are far superior for meeting the needs of average retirees than DC plans, as several studies have shown, because untrained workers do not manage those assets, nor can they make excessive withdrawals. That is the downside of DC plans. They have to be managed, and they are too easy to mismanage. Today’s boomers are mostly bust due to the 401k scam. Charlie
DB plans, because they are annuities, can never be depleted, nor do they ever have to be managed by the worker himself. DB plans are far superior for meeting the needs of average retirees than DC plans, as several studies have shown, because untrained workers do not manage those assets, nor can they make excessive withdrawals. I do not share your faith in defined benefit plans. Since I have a DC plan, I have never really looked into DB plans. But DB plans seem to be chronically underfunded and some large companies have defaulted on their pensions. The people running the DB plans may be professionals, but they share all the same assumptions with the rest of the investment community.Two quick Google results:The problem of public pension underfunding is rapidly becoming the next major administrative nightmare as the over $1 trillion underfunding will at some point have to receive appropriate funding treatment. But public workers are not the only ones who should be very concerned as a result of pension fund underperformance, due in major part to the collapse in capital markets and pension funds' large investments in public equities. http://zerohedge.blogspot.com/2009/03/pension-underfunding-a...From 2005:The United pension default — the largest in U.S. history — comes atop a string of bankruptcies and retirement plan meltdowns in the steel, retail and other industries in the past several years that have directly affected the retirement security of millions of Americans and prompted millions more to worry whether they're next.http://www.usatoday.com/money/perfi/retirement/2005-05-15-pe...
You are misunderstanding me. And if I'm not mistaken, we've had this sort of disagreement three years ago. You think 401k plans are a good idea. I think they are a bad idea.I do not think they are a "good idea". I do think that they are better than nothing, which is the alternative available to most employees nowadays. I would far prefer a decent, portable, defined benefit type of plan. However, the days of those kinds of plans are pretty much gone.You favor stock investing. I don't.I do not favor stock investing. I favor investing in things that will earn me the best and most risk appropriate return. Sometimes those things are stocks, sometimes bonds, and sometimes other things (though I haven't had much success with the private investments I've made to date).Just for kicks, I did a quick inventory as of this moment in my major accounts -Class Percentage----- ----------Cash 46.5%Bonds 24.8%Stocks 15.9%Funds 8.8%Commodities 1.6%Options 2.4%The options are on a common stock, and the funds (in my 401(k) are stock funds), so they should be included in stocks.Does that sound like someone who favors stocks? :-) NO, it looks like someone who is very mixed up and fearful for the future.I also just noticed that almost all my bonds are inflation linked (I-bonds, TIPS, etc).Not a problem. Each of us has chosen a path that suits our personalities and financial goals.Yep. And some of us haven't really chosen a path yet.But where you got the idea that I wanted 401k plans to include access to corporate bond is beyond me. Please, tell me where in my original post did I say that?My mistake. Sorry.I hate 401k plans because I had one. We had a dollar-for-dollar match up to 8% of our wages. That’s about as good as it gets. But I also had a defined-benefits plan that was far superior in terms of returns, like an 8x factor of difference. So let’s run the numbers.At my company, if I put up $1, my employer matched that dollar. I could then dump that $2 into the GIC fund and earn 5%. Therefore, over a 15-year holding period, my return on that initial $1 would be 9.97% (ann.).By my calculation, it comes out to a 12.66% return (CAGR) over 15 years. If you want, I can send you the excel spreadsheet that I used for the calculation (cashflows with an XIRR() at the end). Not the best, but not too shabby either. In fact, I would regularly coerce coworkers into joining the 401k plan just to capture the match that amounted to $56/week (based on average wages). It was free money. Why not take it?Absolutely. I implore everyone to contribute, at a minimum, a high enough percentage to collect the maximum matching finds each year. Right now, I contribute the maximum permitted by law, but that may change in the future (though probably not because we all need to save as much as possible if we ever even want a small chance to retire someday).My company was unionized, as I think all companies should be. But our DB-pensions did not come from the company, as I think no DB pension should. It came from my union of which there were 12 at the company, each according to a worker’s craft. Contributions into our pension fund were part of our three-year wages and benefits contract. The employer’s contribution to the pension plan was negotiated, as were our wage increases. What we wanted to do with those wage increases –whether to take them on our check or to kick them into our pension plan— was decided on a craft to craft basis. Only the machinists would choose to put the money into the pension, and every time it was a fight to get the needed votes.My grandfathers pension was also held by his union. Until the union bosses stole all the money and disappeared. This was one of the well-known garment unions in NYC. When he retired, he received zero pension from anywhere.The point of that story is that 401k plans can easily be depleted. DB plans, because they are annuities, can never be depletedWell ... unless they are managed by a crooked insurance company like AIG. And then later managed by a crooked Federal government. Imagine what an autoworker that is expecting a $70,000 annual pension will feel like when PBGC will limit that pension to a maximum of $54,000? Regardless of that autoworker being overpaid for 20+ years, and regardless of the worthless promises made to him via his union, he was still expecting the larger amount., nor do they ever have to be managed by the worker himself.Instead they can be screwed up by the experts :-) DB plans are far superior for meeting the needs of average retirees than DC plans, as several studies have shown, because untrained workers do not manage those assets, nor can they make excessive withdrawals. That is the downside of DC plans. They have to be managed, and they are too easy to mismanage. Today’s boomers are mostly bust due to the 401k scam.I agree that DB plans are much better. But they are also much more expensive for the employers. The 401(k) scam is worse than you think. Back in the early 80's, I worked for AT&T and they had a DB pension plan. They contributed varying amounts to it, but roughly 8% of our wages (less for younger folks, more for older folks, and varying depending on investment returns). This was similar at all companies that has DB plans. Then, many companies switched to 401(k) plans. Some were generous and gave an 8% match, most gave 6%, and many gave less. Then, over the years, the match amount dwindled such that the typical match is 3% (50% of the first 6% contributed by the employee). So, not only was the switch "safer" (much safer) for the company, but it also saved them a bunch of money. Now to add insult to injury, companies with financial issues are discontinuing their 401(k) match, and have thus reduced their retirement contribution to ZERO! The whole thing was a big screw job from day 1 of the switch from DB to DC. And that is without even mentioning the other screw job of the damned funds taking their vig every year. And, most recently, the third screw job of 401(k) plans being permitted to deduct expenses directly from the accounts every year.See what you did, you got me going on a rant.....And the biggest screw job of all is that the taxpayers via a number of methods (most notably currency debasement and inflation) will be paying for our multitude of sins.
Class Percentage----- ----------Cash 46.5%Bonds 24.8%Stocks 15.9%Funds 8.8%Commodities 1.6%Options 2.4%
Thank you, Mark, for that long reply. That's exactly the kind of exchange that is helpful to people who are trying to find their own path. I'm pushing in one direction. You are pushing in another. Anyone else who joins in will offer further alternatives. But the common message I take away is this: (1) There are lots of ways of doing this stuff. (2) Lots of them offer very satisfactory results. That's should be a message of hope to those who have been so badly beaten up in the recent financial turmoils. That on the personal level, a lot of very effective things can be done toward achieving one's financial goals. Charlie
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