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Author: markr33 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35367  
Subject: Re: 60 Minutes, 401ks, & Saving Date: 4/21/2009 12:08 PM
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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 depleted

Well ... 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.
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