401k vs pension

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kiryan
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401k vs pension

Postby kiryan » Fri Jan 09, 2009 12:14 am

In the automaker thread I talked briefly about pensions being phased out in favor of 401ks because 401ks are cheaper for employers. Heres an article that mentions this as well as discusses the move to 401ks as perhaps a failed experiment.

http://online.wsj.com/article/SB123137714796462913.html

But the legislation marked the beginning of the end of professionally managed pensions that provided guaranteed benefits to retirees. As big employers recognized that 401(k)s are substantially cheaper than defined-benefit plans, the employee-managed accounts moved from supporting role to center stage. Many workers didn't even participate in the voluntary plans, which meant that employers didn't have to make matching contributions. What's more, employers aren't required to contribute to the plans at all.

I don't agree with a lot of what is said in this article, especially stuff about how government should create a national retirement fund and regulating investments to more and more conservative positions as you age, but I'm drawn back to the bailout argument. If the government is going to guarantee it, then they do have to bail it out. I'm very concerned, the whole idea of 401ks was to make people individually responsible for planning their retirement and to protect them from failed companies (and pensions)... If people are going to not plan their retirement, then we might as well have pensions again...

more later, gotta drive home for zonage.
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Re: 401k vs pension

Postby Sarvis » Fri Jan 09, 2009 12:35 am

kiryan wrote:I don't agree with a lot of what is said in this article, especially stuff about how government should create a national retirement fund


Err... isn't that what social security is?

and regulating investments to more and more conservative positions as you age, but I'm drawn back to the bailout argument. If the government is going to guarantee it, then they do have to bail it out. I'm very concerned, the whole idea of 401ks was to make people individually responsible for planning their retirement and to protect them from failed companies (and pensions)... If people are going to not plan their retirement, then we might as well have pensions again...



The problem with 401(k) is nothing protects people from a failed economy. Not that pensions would either... but again, that's what social security is for right?
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Re: 401k vs pension

Postby Vaprak » Fri Jan 09, 2009 2:47 am

Conventional wisdom says that the closer you get to retirement the more conservative your investment portfolio should be weighted such that when you hit retirement age you have less than 10% in stocks and 90% in fixed income and/or "safe" vehicles like bonds and CDs. If you do it as a gradual shift you're not going to end up like a lot of almost retired people are right now...flat broke.

And yes I think it should be 100% the employee's responsibility to plan for their retirement and that the employment market can dictate benefits to some degree such that, for example, I won't work for a company that doesn't provide some sort of 401k match.

It absolutely blows me away when I find out about people at work who don't contribute the minimum amount required to get a full company match on their 401k. Hell, a guy I worked for one summer when I was 19 explained compounding growth to me on a napkin while we were on lunch break. Ever since that day I've been working towards putting the maximum into my 401k, Roth IRA, and lately putting an additional $600 a month into a high yield savings account. Once I've got around $75k in my savings I'll redirect that cash into direct mutual funds.

And no I didn't start out maxing everything out. I started out by putting like $75/month into a Roth IRA when I was 19 and each year increased the monthly contribution until I was at max. I'm not counting on getting any Social Security, but I am planning on retiring comfortably.
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Lathander
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Re: 401k vs pension

Postby Lathander » Fri Jan 09, 2009 4:42 am

Laugh, this type of article always makes me chuckle. Argentina recently took over people's 401k's to "protect" them. Just more socialist/communist nonsense. The trouble is not just the cost factor of a 401k but also, as a worker, I feel better having a 401k that I know is mine than a pension which is guaranteed by the company. If the company goes belly up, you lose a good portion of your pension guarantee. So in some ways, a 401k is safer. Also, with pensions, if you leave a company early, you may lose part or all of your projected pension benefit. Once again, as a worker, I prefer having my money be controlled by me.

Look at most 401k investment options. Most are not fantastic and you are extremely limited by what you can put in. What should happen is people should have more control over their 401k's with possibly be able to use money managers to run their money if they don't want to. The most frequently selected option in a 401k is the stable value fund. That goes against the whole idea of planning for the future.

In terms of folks losing 60% or more in their 401k, that really boggles me. Last year was tough, but it wasn't that tough. Maybe if you have it all in the small cap or international, you might be able to lose more than 50%, but I find it hard to believe. Now if you had it all in your company stock, that's very possible with the year we had. People need to take some responsiblity for what they do and we shouldn't penalize those that are responsible and invest wisely for their future.

Finally, last year was an oddball because you couldn't hide in bonds like asset allocation tells you. Those got hit, maybe not as hard, but they took some damage. Thing is, we shouldn't decide big things based on a two or three standard deviation event.
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Re: 401k vs pension

Postby Corth » Fri Jan 09, 2009 5:58 am

If I were an employee and had a 401k I certainly would contribute enough to get the match, but I'm not sure I would contribute more. I require more control over my money. Luckily, I qualify for a SEP-IRA which allows me to put in quite a bit every year and I can buy whatever the hell I want with it. Unfortunately, there aren't any similar options for tax deferred college savings, other than the Coverdale Education Savings Account, but you can only contribute $2k per year into that. I'd rather lose the tax advantages than stick money into a 529 where there is no control other than picking a basic allocation program.
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Re: 401k vs pension

Postby kiryan » Fri Jan 09, 2009 10:25 pm

My biggest point is that 401ks are cheaper for companies... which you can read as companies are compensating people less which between this and inflation has resulted in real major decreases in where our standard of living should be (minus standard of living being propped up by meteoric housing and stock market increases).

The problems with a 401k are the same as the benefits. You control it. Now you don't have control to the degree that people who are willing to follow the market are (like Corth), but much better than the control you have over a pension program you lose when the company goes bankrupt (even if it is guaranteed by the PBG).

The "problem" is being defined as a system problem rather than as a personal responsibility problem. People who make risky decisions like leaving 90% of their income in stocks the immediately before and continuing after they retire (my father in law for example). Now why would you leave all your money in a volatile vehicle if you expect to live off of it for 20 years? The proposed solution is that the government should get involved and take more choice away. I'd like to be against this idea because it leads us right back to pensions, except now its a government controlled.... government backed.... pension.

Cuasing me further fits is if the government is going to defacto back it by propping up stock prices (please don't tell me that Bernake's closed door testimony to congress did not cover baby boomers losing their shirt as they retire) then we got to regulate the shit out of it.
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Re: 401k vs pension

Postby Lathander » Sat Jan 10, 2009 12:56 am

Entrepreneurs and business folks make "risky" decisions all the time. Leaving my $10 an hour job to take a more competitive $50 an hour job could be seen as a "risky" move. When we allow the government to determine what choices we have for our investments, we're in the book 1984 where everyone has to be equal.

The reason you leave your money in a volitile asset class like stocks is because your required rate of return to generate the money to live on. Also, you may choose to accept the increased movement in those assets because on average, you will tend to do better. In that example, it should be obvious why one would choose that option.
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Re: 401k vs pension

Postby Sarvis » Sat Jan 10, 2009 1:04 am

Lathander wrote:When we allow the government to determine what choices we have for our investments, we're in the book 1984 where everyone has to be equal.


Well that's an interesting interpretation, considering the book explicitly states they are wasting resources in order to PREVENT a situation in which everyone is equal.
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Re: 401k vs pension

Postby kiryan » Fri Mar 27, 2009 7:56 pm

Heres a thought on this subject.

What is the purpose of the stock market? IMO its for companies to raise capital to grow business. How do you know which companies to provide capital too? by researching and understanding their opportunities, challenges and markets. There is a reason these people are called invesetors.

Now, think about what we did to the purpose of the market with the shift towards 401ks. We made every American a stock investor. We flooded the market with an ever growing amount of money to "invest". Are these americans investing in companies, or just expecting their money to grow over time because that is the conventional wisdom?

Have we perverted the purpose of the stock market? Its a money making, a retirement saving mechanism now... not a place for companies to raise capital to expand their businesses. I think its possible that a lot of the problems we are dealing with is because the market is dysfunctional. There are too many people in for too many reasons few of which fit the purpose for which it was created.
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Re: 401k vs pension

Postby Sarvis » Fri Mar 27, 2009 8:11 pm

kiryan wrote:Are these americans investing in companies, or just expecting their money to grow over time because that is the conventional wisdom?


Both, isn't it? No one would invest without the expectation of growth...
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Re: 401k vs pension

Postby Ragorn » Fri Mar 27, 2009 8:39 pm

The business world has changed a lot in the last 20 years... I can't even imagine collecting a pension, because the idea of working for the same company for 30 years is totally unfathomable to me. I'd much rather have a 401(k) that migrates from job to job with me.

Problem is, my employer's 401(k) match is fucking terrible (25% up to 4%). Still, even at that relatively lackluster rate, I'm still getting a 25% return on my investment before the money even hits the account (where it then compounds). I might be able to do better than that, but I'd rather take 25% guaranteed.

I contribute the maximum allowable amount to my 401(k). I then use my own personal savings account to play short-term volatility in the stock market. When the economy starts to level out, I'll take a percentage of my savings account and invest it in safer long positions, while I play for highs and lows with the other half.

I don't count on Social Security either. But I plan to retire very comfortably.
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Re: 401k vs pension

Postby kiryan » Wed Apr 01, 2009 11:36 pm

The problem is you are constantly putting money in the market via your 401k and calling it investing. Investing takes skill, research, understanding. If you were investing, you'd probably go through natural periods of time where you aren't putting any money in and times when you are putting every dime you can save in.

Instead the whole 401k system is designed around regular consistent contributions invested as allocated regardless of what the market is doing. The "conventional wisdom" is don't change your positions just keep investing and expect them to balance out and increase over time. There are policies being debated that would make 401k enrollment automatic.

There are aspects of the 401k program that remind me of a giant ponzi scheme. Of course the biggest ponzi scheme is still SSI.

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