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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.


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.

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